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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. Charlotte Ostergaard & Bent E. Serensen & Oved Yosha, 2002. "Consumption and Aggregate Constraints: Evidence from U.S. States and Canadian Provinces," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 634-645, June.
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Cited by:
  1. Kose, Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2004. "Financial Globalization, Growth and Volatility in Developing Countries," CEPR Discussion Papers 4772, C.E.P.R. Discussion Papers.
  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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