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Natural volatility, welfare and taxation

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Author Info
Olaf, POSCH
Klaus, WAELDE

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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 attitude 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 Université catholique de Louvain, Département des Sciences Economiques in its series Université catholique de Louvain, Département des Sciences Economiques Working Paper with number 2005009.

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Length: 33
Date of creation: 15 Mar 2005
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Handle: RePEc:ctl:louvec:2005009

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Keywords: Endogenous fluctuations and growth welfare analysis taxation stochastic continuous time model Poisson uncertainty

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Find related papers by JEL classification:
C65 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Miscellaneous Mathematical Tools
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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