Working Paper: CEPR ID: DP1129
Authors: Philippe Martin; Carol Ann Rogers
Abstract: The paper analyses, along the transition path and in steady state, the optimal stabilization policy in an economy in which growth is driven by learning by doing. If future benefits of learning by doing are not fully internalized by workers the optimal fiscal policy is to tax labour during expansions so as to be able to subsidize it during recessions. The long-term impact on output and on human capital of such a policy depends critically on initial conditions: if stabilization is initiated during an expansion its effect on long-term production is positive. The long-term effect is negative when stabilization is initiated during a recession.
Keywords: stabilization policy; learning by doing; growth; cycles
JEL Codes: E32; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal fiscal policy is countercyclical (E62) | Labor is taxed during high productivity periods (H31) |
| Labor is taxed during high productivity periods (H31) | Subsidies are financed during low productivity periods (H23) |
| Optimal fiscal policy (E62) | Smooth output and employment over the business cycle (E32) |
| Stabilization policies initiated during a good period (E63) | Positive long-term impact on production (E23) |
| Stabilization policies initiated during a bad period (E63) | Negative long-term impact on production (F69) |
| Presence of learning by doing (J24) | Justifies government intervention through fiscal policy (E62) |
| Recessions limit opportunities for human capital accumulation (E24) | Necessitates government intervention (H13) |
| Optimal stabilization policy initiated during a boom (E63) | Increased human capital in the long term (J24) |
| Optimal stabilization policy initiated during a recession (E63) | Increased human capital in the short term (J24) |
| Optimal stabilization policy (E63) | Contradicting expectation that policies foster growth (O29) |