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Advisor(s)
Abstract(s)
This study addresses diffusion dynamics in an economic environment in which fiscal policy changes take place. The discussion, based upon a conventional intertemporal optimization setup, involves the consideration of a peculiar form of bounded rationality: it is assumed that only a small share of house-
holds is able to instantly recompute the optimal solution once the value of a tax rate is disturbed; all the other agents will then, gradually, follow the behavior of thefirst group (this can occur through contagion, social influence or social learning). As a result, the convergence towards the post-perturbation steady-state tends to follow a diffusion process and, consequently, policy measures may take time in affecting pervasively labor-leisure and consumption-savings choices.
Description
Keywords
Fiscal policy, Diffusion processes, Utility maximization, Labor- leisure choices.
Citation
Gomes, O. (2014). “Diffusion Dynamics in Economics: an Application to the Effects of Fiscal Policy.” in A.A. Pinto and D. Zilberman (eds.), Modeling, Dynamics, Optimization and Bioeconomics I, Springer Proceedings in Mathematics & Statistics, series volume 73, Springer International Publishing, chapter 19, pp. 305-328.