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

On the welfare gains of reducing the likelihood of economic crises

Contents:

Author Info

  • Satyajit Chatterjee
  • Dean Corbae

Abstract

The authors' aim in this paper is to obtain a measure of the potential benefit of reducing the likelihood of economic crises. The authors define an economic crisis as a Depression-style collapse of economic activity. Based on the observed frequency of Depression-like events, the authors estimate this likelihood to be approximately once every 83 years for the United States. Even for this small probability of moving into a Depression-like state, the welfare gain from setting it to zero can range between 1.05 percent and 6.59 percent of annual consumption, in perpetuity. These large gains arise because even though the probability of encountering a Depression-like state is small, it is highly persistent once it occurs. The authors also find that for some calibrations of the model, uninsured unemployment risk contributes significantly to the size of these gains.

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://www.philadelphiafed.org/research-and-data/publications/working-papers/2000/wp00-14.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 00-14.

as in new window
Length:
Date of creation: 2000
Date of revision:
Handle: RePEc:fip:fedpwp:00-14

Contact details of provider:
Postal: 10 Independence Mall, Philadelphia, PA 19106-1574
Web page: http://www.philadelphiafed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.phil.frb.org/econ/wps/index.html

Related research

Keywords: Depressions;

Other versions of this item:

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. Darrel Cohen, 2000. "A quantitative defense of stabilization policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-34, Board of Governors of the Federal Reserve System (U.S.).
  2. 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.
  3. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, Elsevier, vol. 38(7), pages 1471-1486, August.
  4. 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.
  5. Romer, Christina, 1986. "Spurious Volatility in Historical Unemployment Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(1), pages 1-37, February.
  6. Otrok, Christopher, 2001. "On measuring the welfare cost of business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(1), pages 61-92, February.
  7. Mehra, Rajnish & Prescott, Edward C., 1988. "The equity risk premium: A solution?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 133-136, July.
  8. Gadi Barlevy, 2000. "Evaluating the Costs of Business Cycles in Models of Endogenous Growth," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1287, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Danthine, Jean-Pierre & Donaldson, John B, 1999. "Non-falsified Expectations and General Equilibrium Asset Pricing: The Power of the Peso," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(458), pages 607-35, October.
  10. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
  11. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24.
  12. Per Krusell & Anthony A. Smith, Jr., . "On the Welfare Effects of Eliminating Business Cycles," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 243, Carnegie Mellon University, Tepper School of Business.
  13. Fernando Alvarez & Urban J. Jermann, 2000. "Using Asset Prices to Measure the Cost of Business Cycles," NBER Working Papers 7978, National Bureau of Economic Research, Inc.
  14. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Working Papers 4719, National Bureau of Economic Research, Inc.
  15. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 117-131, July.
  16. Larry E. Jones & Rodolfo E. Manuelli & Ennio Stacchetti, 1999. "Technology (and Policy) Shocks in Models of Endogenous Growth," NBER Working Papers 7063, National Bureau of Economic Research, Inc.
  17. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 1-14, March.
  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. Huberto M. Ennis & Todd Keister, 2003. "Aggregate demand management with multiple equilibria," Working Paper, Federal Reserve Bank of Richmond 03-04, Federal Reserve Bank of Richmond.
  4. Gadi Barlevy, 2005. "The cost of business cycles and the benefits of stabilization," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q I, pages 32-49.
  5. Stephen Turnovsky & Marcelo Bianconi, . "The Welfare Gains from Stabilization in a Stochastically Growing Economy with Idiosyncratic Shocks and Flexible Labor Supply," Working Papers, University of Washington, Department of Economics UWEC-2004-08-P, University of Washington, Department of Economics.

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:fip:fedpwp:00-14. 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: (Beth Paul).

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.