Macroeconomic fluctuations and welfare cost of stabilization policy

This paper uses an extended Real-Business-Cycle (RBC) model including money and government spending to analyze US macroeconomic policy and business cycles. There exist two kinds of exogenous shocks: nominal random disturbance (money) and real random disturbance (technology, government spending and tax rate). In addition, the welfare cost of business cycles is measured and different stabilization policies are discussed and compared. The results of the calibration indicate that this model can mimic the characteristics of post-war business cycles well and that it does a good job of explaining the dynamic interactions of money and real variables. It is obvious that monetary and fiscal shocks play important roles in the explanation of post-war business cycles. According to the welfare cost of different stabilization policies, it can be found that (1) monetary policy may be a better stabilization policy than other policies, (2) there may exist a kind of "Laffer curve" patterns for the feedback coefficient of government consumption, and (3) tax smoothing induces lower welfare cost than variable tax rate. (C) 2002 Society for Policy Modeling. Published by Elsevier Science Inc. All rights reserved.