Natural Volatility, welfare and taxation

Posch, Olaf;Waelde, Klaus
(2005)

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  • Posch, Olaf
    Author
  • Waelde, Klaus
    Author
Abstract
Cyclical components are analytically computed in a theoretical model of stochastic endogenous fluctuations and growth. Volatility is shown to depend on the speed of convergence of the cyclical component, the expected length of a cycle and on the altitude of the slump. Taxes affect these channels and can therefore explain cross-country differences and breaks over time in volatility. With exogenous sources of fluctuations, a special case of our model, decentralized factor allocation is efficient. With endogenous fluctuations and growth, decentralized factor allocation is inefficient and (time-invariant) taxes can (de-) stabilize the economy. No unambiguous link exists between volatility and welfare.
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Posch, O., & Waelde, K. (2005). Natural Volatility, welfare and taxation (ECON Working Papers 2005/09). https://hdl.handle.net/2078.5/78838