Abstract
The paper aims to analyse the question of how cyclical fluctuations might affect long run growth. The analysis is based on a dynamic stochastic general equilibrium model for an imperfectly competitive economy with fully optimising agents. The model is characterized with nominal rigidities, an endogenous technology, and multiple shocks. It predicts either a negative or positive relationship between short run volatility and long run growth depending on the source of shocks and the reaction of the central bank. The model also shows that, even when the negative relationship exits the policy that is designed to stabilise short run volatility may either increase or decrease growth depending on the source of shocks.
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Notes
The assumption that utility is additively separable in consumption, real money balances, and labour supply allows for closed-form solutions. The budget constraint is also written without bond holdings for analytical convenience.
We approximate the stock of disembodied knowledge available to firms by the past aggregate output, that is, \( {Z_t} = A{Y_{t - 1}} \) in (16). As shown by others, the main implication of this is to make it possible for the level of output to depend on the accumulated realizations of any type of shock, whether real or nominal, temporary or permanent. Furthermore, as can be seen later, this learning by doing mechanism also allows us to derive a closed form solution of the average rate of output growth as a function of the variances of the shocks and a relationship between secular growth and cyclical volatility.
Note that under flexible prices the long term growth in equation (38) is given by δ. Therefore, the policy that aims at maximising long term growth is the same as the policy aims at reducing the growth gap between flexible and sticky prices.
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This paper is a substantially revised chapter in my PhD dissertation at the University of Manchester, United Kingdom. I would like to thank Prof. Keith Blackburn for his very useful comments and guidance.
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Pham, T.A. Growth, volatility and stabilisation policy in a DSGE model with nominal rigidities and learning-by-doing. Int Econ Econ Policy 8, 307–322 (2011). https://doi.org/10.1007/s10368-010-0173-9
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DOI: https://doi.org/10.1007/s10368-010-0173-9