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Natural volatility, welfare and taxation

  • Olaf Posch

    ()

    (Department of Economics University of Hamburg)

  • Klaus Wälde

    (University of Würzburg, CESifo and UCL)

Cyclical components are analytically computed in a theoretical model of stochastic endogenous fluctuations and growth. Volatility is shown to depend on the speed of convergence of the cyclical component, the expected length of a cycle and on the altitude of the slump. Taxes affect these channels and can therefore explain cross-country differences and breaks over time in volatility. With exogenous sources of fluctuations, a special case of our model, decentralized factor allocation is efficient. With endogenous fluctuations and growth, decentralized factor allocation is inefficient and (time-invariant) taxes can (de-) stabilize the economy. No unambiguous link exists between volatility and welfare

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 95.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:95
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