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A welfare comparison of pre- and post-WWII business cycles: some implications for the role of postwar macroeconomic policies

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  • Satyajit Chatterjee
  • Dean Corbae

Abstract

The authors compute the potential economic benefits that would accrue to a typical pre-WWII era U.S. worker from the post-WWII macroeconomic policy regime. The authors assume that workers face undiversifiable income risk but can self-insure by saving in nominal assets. The worker's average utility is computed for two eras: pre-WWII (1875-1941) and post-WWII. In the pre-WWII era, the worker endured business cycles that were large in amplitude and quite volatile, a procyclical aggregate price level with large cyclical amplitude, a high average unemployment rate, and virtually no trend in the aggregate price level. In the post-WWII era, the same worker would have encountered business cycles with smaller amplitude and less volatility, a countercyclical aggregate price level with small cyclical amplitude, a much lower mean unemployment rate, and a positive trend in the aggregate price level. Depending on what is assumed about the effects of macroeconomic policies on the mean and var iance of the unemployment rate, the potential gain in the worker's welfare ranges between -0.9 (if policies affected the inflation rate but not the mean or variance of the aggregate unemployment rate) to 4.19 percent of consumption (if policies affected the inflation rate and lowered the mean and variance of the aggregate unemployment rate).

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 99-2.

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Date of creation: 1999
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Handle: RePEc:fip:fedpwp:99-2

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Related research

Keywords: Business cycles ; Economic history;

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  1. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  2. Romer, Christina D, 1986. "Is the Stabilization of the Postwar Economy a Figment of the Data?," American Economic Review, American Economic Association, vol. 76(3), pages 314-34, June.
  3. Cooley, T.F. & Ohanian, L.E., 1989. "The Cyclical Behavior Of Prices," RCER Working Papers 188, University of Rochester - Center for Economic Research (RCER).
  4. Ethel D. Hoover, 1960. "Retail Prices after 1850," NBER Chapters, in: Trends in the American Economy in the Nineteenth Century, pages 141-190 National Bureau of Economic Research, Inc.
  5. Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers 21, California Los Angeles - Applied Econometrics.
  6. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 187-218 National Bureau of Economic Research, Inc.
  7. Per Krusell & Anthony A. Smith, Jr., 1999. "On the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 245-272, January.
  8. J. Bradford De Long & Lawrence H. Summers, . "How Does Macroeconomic Policy Matter?," J. Bradford De Long's Working Papers _130, University of California at Berkeley, Economics Department.
  9. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
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