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On the welfare gains of eliminating a small likelihood of economic crises: A case for stabilization policies?

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  • Satyajit Chatterjee
  • Dean Corbae

Abstract

In this paper the authors estimate the potential benefit of policies that eliminate a small likelihood of economic crises. They define an economic crisis as a Depression-style collapse of economic activity. For the U.S., based on the observed frequency of Depression-like events, the authors estimate the likelihood of encountering a depression to be about once every 83 years. Even for this small probability of moving into a Depression-like state, the welfare gain from setting it to zero can range between 1 and 7 percent of annual consumption, in perpetuity. These estimates are large in comparison to welfare costs typically found for microeconomic distortions and suggest that there may be a net benefit to policies directed toward preventing economic instability.

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File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2003/wp03-20.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 03-20.

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Date of creation: 2003
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Handle: RePEc:fip:fedpwp:03-20

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Keywords: Depressions;

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References

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Cited by:
  1. Ennis, Huberto M. & Keister, Todd, 2005. "Optimal fiscal policy under multiple equilibria," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1359-1377, November.
  2. Preston J. Miller & Gary H. Stern, 2004. "Avoiding significant monetary policy mistakes," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Dec, pages 2-9.

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