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The cost of business cycles and the benefits of stabilization

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  • Gadi Barlevy

Abstract

This article reviews the social cost of U.S. postwar business cycle fluctuations, first calculated by Lucas (1987). Recent work suggests this cost is considerably larger than suggested by Lucas. Despite this, the author argues that it is not obvious that policymakers should have pursued a more aggressive stabilization policy over the postwar period. Still, because volatility is costly, stable growth remains a desirable goal.

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Bibliographic Info

Article provided by Federal Reserve Bank of Chicago in its journal Economic Perspectives.

Volume (Year): (2005)
Issue (Month): Q I ()
Pages: 32-49

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Handle: RePEc:fip:fedhep:y:2005:i:qi:p:32-49:n:v.29no.1

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Keywords: Business cycles;

References

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  1. Portier Franck & Puch Luis A., 2007. "The Welfare Cost of Business Cycles in an Economy with Nonclearing Markets," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 6(3), pages 1-16, January.
  2. Janet L. Yellen & George A. Akerlof, 2006. "Stabilization Policy: A Reconsideration," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 44(1), pages 1-22, January.
  3. Christopher Otrok, 2000. "On Measuring the Welfare Cost of Business Cycles," Econometric Society World Congress 2000 Contributed Papers 1094, Econometric Society.
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  7. Justin Wolfers, 2003. "Is Business Cycle Volatility Costly? Evidence from Surveys of Subjective Wellbeing," NBER Working Papers 9619, National Bureau of Economic Research, Inc.
  8. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 2001. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk," European Economic Review, Elsevier, vol. 45(7), pages 1311-1339.
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  22. Turnovsky, Stephen J. & Bianconi, Marcelo, 2005. "Welfare Gains From Stabilization In A Stochastically Growing Economy With Idiosyncratic Shocks And Flexible Labor Supply," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 9(03), pages 321-357, June.
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  24. Janet L. Yellen, 2004. "Stabilization policy: a reconsideration," Speech, Federal Reserve Bank of San Francisco 1, Federal Reserve Bank of San Francisco.
  25. Tom Krebs, 2003. "Growth and Welfare Effects of Business Cycles in Economies with Idiosyncratic Human Capital Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 846-868, October.
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Citations

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Cited by:
  1. Agnello, Luca & Sousa, Ricardo M., 2009. "The determinants of public deficit volatility," Working Paper Series, European Central Bank 1042, European Central Bank.
  2. Philip Oreopoulos & Till von Wachter & Andrew Heisz, 2006. "The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates," NBER Working Papers 12159, National Bureau of Economic Research, Inc.
  3. Houssa, Romain, 2013. "Uncertainty about welfare effects of consumption fluctuations," European Economic Review, Elsevier, vol. 59(C), pages 35-62.
  4. Adam Elbourne & Debby Lanser & Bert Smid & Martin Vromans, 2008. "Macroeconomic resilience in a DSGE model," CPB Discussion Paper 96, CPB Netherlands Bureau for Economic Policy Analysis.
  5. David Wilcox, 2005. "Discussion of 'What Caused the Decline in US Business Cycle Volatility?'," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
  6. Thomas Beissinger, 2006. "Neue Anforderungen an eine gesamtwirtschaftliche Stabilisierung," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim, Department of Economics, University of Hohenheim, Germany 277/2006, Department of Economics, University of Hohenheim, Germany.
  7. Juan Carlos Cordoba & Genevieve Verdier, 2005. "Lucas vs. Lucas: On Inequality and Growth," Macroeconomics, EconWPA 0511021, EconWPA.
  8. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," Working Papers, Department of Economics, College of William and Mary 91, Department of Economics, College of William and Mary.
  9. Jung, Philip & Kuester, Keith, 2011. "The (un)importance of unemployment fluctuations for the welfare cost of business cycles," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(10), pages 1744-1768, October.
  10. Fischer, Carolyn & Springborn, Michael R., 2009. "Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes," Discussion Papers, Resources For the Future dp-09-47, Resources For the Future.
  11. Cordoba, Juan Carlos & Verdier, Genevieve, 2010. "Inequality and Growth: Some Welfare Calculations," Staff General Research Papers 32119, Iowa State University, Department of Economics.
  12. Juan Carlos Cordoba & Geneviève Verdier, 2007. "Lucas vs. Lucas," IMF Working Papers 07/17, International Monetary Fund.
  13. Philip Jung & Keith Kuester, 2008. "The (un)importance of unemployment fluctuations for welfare," Working Papers 08-31, Federal Reserve Bank of Philadelphia.
  14. Benjamin Eden, 2004. "Substitution and Risk Aversion: Is Risk Aversion Important for Understanding Asset Prices?," Vanderbilt University Department of Economics Working Papers 0422, Vanderbilt University Department of Economics.
  15. Ravi Bansal & Marcelo Ochoa, 2011. "Welfare Costs of Long-Run Temperature Shifts," NBER Working Papers 17574, National Bureau of Economic Research, Inc.

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