Globally-Stabilizing Fiscal Policy Rules ∗ Jang-Ting Guo † University of California, Riverside Kevin J. Lansing ‡ Federal Reserve Bank of San Francisco May 8, 2003 Forthcoming in Studies in Nonlinear Dynamics and Econometrics Abstract This paper demonstrates how fiscal policy rules can be designed to eliminate all forms of endogenous fluctuations in a one-sector growth model with increasing returns-to-scale. When the policy rules are implemented, agents’ optimal decisions depend only on the current state of the economy and not on any expected future states. This property shuts down the mechanism for expectations-driven fluctuations. The proposed policy rules ensure a globally unique and stable equilibrium, regardless of the degree of increasing returns. Keywords: Fiscal Policy, Global Stability, Endogenous Fluctuations, Business Cycles. JEL Classification: E32, E62, H21. ∗ For helpful comments and suggestions, we thank an anonymous referee, Costas Azariadis, Jess Benhabib, Russell Cooper, Roger Farmer, Randall Wright and seminar participants at many places. Of course, we take full responsibility for any errors. † Corresponding author. Department of Economics, 4128 Sproul Hall, University of California, Riverside, CA, 92521-0427, (909) 827-1588, Fax: (909) 787-5685, E-mail: guojt@mail.ucr.edu. ‡ Research Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, CA 94120- 7702, (415) 974-2393, Fax: (415) 977-4031, E-mail: kevin.j.lansing@sf.frb.org.