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The Welfare Cost of Business Cycles in an Economy with Nonclearing Markets

  • Portier Franck

    ()

    (University of Toulouse)

  • Puch Luis A.

    ()

    (FEDEA, Universidad Complutense and ICAE)

In this paper we measure the welfare cost of fluctuations in a simple representative agent economy with nonclearing markets. The market friction we consider involves price rigidities and a voluntary exchange rationing scheme. These features are incorporated into an otherwise standard neoclassical growth model. We show that the frictions we introduce make the losses from fluctuations four times bigger than in a frictionless environment.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 6 (2007)
Issue (Month): 3 (January)
Pages: 1-16

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Handle: RePEc:bpj:bejmac:v:topics.6:y:2007:i:3:n:7
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  1. Aude Pommeret & Anne Epaulard, 2001. "Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility," IMF Working Papers 01/5, International Monetary Fund.
  2. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
  3. Benassy, Jean-Pascal, 1993. "Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 732-61, June.
  4. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August.
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