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Countercyclical Fiscal Policy and Cyclical Factor Utilization

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  • Ioana Moldovan
Abstract
In a neoclassical growth model with monopolistic competition in the product market, the presence of cyclical factor utilization enhances the stabilization role of countercyclical taxes. The costs of varying capital utilization take the form of varying rates of depreciation, which in turn have amplifying effect on investment decisions as well as the volatility of most aggregate variables. This creates an additional channel through which taxes affect the economy, a channel that enhances the stabilization role of countercyclical taxes, with particularly strong effects in the labor market. However, in terms of welfare, countercyclical taxes are welfare inferior due to reduced precautionary saving motives.

Suggested Citation

  • Ioana Moldovan, 2008. "Countercyclical Fiscal Policy and Cyclical Factor Utilization," Working Papers 2008_15, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2008_15
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    References listed on IDEAS

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    More about this item

    Keywords

    countercyclical taxes; capital utilization; stabilization; welfare;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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