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We study the relationship between growth and variability in a growth DSGE model with nominal rigidities and learning‐by‐doing. We show this relationship may be positive or negative depending on the source of fluctuations. A key role is played by labour market features. We find that monetary shocks volatility will generally have a negative effect on growth, while the opposite is true for fiscal and productivity shocks. These findings are consistent with empirical evidence, as data show an ambiguous relationship between output growth and its variance, but a negative relationship between output growth and nominal variability.

This paper develops a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite lifetimes. The framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. When calibrated to euro area quarterly data, the model predicts that fiscal expansions generate a tradeoff in output dynamics between short-term gains and medium-term losses. It is also shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.