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Stabilizing Fiscal Policies with Capital Market Imperfections

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  • Nicolas Dromel

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

We analyze how investment subsidies can affect aggregate volatility and growth in economies subject to capital market imperfections. Within a model featuring both frictions on the credit market and unequal access to investment opportunities among individuals, we provide specific fiscal parameters able to reduce the probability of recessions, fuel the economy long-run growth rate and place it on a permanent-boom dynamic path. We analyze how conditions on the stabilizing fiscal parameters are modified when frictions in the economy evolve. Eventually, we show how this tax and transfer system can moderate persistence in the economy's response to temporary and permanent productivity shocks.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00389690.

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Date of creation: May 2009
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Handle: RePEc:hal:cesptp:halshs-00389690

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Related research

Keywords: Endogenous business cycles; capital market imperfections; access to productive investment; fiscal policy; macroeconomic stabilization.;

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