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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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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2007_33.

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Date of creation: Jun 2006
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Handle: RePEc:gla:glaewp:2007_33

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Web page: http://www.gla.ac.uk/schools/business/research/
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Keywords: Endogenous fluctuations and growth; welfare analysis; taxation; stochastic continuous time model; Poisson uncertainty;

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Cited by:
  1. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
  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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