Endogenous Business Cycles and Stabilization Policies
We analyze the effects of simple stylized economic policy rules, or stabilization principles, when fluctuations in economic activity are created endogenously by self_fulfilling volatile expectations. We study a simple monetary competitive model with intertemporally optimizing agents and a government. We only depart from neoclassical orthodoxy by assuming that a cycle or a sunspot equilibrium, not necessarily a steady state, could be the descriptive dynamic rational expectations equilibrium. The government may then well out of welfare concerns want to conduct systematic stabilization policy through transfers, expenditure, and taxation even though this has distortionary effects. We show that the policy rules that stabilize output in a way that is best for welfare involve countercyclical elements in government activity.
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- Schmitt-Grohe, Stephanie & Uribe, Martin, 1997.
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"Chaos, sunspots, and automatic stabilizers,"
Working Paper Series, Macroeconomic Issues
WP-96-16, Federal Reserve Bank of Chicago.
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- Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, sunspots, and automatic stabilizers," Staff Report 214, Federal Reserve Bank of Minneapolis.
- Benassy, Jean-Pascal, 2001.
"On the optimality of activist policies with a less informed government,"
Journal of Monetary Economics,
Elsevier, vol. 47(1), pages 45-59, February.
- Bénassy, Jean-pascal, 1997. "On the optimality of activist policies with a less informed government," CEPREMAP Working Papers (Couverture Orange) 9722, CEPREMAP.
- Grandmont Jean-michel, 1985.
"Stabilizing competitive business cycles,"
CEPREMAP Working Papers (Couverture Orange)
- Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
- Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
- Guo, Jang-Ting & Lansing, Kevin J., 1998.
"Indeterminacy and Stabilization Policy,"
Journal of Economic Theory,
Elsevier, vol. 82(2), pages 481-490, October.
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