Endogenous Business Cycles and Stabilization Policies

Marta Aloi, Hans Jorgen Jacobsen and Teresa Lloyd-Braga
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Hans Jorgen Jacobsen: University of Copenhagen, Institute of Economics

No 00-06, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: We analyze the effects of simple stylized economic policy rules, or stabilization principles, when fluctuations in economic activity are created endogenously by self_fulfilling volatile expectations. We study a simple monetary competitive model with intertemporally optimizing agents and a government. We only depart from neoclassical orthodoxy by assuming that a cycle or a sunspot equilibrium, not necessarily a steady state, could be the descriptive dynamic rational expectations equilibrium. The government may then well out of welfare concerns want to conduct systematic stabilization policy through transfers, expenditure, and taxation even though this has distortionary effects. We show that the policy rules that stabilize output in a way that is best for welfare involve countercyclical elements in government activity.

Keywords: Endogenous business cycles; Stabilization policy (search for similar items in EconPapers)
JEL-codes: E32 E63 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1998-09, Revised 2000-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.econ.ku.dk/english/research/publications/wp/2000/0006.pdf/ (application/pdf)

Related works:
Working Paper: Endogenous Business Cycles and Stabilization Policies (2000)
Working Paper: Endogenous business cycles and stabilization policies (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0006

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