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The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period

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  • Franco Neto, Afonso Arinos de Mello
  • Issler, João Victor
  • Guillén, Osmani Teixeira de Carvalho

Abstract

Lucas (1987) has shown the surprising result that the welfare cost of business cycles is quite small. Using standard assumptions on preferences and a fully-fledged econometric model we computed the welfare costs of macroeconomic uncertainty for the post-WWII era using the multivariate Beveridge-Nelson decomposition for trends and cycles, which considers not only business-cycle uncertainty but also uncertainty from the stochastic trend in consumption. The post-WWII period is relatively quiet, with the welfare costs of uncertainty being about 0.9% of per-capita consumption. Although changing the decomposition method changed substantially initial results, the welfare cost of uncertainty is qualitatively small in the post-WWII era - about $175.00 a year per-capita in the U.S. We also computed the marginal welfare cost of macroeconomic uncertainty using this same technique. It is about twice as large as the welfare cost - $350.00 a year per-capita.

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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 605.

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Date of creation: 01 Dec 2005
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Handle: RePEc:fgv:epgewp:605

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Citations

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Cited by:
  1. Cysne, Rubens Penha, 2006. "An Intra-Household Approach to the Welfare Costs of Inflation (Revised Version, Forthcoming 2006, Estudos Econômicos)," Economics Working Papers (Ensaios Economicos da EPGE) 612, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  2. Lima, Luiz Renato & Gaglianone, Wagner Piazza & Sampaio, Raquel M.B., 2008. "Debt ceiling and fiscal sustainability in Brazil: A quantile autoregression approach," Journal of Development Economics, Elsevier, vol. 86(2), pages 313-335, June.
  3. Monteiro, Paulo Klinger, 2006. "First-Price Auction Symmetric Equilibria with a General Distribution," Economics Working Papers (Ensaios Economicos da EPGE) 616, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  4. Cysne, Rubens Penha, 2006. "Income Inequality in a Job-Search Model With Heterogeneous Discount Factors (Revised Version, Forthcoming 2006, Revista Economia)," Economics Working Papers (Ensaios Economicos da EPGE) 611, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  5. Guillén, Osmani Teixeira de Carvalho & Issler, João Victor & Franco-Neto, Afonso Arinos de Mello, 2013. "On the Welfare Costs of Business-Cycle Fluctuations and Economic-Growth Variation in the 20th Century and Beyond," Economics Working Papers (Ensaios Economicos da EPGE) 748, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  6. Flôres Junior, Renato Galvão & Fontoura, Maria Paula & Santos, Rogério Guerra, 2006. "Foreign direct investment spillovers in Portugal: additional lessons from a country study," Economics Working Papers (Ensaios Economicos da EPGE) 618, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  7. Lima, Luiz Renato Regis de Oliveira & Neri, Breno de Andrade Pinheiro, 2006. "Comparing Value-at-Risk Methodologies," Economics Working Papers (Ensaios Economicos da EPGE) 629, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  8. Araújo, Fabio & Issler, João Victor & Fernandes, Marcelo, 2006. "A Stochastic Discount Factor Approach to Asset Pricing Using Panel Data," Economics Working Papers (Ensaios Economicos da EPGE) 628, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  9. Xiao, Zhijie & Lima, Luiz Renato Regis de Oliveira, 2006. "Testing Covariance Stationarity," Economics Working Papers (Ensaios Economicos da EPGE) 632, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  10. Aloisio Araujo & Mario Pascoa & Juan Pablo Torres-Martinez, 2005. "Bubbles, collateral and monetary equilibrium," Textos para discussão 513, Department of Economics PUC-Rio (Brazil).
  11. Flôres Junior, Renato Galvão, 2006. "The Diversity of Diversity: further methodological considerations on the use of the concept in cultural economics," Economics Working Papers (Ensaios Economicos da EPGE) 626, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  12. Flôres Junior, Renato Galvão & Watanuki, Masakazu, 2006. "Integration Options for Mercosul - An Investigation Using the AMIDA Model," Economics Working Papers (Ensaios Economicos da EPGE) 610, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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