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Endogenous Business Cycles and Systematic Stabilization Policy

Author

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  • Marta Aloi
  • Teresa Lloyd-Braga
  • Hans Jørgen Whitta-Jacobsen

Abstract

We study the effects of stylized fiscal policy rules on the (global) determinacy of rational expectations equilibrium in perfectly competitive monetary model with constant returns to scale and labor as the unique input. Government spending on transfers and/or demand implies a distortion of the mnetary steady state due to the implied income or inflationary taxation. We show that policy rules for which the GNP share of government spending depends sufficiently negatively on increases in GNP can stabilize the economy with respect to endogenous fluctuations for an arbitrarily small level of distortion of the steady state at which stabilization occurs. These policy rules do not involve features such as positive lump sum taxation, negative income taxation, or exact knowledge of the economy's laissez faire steady state.

Suggested Citation

  • Marta Aloi & Teresa Lloyd-Braga & Hans Jørgen Whitta-Jacobsen, 2002. "Endogenous Business Cycles and Systematic Stabilization Policy," EPRU Working Paper Series 02-03, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:epruwp:02-03
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    Cited by:

    1. Maravalle, Alessandro & Claeys, Peter, 2012. "Boom–bust cycles and procyclical fiscal policy in a small open economy," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 735-754.
    2. Klaus Wälde, 2005. "Endogenous Growth Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 867-894, August.
    3. Claeys, Peter & Maravalle, Alessandro, 2010. "Fiscal Policy and Economic Stability: Does PIGS stand for Procyclicality In Government Spending?," DFAEII Working Papers 2010-11, University of the Basque Country - Department of Foundations of Economic Analysis II.
    4. Malley, Jim & Philippopoulos, Apostolis & Woitek, Ulrich, 2009. "To react or not? Technology shocks, fiscal policy and welfare in the EU-3," European Economic Review, Elsevier, vol. 53(6), pages 689-714, August.
    5. Kaas, Leo & Madden, Paul, 2005. "Imperfectly competitive cycles with Keynesian and Walrasian features," European Economic Review, Elsevier, pages 861-886.
    6. Erkki Koskela & Mikko Puhakka, 2006. "Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(2), pages 149-167, June.
    7. Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2007. "To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3," IEW - Working Papers 312, Institute for Empirical Research in Economics - University of Zurich.
    8. Patrick A. Pintus, 2008. "Laffer traps and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 165-174.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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