We study the effects of fiscal policy rules on the determinacy of rational expectations equilibrium in a perfectly competitive monetary model with constant returns. Government spending implies a distortion of the monetary steady state due to the implied taxation. We show that policy rules that let the GNP share of government spending sufficiently negatively on increases in GNP stabilize the economy with respect to endogenous fluctuations for arbitrarily little distortion of the steady state of which stabilization occurs. The rules do not involve lump sum taxation, negative income taxation, or exact knowledge of the economy's laissez faire steady state. (JEL E32 and E63 - Keywords: Endogenous business cycles, stabilization policy - Running title: "Endogenous Fluctuations and Stabilization Policy")
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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number
02-15.
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Klaus Wälde, 2005.
"Endogenous Growth Cycles,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 867-894, 08.
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