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Endogenous business cycles and stabilization policies

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  • Marta Aloi
  • Hans Jorgen Jacobsen
  • Teresa Lloyd Braga

Abstract

The paper reports results on the effects of stylized stabilization policies on endogenously created fluctuations. A simple monetary model with intertemporally optimizing agents is considered. Fluctuations in output may occur due to fluctuations in labor supply which are again caused by volatile expectations which are ``self fulfilling'', i.e. correct given the model. It turns out that stabilization policies that are sufficiently countercyclical in the sense that government spending (on transfers or demand) depends sufficiently strongly negatively on GNP-increases can stabilize the economy at a monetary steady state for an arbitrarily low degree of distortion of that steady state. Such stabilization has unambiguously good welfare effects and can be achieved without features such as positive lump sum taxation or negative income taxation as part of the stabilization policy.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 476.

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Date of creation: Sep 1998
Date of revision: Jun 2000
Handle: RePEc:upf:upfgen:476

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Web page: http://www.econ.upf.edu/

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Keywords: Endogenous business cycles; stabilization policy;

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  1. BĂ©nassy, Jean-pascal, 1997. "On the optimality of activist policies with a less informed government," CEPREMAP Working Papers (Couverture Orange) 9722, CEPREMAP.
  2. Guo, Jang-Ting & Lansing, Kevin J., 1998. "Indeterminacy and Stabilization Policy," Journal of Economic Theory, Elsevier, vol. 82(2), pages 481-490, October.
  3. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  4. Grandmont, Jean-Michel, 1986. "Stabilizing competitive business cycles," Journal of Economic Theory, Elsevier, vol. 40(1), pages 57-76, October.
  5. Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, sunspots, and automatic stabilizers," Staff Report 214, Federal Reserve Bank of Minneapolis.
  6. Goenka, Aditya, 1994. "Fiscal Rules and Extrinsic Uncertainty," Economic Theory, Springer, vol. 4(3), pages 401-16, May.
  7. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  8. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series 95-44, Board of Governors of the Federal Reserve System (U.S.).
  9. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
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Cited by:
  1. Vivaldo M. Mendes & Diana A. Mendes, 2006. "Active Interest Rate Rules and the Role of Stabilization Policy R&D Tax Credits," Working Papers Series 1 ercwp0208, ISCTE-IUL, Business Research Unit (BRU-IUL).

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