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Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy


  • Turnovsky, Stephen J


An integrated stochastic equilibrium growth model is constructed and directed to various questions pertaining to monetary and tax policy. Two main issues addressed include (1) the tradeoff between the rate of capital accumulation and inflation in a stochastic environment; and (2) economic welfare and optimal policy making. The key result is that policy variables impact on welfare through their effect on the after-tax nominal interest rate, which therefore serves as an intermediate policy target. The welfare maximizing interest rate target is derived and the author discusses its attainment through appropriate monetary and tax policies. Tradeoffs between policy instruments are also addressed. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-981, November.
  • Handle: RePEc:ier:iecrev:v:34:y:1993:i:4:p:953-81

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    References listed on IDEAS

    1. Paul Milgrom & Sharon Oster, 1987. "Job Discrimination, Market Forces, and the Invisibility Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 453-476.
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    4. Lawrence H. Summers, 1986. "Why is the Unemployment Rate So Very High near Full Employment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 339-396.
    5. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-793, August.
    6. Rogerson, Richard, 1987. "An Equilibrium Model of Sectoral Reallocation," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 824-834, August.
    7. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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