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The welfare cost of macroeconomic uncertainty in the post-war period

  • Issler, Joao Victor
  • de Mello Franco-Neto, Afonso Arinos
  • de Carvalho Guillen, Osmani Teixeira

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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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 98 (2008)
Issue (Month): 2 (February)
Pages: 167-175

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Handle: RePEc:eee:ecolet:v:98:y:2008:i:2:p:167-175
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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