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Countercyclical Fiscal Policy and Cyclical Factor Utilization

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  • Ioana Moldovan

Abstract

In a neoclassical growth model with monopolistic competition in the product market, the presence of cyclical factor utilization enhances the stabilization role of countercyclical taxes. The costs of varying capital utilization take the form of varying rates of depreciation, which in turn have amplifying effect on investment decisions as well as the volatility of most aggregate variables. This creates an additional channel through which taxes affect the economy, a channel that enhances the stabilization role of countercyclical taxes, with particularly strong effects in the labor market. However, in terms of welfare, countercyclical taxes are welfare inferior due to reduced precautionary saving motives.

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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2008_15.

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Date of creation: Apr 2008
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Handle: RePEc:gla:glaewp:2008_15

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Keywords: countercyclical taxes; capital utilization; stabilization; welfare;

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