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Oxford Economic Papers Advance Access originally published online on December 10, 2004
Oxford Economic Papers 2005 57(2):262-282; doi:10.1093/oep/gpi012
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Right arrow O42 - Monetary Growth Models
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© Oxford University Press 2005; All rights reserved

Growth, cycles, and stabilization policy

Keith Blackburn* and Alessandra Pelloni{dagger}

*Centre for Growth and Business Cycle Research, School of Economic Studies, University of Manchester, Manchester M13 9PL; e-mail: keith.blackburn{at}man.ac.uk {dagger}Department of Economics, University of Rome II, Italy

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.

Key Words: JEL classification: E32 • E52 • O42


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Note on 'Growth, cycles, and stabilization policy'
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