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Growth, cycles, and stabilization policy

Posted: 29 Feb 2008  

Keith Blackburn

University of Manchester - School of Social Sciences

Date Written: April 2005

Abstract

This paper presents an analysis of the joint determination of growth and business cycles with the view to studying the long-run implications of short-term monetary stabilization policy. The analysis is based on a simple stochastic growth model in which both real and nominal shocks have permanent effects on output due to nominal rigidities (wage contracts) and an endogenous technology (learning-by-doing). It is shown that there is a negative correlation between the mean and variance of output growth irrespective of the source of fluctuations. It is also shown that, in spite of this, there may exist a conflict between short-term stabilization and long-term growth depending on the type of disturbance. Finally, it is shown that, from a welfare perspective, the optimal monetary policy is that policy which maximizes long-run growth to the exclusion of stabilization considerations.

JEL Classification: E32; E52; O42

Suggested Citation

Blackburn, Keith, Growth, cycles, and stabilization policy (April 2005). Oxford Economic Papers, Vol. 57, Issue 2, pp. 262-282, 2005. Available at SSRN: https://ssrn.com/abstract=916826

Keith Blackburn (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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