On the Likelihood and Welfare Effects of "Stop–and–go" Policies

Baleiras and Santos (2000) show that "stop–and–go" policies may be inherent in the institutional set–up rather than result from the wrong timing of expansionary vs. contractionary policies or any form of players' irrationality. We use this set–up, involving ultrarational players and perfect foresight, to show that stop–and–go policies are more likely (in a statistical sense) than the opposite type of phenomenon. Moreover, it is shown that having the voters' and the business community's preferences concerning the cycle converge to the socially optimal cycle pattern may entail a welfare loss.