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The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period

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Author Info
João Victor Issler (Graduate School of Economics - EPGE, Getulio Vargas Foundation)
Afonso Arinos de Mello Franco (Graduate School of Economics - EPGE, Getulio Vargas Foundation)
Osmani Teixeira de Carvalho Guillén (IBMEC Business School - Rio de Janeiro and Banco Central do Brasil)

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Abstract

Lucas (1987) has shown the surprising result that the welfare cost of business cycles is quite small. Using standard assumptions on preferences and a fully-fledged econometric model we computed the welfare costs of macroeconomic uncertainty for the post-WWII era using the multivariate Beveridge-Nelson decomposition for trends and cycles, which considers not only business-cycle uncertainty but also uncertainty from the stochastic trend in consumption. The post-WWII period is relatively quiet, with the welfare costs of uncertainty being about 0.9% of per-capita consumption. Although changing the decomposition method changed substantially initial results, the welfare cost of uncertainty is qualitatively small in the post-WWII era - about $175.00 a year per-capita in the U.S. We also computed the marginal welfare cost of macroeconomic uncertainty using this same technique. It is about twice as large as the welfare cost - $350.00 a year per-capita.

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Paper provided by Economics Research Group, IBMEC Business School - Rio de Janeiro in its series IBMEC RJ Economics Discussion Papers with number 2006-02.

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Date of creation: 02 Jan 2006
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Handle: RePEc:ibr:dpaper:2006-02

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Related research
Keywords: welfare costs of business cycles; Beveridge-Nelson decomposition;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications

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References listed on IDEAS
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