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

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.

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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2006_19.

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Date of creation: Jul 2006
Date of revision: Jul 2006
Handle: RePEc:lbo:lbowps:2006_19
Contact details of provider: Postal: Loughborough, Leicestershire, LE11 3TU
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  1. Collard, Fabrice, 1998. "Spectral and persistence properties of cyclical growth," Journal of Economic Dynamics and Control, Elsevier, vol. 23(3), pages 463-488, November.
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  10. Saint-Paul, Gilles, 1997. "Business Cycles and Long-Run Growth," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 145-53, Autumn.
  11. George W. Stadler, 1994. "Real Business Cycles," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1750-1783, December.
  12. Larry E. Jones & Rodolfo E. Manuelli & Ennio Stacchetti, 1999. "Technology (and Policy) Shocks in Models of Endogenous Growth," NBER Working Papers 7063, National Bureau of Economic Research, Inc.
  13. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  14. K Blackburn & D Varvarigos, 2006. "Human Capital Accumulation in a Stochastic Environment: Some New Results on the Relationship Between Growth and Volatility," Centre for Growth and Business Cycle Research Discussion Paper Series 74, Economics, The Univeristy of Manchester.
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  25. Steven P. Cassou & Kevin J. Lansing, 1996. "Welfare, stabilization, or growth: a comparison of different fiscal objectives," Working Paper 9614, Federal Reserve Bank of Cleveland.
  26. Ireland, Peter N., 1997. "A small, structural, quarterly model for monetary policy evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 83-108, December.
  27. E Andreou & A Pelloni & M Sensier, 2003. "The effect of nominal shock uncertainty on output growth," Centre for Growth and Business Cycle Research Discussion Paper Series 40, Economics, The Univeristy of Manchester.
  28. Imbs, Jean, 2002. "Why the Link Between Volatility and Growth is Both Positive and Negative," CEPR Discussion Papers 3561, C.E.P.R. Discussion Papers.
  29. Aghion, Philippe & Saint-Paul, Gilles, 1998. "VIRTUES OF BAD TIMES Interaction Between Productivity Growth and Economic Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 322-344, September.
  30. Blackburn, Keith, 1999. "Can Stabilisation Policy Reduce Long-Run Growth?," Economic Journal, Royal Economic Society, vol. 109(452), pages 67-77, January.
  31. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
  32. Erik Canton, 2002. "Business cycles in a two-sector model of endogenous growth," Economic Theory, Springer, vol. 19(3), pages 477-492.
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