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On Stabilization Policy in Sunspot-Driven Oligopolistic Economies

Rodolphe Dos Santos Ferreira () and Frédéric Dufourt ()

No 1337, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Economies with oligopolistic markets are prone to inefficient sunspot fluctuations triggered by autonomous changes in firms equilibrium conjectures. We show that a well designed taxation-subsidization scheme can eliminate these fluctuations by coordinating firms in each sector on a single efficient equilibrium. At the macroeconomic level, implementing this stabilization policy leads to significant welfare gains, attributable to a quantitatively dominant "efficient stabilization effect". This effect, while important, is typically ignored in the traditional computations of the welfare costs of aggregate fluctuations (e.g., Lucas, 2003).

Keywords: Business cycles; Stabilization policy; Indeterminacy; Sunspot equilibria; Oligopolistic competition (search for similar items in EconPapers)
JEL-codes: E32 E62 D43 D61 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013-06-30, Revised 2013-06-30
New Economics Papers: this item is included in nep-cwa and nep-mac
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