DP1130 | Stabilization Policy, Learning by Doing, and Economic Growth

Publication Date

28/02/1995

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Abstract

This paper shows that fiscal policy, when used for stabilization purposes, can have a positive effect on the economy's growth, on human capital accumulation, and on welfare, along the transition path. We introduce symmetric productivity shocks into a model in which productivity is augmented through learning by doing. If future benefits of learning by doing are not fully internalized by workers, then recessions are periods in which opportunities for acquiring experience are foregone. We identify configurations of disturbances and other parameters for which a countercyclical policy maximizes growth and welfare.