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The States vs. the states: On the Welfare Cost of Business Cycles in the U.S

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  • Michel A. Robe
  • Stephane Pallage

Abstract

Economic fluctuations are much stronger when measured at the state level than they are for the United States as a whole. This observation raises the question of how costly business cycles really are in the United States. Using state-level consumption data, we show that the welfare cost of consumption volatility is in fact very substantial. Indeed, in many U.S. states, the welfare gain from eliminating business cycles can exceed the gain from increasing the long-term growth rate by 1\% forever. Our findings have important implications for some key puzzles in economics and finance.
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Suggested Citation

  • Michel A. Robe & Stephane Pallage, 2003. "The States vs. the states: On the Welfare Cost of Business Cycles in the U.S," Computing in Economics and Finance 2003 43, Society for Computational Economics.
    • Handle: RePEc:sce:scecf3:43
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    5. 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.
    6. Stuart Landon and Constance Smith, 2015. "Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    7. Letasi Iulai, 2014. "Aid Volatility: Is It a Problem in Tuvalu?," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 1(2), pages 379-394, May.
    8. Gadi Barlevy, 2005. "The cost of business cycles and the benefits of stabilization," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 29(Q I), pages 32-49.

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    More about this item

    Keywords

    Business cycles; Consumption volatility; Growth; Welfare; Regional data;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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