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Stabilizing fiscal policies with capital market imperfections



We analyze how investment subsidies can affect aggregate volatility and growth in economies subject to capital market imperfections. Within a model featuring both frictions on the credit market and unequal access to investment opportunities among individuals, we provide specific fiscal parameters able to reduce the probability of recessions, fuel the economy long-run growth rate and place it on a permanent-boom dynamic path. We analyze how conditions on the stabilizing fiscal parameters are modified when frictions in the economy evolve. Eventually, we show how this tax and transfer system can moderate persistence in the economy's response to temporary and permanent productivity shocks

Suggested Citation

  • Nicolas L. Dromel, 2009. "Stabilizing fiscal policies with capital market imperfections," Documents de travail du Centre d'Economie de la Sorbonne 09030, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  • Handle: RePEc:mse:cesdoc:09030

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    References listed on IDEAS

    1. Moulin, H. & Peleg, B., 1982. "Cores of effectivity functions and implementation theory," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 115-145, June.
    2. Peleg, Bezalel, 2004. "Representation of effectivity functions by acceptable game forms: a complete characterization," Mathematical Social Sciences, Elsevier, vol. 47(3), pages 275-287, May.
    3. Rosenthal, Robert W., 1972. "Cooperative games in effectiveness form," Journal of Economic Theory, Elsevier, vol. 5(1), pages 88-101, August.
    4. Abdou, J, 1995. "Nash and Strongly Consistent Two-Player Game Forms," International Journal of Game Theory, Springer;Game Theory Society, vol. 24(4), pages 345-356.
    5. Abdou, J., 2000. "Exact stability and its applications to strong solvability," Mathematical Social Sciences, Elsevier, vol. 39(3), pages 263-275, May.
    6. Eyal Winter & Bezalel Peleg, 2002. "original papers : Constitutional implementation," Review of Economic Design, Springer;Society for Economic Design, vol. 7(2), pages 187-204.
    7. Abdou, Joseph & Keiding, Hans, 2003. "On necessary and sufficient conditions for solvability of game forms," Mathematical Social Sciences, Elsevier, vol. 46(3), pages 243-260, December.
    8. repec:dau:papers:123456789/13220 is not listed on IDEAS
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    More about this item


    Endogenous business cycles; capital market imperfections; access to productive investment; fiscal policy; macroeconomic stabilization;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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