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On the stability of endogenous growth models: An evaluation of the agents' response to output fluctuations

  • Orlando Gomes

Purpose – The purpose of this paper is to present three modified versions of the simple AK endogenous growth model. Design/methodology/approach – Such frameworks stress the role of consumers' sentiment, the impact of fiscal policy and the effect of non-optimal investment decisions made by firms. In all the cases, today's decisions take into consideration the economic performance of the previous period; in the first case, households react pro-cyclically to the output path; in the second case, a counter-cyclical fiscal policy is considered; and in the third case, firms adopt a pro-cyclical behavior concerning investment choices. Findings – The author studies the stability properties of the three models and concludes that, on each one of them, a saddle-path stable equilibrium exists. Originality/value – The paper accentuates the relevance of the reaction of the economic agents relatively to the business cycle. By assuming that the behavior of consumers, government and firms is a behavior of reaction to economic fluctuations, we find interesting and relevant results in what concerns the conventional intertemporal optimization growth model.

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Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 36 (2009)
Issue (Month): 1 (January)
Pages: 17-35

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Handle: RePEc:eme:jespps:v:36:y:2009:i:1:p:17-35
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  1. Staehr, Karsten, 2008. "Fiscal policies and business cycles in an enlarged euro area," Economic Systems, Elsevier, vol. 32(1), pages 46-69, March.
  2. Bob McNabb & Karl Taylor, 2002. "Business Cycles and the Role of Confidence: Evidence from Europe," Discussion Papers in Economics 02/3, Department of Economics, University of Leicester.
  3. Mackiewicz, Michał, 2008. "Determinants of Cyclicality of Fiscal Surpluses in The OECD Countries," MPRA Paper 16034, University Library of Munich, Germany.
  4. U. Michael Bergman & Michael D. Bordo & Lars Jonung, 1998. "Historical evidence on business cycles: the international experience," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 42(Jun), pages 65-119.
  5. Martin, Philippe & Rogers, Carol Ann, 1997. "Stabilization Policy, Learning-by-Doing, and Economic Growth," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 152-66, April.
  6. Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Harvard Institute of Economic Research Working Papers 2090, Harvard - Institute of Economic Research.
  7. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  8. Guo, Jang-Ting & Lansing, Kevin J., 2002. "Fiscal Policy, Increasing Returns, And Endogenous Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 6(05), pages 633-664, November.
  9. Dion, David Pascal, 2006. "Does Consumer Confidence Forecast Household Spending?," MPRA Paper 902, University Library of Munich, Germany.
  10. Khoon Lek Goh, 2003. "Does Consumer Confidence Forecast Consumption Expenditure in New Zealand?," Treasury Working Paper Series 03/22, New Zealand Treasury.
  11. Eckhard Hein & Achim Truger, 2007. "Monetary Policy, Macroeconomic Policy Mix and Economic Performance in the Euro Area," Chapters, in: Money, Distribution and Economic Policy, chapter 11 Edward Elgar.
  12. Budina, Nina & van Wijnbergen, Sweder, 1997. "Fiscal Policies in Eastern Europe," Oxford Review of Economic Policy, Oxford University Press, vol. 13(2), pages 47-64, Summer.
  13. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-88, September.
  14. repec:cup:macdyn:v:6:y:2002:i:5:p:633-64 is not listed on IDEAS
  15. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
  16. Perry, Guillermo, 2003. "Can fiscal rules help reduce macroeconomic volatility in the Latin America and Caribbean Region?," Policy Research Working Paper Series 3080, The World Bank.
  17. António Afonso & Christiane Nickel & Philipp C. Rother, 2006. "Fiscal Consolidations in the Central and Eastern European Countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 142(2), pages 402-421, July.
  18. Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2006. "An Evolutionary Model of Endogenous Business Cycles," Computational Economics, Society for Computational Economics, vol. 27(1), pages 3-34, February.
  19. Jason Bram & Sydney Ludvigson, 1997. "Does consumer confidence forecast household expenditure?: A sentiment index horse race," Research Paper 9708, Federal Reserve Bank of New York.
  20. David B. Gordon & Eric M. Leeper, 2005. "Are Countercyclical Fiscal Policies Counterproductive?," NBER Working Papers 11869, National Bureau of Economic Research, Inc.
  21. Dion, David Pascal, 2006. "Does Consumer Confidence Forecast Household Spending? The Euro Area Case," MPRA Paper 911, University Library of Munich, Germany.
  22. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
  23. Mark Doms & Norman Morin, 2004. "Consumer sentiment, the economy, and the news media," Finance and Economics Discussion Series 2004-51, Board of Governors of the Federal Reserve System (U.S.).
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