Discussion Paper Details

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Title: Optimal Stabilization Policy in the Presence of Learning by Doing

Author(s): Philippe Martin and Carol Ann Rogers

Publication Date: February 1995

Keyword(s): Cycles, Growth, Learning By Doing and Stabilization Policy

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Martin, P and Rogers, C. 1995. 'Optimal Stabilization Policy in the Presence of Learning by Doing'. London, Centre for Economic Policy Research.