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On the Welfare Effects of Eliminating Business Cycles

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  • Per Krusell

    (Department of Economics, University of Rochester)

  • Anthony A. Smith, Jr.

    (Graduate School of Industrial Administration, Carnegie Mellon University)

Abstract

We investigate the welfare effects of eliminating business cycles in a model with substantial consumer heterogeneity. The heterogeneity arises from uninsurable and idiosyncratic uncertainty in preferences and employment, where regarding employment, we distinguish among employment and short- and long-term unemployment. We calibrate the model to match the distribution of wealth in U.S. data and features of transitions between employment and unemployment. Unlike previous studies, we study how business cycles affect different groups of consumers. We conclude that the cost of cycles is small for almost all groups and, indeed, is negative for some. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1998.0043
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 2 (1999)
Issue (Month): 1 (January)
Pages: 245-272

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Handle: RePEc:red:issued:v:2:y:1999:i:1:p:245-272

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  1. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-62, December.
  2. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  3. Jim Dolmas, 1998. "Risk Preferences and the Welfare Cost of Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 646-676, July.
  4. Kjetil Storesletten & Chris Telmer & Amir Yaron, . "Asset pricing with idiosyncratic risk and overlapping generations," GSIA Working Papers 226, Carnegie Mellon University, Tepper School of Business.
  5. Maurice Obstfeld, 1995. "Evaluating Risky Consumption Paths: The Role of Intertemporal Substitutability," NBER Technical Working Papers 0120, National Bureau of Economic Research, Inc.
  6. Beaudry, Paul & Pages, Carmen, 2001. "The cost of business cycles and the stabilization value of unemployment insurance," European Economic Review, Elsevier, vol. 45(8), pages 1545-1572, August.
  7. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 187-218 National Bureau of Economic Research, Inc.
  8. Harold L. Cole & Narayana R. Kocherlakota, 1997. "A microfoundation for incomplete security markets," Working Papers 577, Federal Reserve Bank of Minneapolis.
  9. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-89, August.
  10. Mankiw, N. Gregory, 1986. "The equity premium and the concentration of aggregate shocks," Journal of Financial Economics, Elsevier, vol. 17(1), pages 211-219, September.
  11. Cochrane, John H, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," American Economic Review, American Economic Association, vol. 79(3), pages 319-37, June.
  12. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  13. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  14. Krusell, Per & Smith, Anthony Jr., 1996. "Rules of thumb in macroeconomic equilibrium A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 527-558, April.
  15. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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