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Endogenous volatility, endogenous growth, and large welfare gains from stabilization policies

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Pengfei Wang
Yi Wen

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Abstract

This paper shows that (i) fluctuations driven by self-fulfilling expectations can negatively affect long-run growth and (ii) the welfare gain from further stabilizing the U.S. economy can be several orders larger than that calculated by Lucas (1987) because policies designed to reduce fluctuations can generate permanently higher rates of growth. Self fulfilling expectations arise from incomplete information for price setting firms. ; Previously titled: Volatility, growth, and large welfare gains from stabilization policies

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-032.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2006-032

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