On the Welfare Costs of Business-Cycle Fluctuations and Economic-Growth Variation in the 20th Century
AbstractLucas(1987) has shown a surprising result in business-cycle research: the welfare cost ofbusiness cycles are very small. Our paper has several original contributions. First, in computingwelfare costs, we propose a novel setup that separates the effects of uncertainty stemming frombusiness-cycle uctuations and economic-growth variation. Second, we extend the sample fromwhich to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence.So, we employ also pre-WWII data. Third, we take an econometric approach and computeexplicitly the asymptotic standard deviation of welfare costs using the Delta Method.Estimates of welfare costs show major diferences for the pre-WWII and the post-WWII era.They can reach up to 15 times for reasonable parameter values = 0:985, and = 5. Forexample, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumptionif we consider only permanent shocks and 0.61% of consumption if we consider only transitoryshocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are0.11% and welfare costs of business cycles are 0.037% the latter being very close to the estimatein Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the totalwelfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business-cycle uctuations are respectively 0.63% and 1.17% of per-capita consumption. The same guresfor the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption.
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Bibliographic InfoPaper 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 735.
Date of creation: 17 Oct 2012
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- Osmani Teixeira de Carvalho Guillény & João Victor Issler & Afonso Arinos de Mello Franco-Neto, 2012. "On the Welfare Costs of Business-Cycle Fluctuations and Economic-Growth Variation in the 20th Century," Working Papers Series 284, Central Bank of Brazil, Research Department.
- Guillén, Osmani Teixeira de Carvalho & Issler, João Victor & Franco-Neto, Afonso Arinos de Mello, 2012. "On the Welfare Costs of Business-Cycle Fluctuations and Economic-Growth Variation in the 20th Century," Economics Working Papers (Ensaios Economicos da EPGE) 729, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- NEP-ALL-2012-11-03 (All new papers)
- NEP-BEC-2012-11-03 (Business Economics)
- NEP-HIS-2012-11-03 (Business, Economic & Financial History)
- NEP-MAC-2012-11-03 (Macroeconomics)
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