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Endogenous Business Cycles and Systematic Stabilization Policy

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  • Marta Aloi
  • Teresa Lloyd-Braga
  • Hans Jørgen Whitta-Jacobsen

Abstract

We study the effects of stylized fiscal policy rules on the (global) determinacy of rational expectations equilibrium in perfectly competitive monetary model with constant returns to scale and labor as the unique input. Government spending on transfers and/or demand implies a distortion of the mnetary steady state due to the implied income or inflationary taxation. We show that policy rules for which the GNP share of government spending depends sufficiently negatively on increases in GNP can stabilize the economy with respect to endogenous fluctuations for an arbitrarily small level of distortion of the steady state at which stabilization occurs. These policy rules do not involve features such as positive lump sum taxation, negative income taxation, or exact knowledge of the economy's laissez faire steady state.

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Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 02-03.

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Date of creation: Feb 2002
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Handle: RePEc:kud:epruwp:02-03

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Cited by:
  1. Kaas, Leo & Madden, Paul, 2005. "Imperfectly competitive cycles with Keynesian and Walrasian features," European Economic Review, Elsevier, vol. 49(4), pages 861-886, May.
  2. Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2007. "To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3," IEW - Working Papers 312, Institute for Empirical Research in Economics - University of Zurich.
  3. Klaus, WAELDE, 2003. "Endogenous growth cycles," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 15 Mar 2004.
  4. Alessandro Maravalle & Peter Claeys, 2010. "Fiscal policy and economic stability: does PIGS stand for Procyclicality In Government Spending?," IREA Working Papers 201015, University of Barcelona, Research Institute of Applied Economics, revised 2010.
  5. Malley, Jim & Philippopoulos, Apostolis & Woitek, Ulrich, 2009. "To react or not? Technology shocks, fiscal policy and welfare in the EU-3," European Economic Review, Elsevier, vol. 53(6), pages 689-714, August.
  6. Patrick A. Pintus, 2008. "Laffer traps and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 165-174.
  7. Maravalle, Alessandro & Claeys, Peter, 2012. "Boom–bust cycles and procyclical fiscal policy in a small open economy," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 735-754.

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