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Endogenous business cycles and systematic stabilization policy*
Author(s) -
Aloi Marta,
LloydBraga Teresa,
WhittaJacobsen Hans Jørgen
Publication year - 2003
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.t01-1-00093
Subject(s) - determinacy , economics , distortion (music) , business cycle , monetary policy , government spending , fiscal policy , monetary economics , state (computer science) , stabilization policy , government (linguistics) , constant (computer programming) , steady state (chemistry) , rational expectations , keynesian economics , macroeconomics , microeconomics , market economy , welfare , mathematics , philosophy , cmos , algorithm , chemistry , electronic engineering , mathematical analysis , amplifier , linguistics , computer science , engineering , programming language
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.