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Government Policy in a Stochastic Growth Model with Elastic Labor Supply

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  • Stephen J. Turnovsky

Abstract

Endogenous labor supply is introduced into a stochastic growth model. Money is superneutral, and the real part of the equilibrium can be characterized by two nonlinear trade‐off loci between the time devoted to leisure and the mean growth rate that ensure the following: (i) equality among the risk‐adjusted rates of return and (ii) equilibrium in the output market. The balanced growth equilibrium is characterized analytically and policy implications derived. Extensive numerical simulations are also conducted. These assess the effects of risk on growth and the impact of fiscal policy on both the mean growth rate and its volatility. Implications for optimal monetary policy are also addressed.

Suggested Citation

  • Stephen J. Turnovsky, 2000. "Government Policy in a Stochastic Growth Model with Elastic Labor Supply," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(4), pages 389-433, October.
    • Handle: RePEc:bla:jpbect:v:2:y:2000:i:4:p:389-433
    DOI: 10.1111/1097-3923.00044
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