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On stabilisation policy: Are there conflicting implications for growth and welfare?

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    Abstract

    The paper examines the choices for fiscal stabilisation policy that maximise aggregate welfare and long-run growth. This is done in the context of a stochastic dynamic general equilibrium model where premeditated learning provides the engine of human capital accumulation and growth, and technology shocks provide the impulse source of fluctuations. Contrary to existing conventional wisdom, the results indicate a conflict between the two policy objectives: the choice of no stabilisation, associated with maximum growth, is also associated with minimum welfare. Welfare maximisation requires a full stabilisation response to the occurrence of business cycles.

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    File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/CC_pol_gro.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2006_19.

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    Date of creation: Jul 2006
    Date of revision: Jul 2006
    Handle: RePEc:lbo:lbowps:2006_19

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    Keywords: money; growth; volatility.;

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