Markups and the Welfare Cost of Business Cycles : A Reappraisal
AbstractGali et al. (2007) have recently shown in a quantitative way that inefficient fluctuations in the allocation of resources do not generate sizable welfare costs. In this note, we show that their evaluation underestimates the welfare costs of inefficient fluctuations and propose a biased estimate of the impact of structural distortions on business cycle costs. As monopolistic suppliers, both firms and households aim at preserving their expected markups ; the interaction between aggregate fluctuations in the efficiency gap and price-setting behaviors results in making average consumption and employment lower than their counterparts in the flexible price economy. This level increases the welfare cost of business cycles. It is all the more sizable in that the degree of inefficiency is structurally high at the steady state.
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Bibliographic InfoPaper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 10043.
Length: 11 pages
Date of creation: Mar 2010
Date of revision:
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Business cycle costs; inefficiency gap; new-Keynesian macroeconomics.;
Other versions of this item:
- Jean‐Olivier Hairault & François Langot, 2012. "Markups and the Welfare Cost of Business Cycles: A Reappraisal," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 995-1014, 08.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-18 (All new papers)
- NEP-CBA-2010-06-18 (Central Banking)
- NEP-DGE-2010-06-18 (Dynamic General Equilibrium)
- NEP-MAC-2010-06-18 (Macroeconomics)
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