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The Costs of Recession

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  • Clark, Kenneth
  • Leslie, Derek
  • Symons, Elizabeth

Abstract

The paper measures the cost of business cycles by asking what proportion of consumption representative households, whose head is currently employed, would be prepared to give up to avoid the risk of unemployment. Previous estimates by Lucas suggested that the costs of macroeconomic fluctuations measured in this way are surprisingly small. The first part of the paper presents a critique of the Lucas aggregate method showing that his estimates are not robust. An alternative disaggregated framework is then developed and shows that the costs of macroeconomic fluctuations are significantly higher than those obtained by Lucas. Consequently, the view that inflation 'matters' whereas business cycles are unimportant events is questioned. Copyright 1994 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 104 (1994)
Issue (Month): 422 (January)
Pages: 20-36
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Handle: RePEc:ecj:econjl:v:104:y:1994:i:422:p:20-36

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Cited by:
  1. Marcelo Bianconi, 2004. "The Welfare Gains from Stabilization in a Stochastically Growing Economy with Idiosyncratic Shocks and Flexible Labor Supply," Discussion Papers Series, Department of Economics, Tufts University 0413, Department of Economics, Tufts University.
  2. Fabio Sánchez Torres & Luz Magdalena Salas Bahamón, 2004. "How do the Colombian Families Respond to the Changes in the Economic Conditions?," IDB Publications 8853, Inter-American Development Bank.
  3. F. Gerard Adams & Byron Gangnes, 2010. "The Employment Effects of Fiscal Policy: How Costly Are ARRA Jobs?," Working Papers 201026, University of Hawaii at Manoa, Department of Economics.
  4. Fabio Sánchez Torres & Luz Magdalena Salas Bahamón, 2004. "¿Cómo Responden las Familias Colombianas a los Cambios en las Condiciones de la Economía?," IDB Publications 8843, Inter-American Development Bank.
  5. Stratford Douglas & Howard J. Wall, 2000. "The revealed cost of unemployment," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 1-10.
  6. Marco Guerrazzi, 2011. "Search And Stochastic Dynamics In The Old Keynesian Economics: A Rationale For The Shimer Puzzle," Metroeconomica, Wiley Blackwell, vol. 62(4), pages 561-586, November.

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