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

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  • 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.

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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 748.

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Date of creation: 04 Nov 2013
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Handle: RePEc:fgv:epgewp:748

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Cited by:
  1. Eurilton Araújo & Alexandre B. Cunha, 2014. "Simple Macroeconomic Policies and Welfare: a quantitative assessment," Working Papers Series, Central Bank of Brazil, Research Department 360, Central Bank of Brazil, Research Department.

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