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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 Business School - Economics, University of Glasgow in its series Working Papers with number 2007_33.

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Date of creation: Jun 2006
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Handle: RePEc:gla:glaewp:2007_33
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