Advanced Search
MyIDEAS: Login to save this paper or follow this series

On the Welfare Costs of Business-Cycle Fluctuations and Economic-Growth Variation in the 20th Century and Beyond

Contents:

Author Info

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

Abstract

The main objective of this paper is to propose a novel setup that allows estimating sepa-rately the welfare costs of the uncertainty stemming from business-cycle uctuations and fromeconomic-growth variation, when the two types of shocks associated with them (respectively,transitory and permanent shocks) hit consumption simultaneously. Separating these welfarecosts requires dealing with degenerate bivariate distributions. Levi s Continuity Theorem andthe Disintegration Theorem allow us to adequately de ne the one-dimensional limiting marginaldistributions. Under Normality, we show that the parameters of the original marginal distri-butions are not a¤ected, providing the means for calculating separately the welfare costs ofbusiness-cycle uctuations and of economic-growth variation.Our empirical results show that, if we consider only transitory shocks, the welfare cost ofbusiness cycles is much smaller than previously thought. Indeed, we found it to be negative- -0:03% of per-capita consumption! On the other hand, we found that the welfare cost ofeconomic-growth variation is relatively large. Our estimate for reasonable preference-parametervalues shows that it is 0:71% of consumption US$ 208:98 per person, per year.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://bibliotecadigital.fgv.br/dspace/bitstream/10438/11273/6/On-the-Welfare-Costs-of-Business-Cycle-Fluctuations-and-Economic-Growth-Variation-in-the-20th-Century-and-Beyond.pdf
Download Restriction: no

Bibliographic Info

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 748.

as in new window
Length:
Date of creation: 04 Nov 2013
Date of revision:
Handle: RePEc:fgv:epgewp:748

Contact details of provider:
Postal: Praia de Botafogo 190, sala 1100, Rio de Janeiro/RJ - CEP: 22253-900
Phone: 55-21-2559-5871
Fax: 55-21-2553-8821
Email:
Web page: http://epge.fgv.br
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lars Peter Hansen & Jose Scheinkman, 2006. "Long Term Risk: An Operator Approach," NBER Working Papers, National Bureau of Economic Research, Inc 12650, National Bureau of Economic Research, Inc.
  2. Gali, J., 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-28, C.V. Starr Center for Applied Economics, New York University.
  3. Alvarez, F. & Jermann, U.J., 2000. "Using Asset Prices to Measure the Cost of Business Cycles," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 00-1, Wharton School - Weiss Center for International Financial Research.
  4. Maurice Obstfeld, 1995. "Evaluating Risky Consumption Paths: The Role of Intertemporal Substitutability," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0120, National Bureau of Economic Research, Inc.
  5. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 1-14, March.
  6. Angelo Melino, 2010. "Measuring the cost of economic fluctuations with preferences that rationalize the equity premium," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 43(2), pages 405-422, May.
  7. Simon Kuznets & Elizabeth Jenks, 1961. "Introduction to "Capital in the American Economy: Its Formation and Financing"," NBER Chapters, National Bureau of Economic Research, Inc, in: Capital in the American Economy: Its Formation and Financing, pages 3-14 National Bureau of Economic Research, Inc.
  8. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 819-40, September.
  9. Zellner, A., 1992. "Statistics, Science and Public Policy," Papers, California Irvine - School of Social Sciences 92-21, California Irvine - School of Social Sciences.
  10. John Y. Campbell, 1986. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers, National Bureau of Economic Research, Inc 1805, National Bureau of Economic Research, Inc.
  11. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(3), pages 507-532, June.
  12. Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, American Economic Association, vol. 99(1), pages 243-64, March.
  13. Issler, Joao Victor & Vahid, Farshid, 2001. "Common cycles and the importance of transitory shocks to macroeconomic aggregates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(3), pages 449-475, June.
  14. Wincoop, Eric van, 1994. "Welfare gains from international risksharing," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(2), pages 175-200, October.
  15. João Victor Issler & Afonso Arinos de Mello Franco & Osmani Teixeira de Carvalho Guillén, 2006. "The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period," IBMEC RJ Economics Discussion Papers, Economics Research Group, IBMEC Business School - Rio de Janeiro 2006-02, Economics Research Group, IBMEC Business School - Rio de Janeiro.
  16. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, Elsevier, vol. 7(2), pages 151-174.
  17. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(3), pages 216-27, June.
  18. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
  19. Simon Kuznets & Elizabeth Jenks, 1961. "Capital in the American Economy: Its Formation and Financing," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number kuzn61-1.
  20. Pemberton, James, 1996. "Growth trends, cyclical fluctuations, and welfare with non-expected utility preferences," Economics Letters, Elsevier, Elsevier, vol. 50(3), pages 387-392, March.
  21. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  22. Chris Otrok, 1999. "On Measuring the Welfare Cost of Business Cycles," Virginia Economics Online Papers, University of Virginia, Department of Economics 318, University of Virginia, Department of Economics.
  23. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
  24. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 309-341.
  25. Simon Kuznets & Elizabeth Jenks, 1961. "Appendices and Index to "Capital in the American Economy: Its Formation and Financing"," NBER Chapters, National Bureau of Economic Research, Inc, in: Capital in the American Economy: Its Formation and Financing, pages 465-664 National Bureau of Economic Research, Inc.
  26. Márcio Antônio Salvato & João Victor Issler & Angelo Mont'alverne Duarte, 2005. "Are Business Cycles All Alike In Europe?," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of 031, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  27. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 76, pages 678.
  28. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
  29. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  30. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 85(2), pages 235-243, May.
  31. Jim Dolmas, 1998. "Risk Preferences and the Welfare Cost of Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 646-676, July.
  32. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(6), pages 1364-83, December.
  33. Fernando Alvarez & Urban J. Jermann, 2005. "Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth," Econometrica, Econometric Society, Econometric Society, vol. 73(6), pages 1977-2016, November.
  34. Proietti, Tommaso, 1997. "Short-Run Dynamics in Cointegrated Systems," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 59(3), pages 405-22, August.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fgv:epgewp:748. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Núcleo de Computação da EPGE).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.