Natural Volatility, Welfare and Taxation

35 Pages Posted: 14 Jul 2006

See all articles by Olaf Posch

Olaf Posch

Universität Hamburg, Department of Economics; CREATES

Klaus Wälde

University of Mainz; CESifo (Center for Economic Studies and Ifo Institute); UCL at Louvain la Neuve

Multiple version iconThere are 2 versions of this paper

Date Written: June 2006


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.

Keywords: endogenous fluctuations and growth, welfare analysis, taxation, stochastic continuous time model, poisson uncertainty

JEL Classification: C65, E32, E62, H3, O33

Suggested Citation

Posch, Olaf and Wälde, Klaus, Natural Volatility, Welfare and Taxation (June 2006). CESifo Working Paper Series No. 1748, Available at SSRN:

Olaf Posch

Universität Hamburg, Department of Economics ( email )

Von-Melle-Park 5
Hamburg, 20146


School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C

Klaus Wälde (Contact Author)

University of Mainz ( email )

Mainz School of Management and Economics
Mainz, 55128
+49 6131 3920143 (Phone)


CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

UCL at Louvain la Neuve

Place Montesquieu, 3
Louvain-la-Neuve, 1348

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