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Can stabilization policies be efficient?

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  • Aurelien Saidi
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    Abstract

    This paper makes use of optimal control relaxed problems to prove the absence of optimal trajectory in continuous time models with social increasing returns to scale where indeterminacy occurs. Although an efficient optimal policy does not exist, some chattering stabilization policies can mimic trajectories whose criterion functional approximates the supremum of the relaxed problem. This configuration is closely related to indeterminacy: by contrast, when the steady state is determined, an optimal policy is likely to exist.

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    File URL: http://cadmus.eui.eu/dspace/bitstream/1814/10168/3/ECO_2009_01.pdf
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    Bibliographic Info

    Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/01.

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    Date of creation: 2009
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    Handle: RePEc:eui:euiwps:eco2009/01

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    Related research

    Keywords: Increasing returns; Indeterminacy; Stabilization policy; Relaxed problems;

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    1. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
    2. Daniel F. Spulber, 1996. "Introduction," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(1), pages 1-4, 03.
    3. Jang-Ting Guo & Kevin J. Lansing, 1997. "Indeterminacy and stabilization policy," Working Paper 9708, Federal Reserve Bank of Cleveland.
    4. Seierstad, Atle & Sydsaeter, Knut, 1977. "Sufficient Conditions in Optimal Control Theory," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 367-91, June.
    5. Jang-Ting Guo & Kevin Lansing, 1999. "Fiscal policy, increasing returns, and endogenous fluctuations," Working Papers in Applied Economic Theory 99-08, Federal Reserve Bank of San Francisco.
    6. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
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