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Endogenous Business Cycles and Stabilization Policies

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Author Info

  • Aloi, M.
  • Jorgen, H.
  • Lloyd-Braga, T.

Abstract

We analyze the effects of simple stylized economic policy rules, or stabilization principles, when fluctuations in economic activity are created endogenously by self_fulfilling volatile expectations. We study a simple monetary competitive model with intertemporally optimizing agents and a government. We only depart from neoclassical orthodoxy by assuming that a cycle or a sunspot equilibrium, not necessarily a steady state, could be the descriptive dynamic rational expectations equilibrium. The government may then well out of welfare concerns want to conduct systematic stabilization policy through transfers, expenditure, and taxation even though this has distortionary effects. We show that the policy rules that stabilize output in a way that is best for welfare involve countercyclical elements in government activity.

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Bibliographic Info

Paper provided by Carleton - School of Public Administration in its series Papers with number 00-06.

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Length: 29 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:carlad:00-06

Contact details of provider:
Postal: Carleton University, School of Public Administration, Ottawa, Canada K1S 5B6.
Web page: http://www.carleton.ca/sppa/
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Keywords: BUSINESS CYCLES ; FINANCIAL POLICY;

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References

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  1. Grandmont Jean-michel, 1985. "Stabilizing competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8518, CEPREMAP.
  2. Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, Sunspots, and Automatic Stabilizers," NBER Working Papers 5703, National Bureau of Economic Research, Inc.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series 95-44, Board of Governors of the Federal Reserve System (U.S.).
  4. BĂ©nassy, Jean-pascal, 1997. "On the optimality of activist policies with a less informed government," CEPREMAP Working Papers (Couverture Orange) 9722, CEPREMAP.
  5. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  6. Guo, Jang-Ting & Lansing, Kevin J., 1998. "Indeterminacy and Stabilization Policy," Journal of Economic Theory, Elsevier, vol. 82(2), pages 481-490, October.
  7. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
  8. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  9. Goenka, Aditya, 1994. "Fiscal Rules and Extrinsic Uncertainty," Economic Theory, Springer, vol. 4(3), pages 401-16, May.
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Cited by:
  1. Vivaldo M. Mendes & Diana A. Mendes, 2006. "Active Interest Rate Rules and the Role of Stabilization Policy R&D Tax Credits," Working Papers Series 1 ercwp0208, ISCTE-IUL, Business Research Unit (BRU-IUL).

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