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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 stabilization 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 stabilization 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 maximizes long-run growth to the exclusion of stabilization considerations. Copyright 2005, Oxford University Press.

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Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 0216.

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Date of creation: 2002
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Handle: RePEc:man:sespap:0216
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