Endogenous business cycles and systematic stabilization policy

Marta Aloi, Teresa Lloyd-Braga, Hans JØrgen Whitta-Jacobsen*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Citations (Scopus)

Abstract

We study the effects of fiscal policy rules on the determinacy of rational expectations equilibrium in a perfectly competitive monetary model with constant returns. Government spending implies a distortion of the monetary steady state due to the implied taxation. We show that policy rules that let the GNP share of government spending depend sufficiently negatively on increases in GNP stabilize the economy with respect to endogenous fluctuations for arbitrarily little distortion of the steady state at which stabilization occurs. The rules do not involve lump-sum taxation, negative income taxation, or exact knowledge of the economy's laissez-faire steady state.
Original languageEnglish
Pages (from-to)895-915
Number of pages21
JournalInternational Economic Review
Volume44
Issue number3
DOIs
Publication statusPublished - Aug 2003

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