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The States vs. the states: On the Welfare Cost of Business Cycles in the U.S

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  • Michel A. Robe
  • Stephane Pallage

Abstract

Extant estimates of the welfare cost of business cycles suggest that this cost is quite low and might well be minuscule. Those estimates are based on consumption data for the United States as a whole. The volatility of aggregate consumption, however, is much stronger at the state level. We argue that, because interstate risk sharing is imperfect, much information about actual consumption volatility is lost by averaging consumption figures across all 50 U.S. states. Using state-level consumption data, we show that the welfare cost of macroeconomic volatility is in fact very substantial. In many states, the welfare gain from eliminating business cycles can exceed the gain from increasing the long-term growth rate by 1% forever. Our results have implications for several key issues in economics and finance

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 164.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:164

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Keywords: Business cycles; Consumption volatility; Growth; Welfare; Regional data;

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References

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  1. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  2. Ellison, Glenn & Glaeser, Edward L, 1997. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 889-927, October.
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  5. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
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  16. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
  17. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
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Cited by:
  1. Eswar S. Prasad & Kenneth Rogoff & Shang-Jin Wei & M. Ayhan Kose, 2007. "Financial Globalization, Growth and Volatility in Developing Countries," NBER Chapters, in: Globalization and Poverty, pages 457-516 National Bureau of Economic Research, Inc.
  2. Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc.
  3. Gadi Barlevy, 2005. "The cost of business cycles and the benefits of stabilization," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 32-49.

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