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Natural Volatility, Welfare and Taxation

  • Olaf Posch
  • Klaus Wälde

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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1748.

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Date of creation: 2006
Handle: RePEc:ces:ceswps:_1748
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