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On stabilisation policy: Are there conflicting implications for growth and welfare?

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Abstract

The paper examines the choices for fiscal stabilisation policy that maximise aggregate welfare and long-run growth. This is done in the context of a stochastic dynamic general equilibrium model where premeditated learning provides the engine of human capital accumulation and growth, and technology shocks provide the impulse source of fluctuations. Contrary to existing conventional wisdom, the results indicate a conflict between the two policy objectives: the choice of no stabilisation, associated with maximum growth, is also associated with minimum welfare. Welfare maximisation requires a full stabilisation response to the occurrence of business cycles.

Suggested Citation

  • Dimitrios Varvarigos, 2006. "On stabilisation policy: Are there conflicting implications for growth and welfare?," Discussion Paper Series 2006_19, Department of Economics, Loughborough University, revised Jul 2006.
  • Handle: RePEc:lbo:lbowps:2006_19
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    File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/CC_pol_gro.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    money; growth; volatility.;

    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
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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