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Natural volatility, welfare and taxation

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  • Posch, Olaf
  • Wälde, Klaus

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 University of Würzburg, Chair for Monetary Policy and International Economics in its series W.E.P. - Würzburg Economic Papers with number 57.

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Date of creation: 2005
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Handle: RePEc:zbw:wuewep:57

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

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References

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Cited by:
  1. Olaf Posch, 2007. "Structural estimation of jump-diffusion processes in macroeconomics," CREATES Research Papers 2007-23, School of Economics and Management, University of Aarhus.
  2. Heijdra, B.J. & Ligthart, J.E., 2006. "Fiscal Policy, Monopolistic Competition and Finite Lives," Open Access publications from Tilburg University urn:nbn:nl:ui:12-199395, Tilburg University.
  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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