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Natural volatility, welfare and taxation

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  • Olaf Posch

    ()
    (Department of Economics University of Hamburg)

  • Klaus Wälde

    (University of Würzburg, CESifo and UCL)

Abstract

Cyclical components are analytically computed in a theoretical model of stochastic endogenous fluctuations and growth. Volatility is shown to depend on the speed of convergence of the cyclical component, the expected length of a cycle and on the altitude of the slump. Taxes affect these channels and can therefore explain cross-country differences and breaks over time in volatility. With exogenous sources of fluctuations, a special case of our model, decentralized factor allocation is efficient. With endogenous fluctuations and growth, decentralized factor allocation is inefficient and (time-invariant) taxes can (de-) stabilize the economy. No unambiguous link exists between volatility and welfare

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 95.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:95

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Keywords: Endogenous fluctuations and growth; welfare analysis; taxation; stochastic continuous time model; Poisson uncertainty;

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Cited by:
  1. Posch, Olaf, 2009. "Structural estimation of jump-diffusion processes in macroeconomics," Journal of Econometrics, Elsevier, vol. 153(2), pages 196-210, December.
  2. Ben J. Heijdra & Jenny Ligthart, 2006. "Fiscal Policy, Monopolistic Competition, and Finite Lives," CESifo Working Paper Series 1661, CESifo Group Munich.
  3. Gary D. Hansen, . "Why Have Business Cycle Fluctuations Become Less Volatile? (with Andres Arias and Lee E. Ohanian)," UCLA Economics Online Papers 416, UCLA Department of Economics.

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