Paper #476

Title:

Endogenous business cycles and stabilization policies

Authors:

Marta Aloi, Hans Jorgen Jacobsen and Teresa Lloyd Braga

Date:

September 1998 (Revised: June 2000)

Abstract:

The paper reports results on the effects of stylized stabilization policies on endogenously created fluctuations. A simple monetary model with intertemporally optimizing agents is considered. Fluctuations in output may occur due to fluctuations in labor supply which are again caused by volatile expectations which are ``self fulfilling'', i.e. correct given the model. It turns out that stabilization policies that are sufficiently countercyclical in the sense that government spending (on transfers or demand) depends sufficiently strongly negatively on GNP-increases can stabilize the economy at a monetary steady state for an arbitrarily low degree of distortion of that steady state. Such stabilization has unambiguously good welfare effects and can be achieved without features such as positive lump sum taxation or negative income taxation as part of the stabilization policy.

Keywords:

Endogenous business cycles, stabilization policy

JEL codes:

E32, E63

Area of Research:

Macroeconomics and International Economics

Published in:

International Economic Review, 44 (2003), 3 (08), pp. 895-915

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