On the welfare gain from stabilizing cyclical fluctuations

Burkhard Heer

Applied Economics Letters, 2001, vol. 8, issue 5, 331-334

Abstract: Welfare gains of optimal cyclical fiscal policies as computed from previous dynamic general equilibrium models seem to be small and generally do not exceed 1% of total consumption if preferences are described by a standard isoelastic utility function. It is demonstrated that the assumption of certainty equivalence and the negligence of binding constraints results in the underestimation of the magnitude of potential welfare effects from stabilization.

Date: 2001
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DOI: 10.1080/135048501750157567

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