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Natural Volatility, Welfare and Taxation

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  • Olaf Posch
  • Klaus Wälde

Abstract

Cyclical components are analytically computed in a theoretical model of stochastic endogenous fluctuations and growth. Volatility is shown to depend on the speed of convergence of the cyclical component, the expected length of a cycle and on the altitude of the slump. Taxes affect these channels and can therefore explain cross-country differences and breaks over time in volatility. With exogenous sources of fluctuations, a special case of our model, decentralized factor allocation is efficient. With endogenous fluctuations and growth, decentralized factor allocation is inefficient and (time-invariant) taxes can (de-) stabilize the economy. No unambiguous link exists between volatility and welfare.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1748.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1748

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Keywords: endogenous fluctuations and growth; welfare analysis; taxation; stochasticcontinuous time model; poisson uncertainty;

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Cited by:
  1. Heijdra, B.J. & Ligthart, J.E., 2005. "Fiscal Policy, Monopolistic Competition and Finite Lives," Discussion Paper 2005-126, Tilburg University, Center for Economic Research.
  2. Posch, Olaf, 2009. "Structural estimation of jump-diffusion processes in macroeconomics," Journal of Econometrics, Elsevier, vol. 153(2), pages 196-210, December.
  3. Gary D. Hansen, . "Why Have Business Cycle Fluctuations Become Less Volatile? (with Andres Arias and Lee E. Ohanian)," UCLA Economics Online Papers 416, UCLA Department of Economics.

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