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Growth, Cycles and Stabilisation Policy

  • K Blackburn
  • A Pelloni

This paper presents an analysis of the joint determination of growth and business cycles with the view to studying the long-run implications of short-term monetary stabilisation policy. The analysis is based on a simple stochastic growth model in which both real and nominal shocks have permanent effects on output due to nominal rigidities (wage contracts) and an endogenous technology (learning-by-doing). It is shown that there is a negative correlation between the mean and variance of output growth irrespective of the source of fluctuations. It is also shown that, in spite of this, there may exist a conflict between short-term stabilisation and long-term growth depending on the type of disturbance. Finally, it is shown that, from a welfare perspective, the optimal monetary policy is that policy which maximises long-run growth to the exclusion of stabilisation considerations.

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File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr12.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 12.

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Length: 21 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:man:cgbcrp:12
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Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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