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The cost of business cycles and the benefits of stabilization

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  • Gadi Barlevy

Abstract

This article reviews the social cost of U.S. postwar business cycle fluctuations, first calculated by Lucas (1987). Recent work suggests this cost is considerably larger than suggested by Lucas. Despite this, the author argues that it is not obvious that policymakers should have pursued a more aggressive stabilization policy over the postwar period. Still, because volatility is costly, stable growth remains a desirable goal.

Suggested Citation

  • 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.
    • Handle: RePEc:fip:fedhep:y:2005:i:qi:p:32-49:n:v.29no.1
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    Cited by:

    1. Adam Elbourne & Debby Lanser & Bert Smid & Martin Vromans, 2008. "Macroeconomic resilience in a DSGE model," CPB Discussion Paper 96.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    2. D'Orlando, Fabio & Ferrante, Francesco, 2015. "The benefits of stabilization policies revisited," MPRA Paper 67321, University Library of Munich, Germany.
    3. Córdoba, Juan Carlos & Verdier, Geneviève, 2008. "Inequality and growth: Some welfare calculations," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1812-1829, June.
    4. Philip Jung & Keith Kuester, 2008. "The (un)importance of unemployment fluctuations for welfare," Working Papers 08-31, Federal Reserve Bank of Philadelphia.
    5. Jung, Philip & Kuester, Keith, 2011. "The (un)importance of unemployment fluctuations for the welfare cost of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1744-1768, October.
    6. Tervala, Juha, 2021. "Hysteresis and the welfare costs of recessions," Economic Modelling, Elsevier, vol. 95(C), pages 136-144.
    7. Juan Carlos Cordoba & Genevieve Verdier, 2005. "Lucas vs. Lucas: On Inequality and Growth," Macroeconomics 0511021, University Library of Munich, Germany.
    8. Adam Elbourne & Debby Lanser & Bert Smid & Martin Vromans, 2008. "Macroeconomic resilience in a DSGE model," CPB Discussion Paper 96, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Barros, Fernando & Gomes, Fábio Augusto R. & Luduvice, André Victor D., 2024. "The welfare costs of business cycles unveiled: Measuring the extent of stabilization policies," European Economic Review, Elsevier, vol. 169(C).
    10. Barros, Fernando & Couto, Gabriel T. & Gomes, Fábio A.R., 2023. "On the welfare costs of business cycles: Beyond nondurable goods," Journal of Macroeconomics, Elsevier, vol. 78(C).
    11. Projektgruppe Gemeinschaftsdiagnose, 2013. "Deutsche Konjunktur erholt sich – Wirtschaftspolitik stärker an der langen Frist ausrichten," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 66(08), pages 03-77, April.
    12. Thomas Beissinger, 2006. "Neue Anforderungen an eine gesamtwirtschaftliche Stabilisierung," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 277/2006, Department of Economics, University of Hohenheim, Germany.
    13. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(4), pages 1371-1406.
    14. Houssa, Romain, 2013. "Uncertainty about welfare effects of consumption fluctuations," European Economic Review, Elsevier, vol. 59(C), pages 35-62.
    15. Tarek A. Hassan & Thomas M. Mertens, 2017. "The Social Cost of Near-Rational Investment," American Economic Review, American Economic Association, vol. 107(4), pages 1059-1103, April.
    16. Hotchkiss, Julie L. & Moore, Robert E. & Rios-Avila, Fernando, 2020. "Cost of policy choices: A microsimulation analysis of the impact on family welfare of unemployment and price changes," Journal of Macroeconomics, Elsevier, vol. 63(C).
    17. Philip Oreopoulos & Till von Wachter & Andrew Heisz, 2006. "The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates," NBER Working Papers 12159, National Bureau of Economic Research, Inc.
    18. Berentsen, Aleksander & Waller, Christopher, 2015. "Optimal Stabilization Policy With Search Externalities," Macroeconomic Dynamics, Cambridge University Press, vol. 19(3), pages 669-700, April.
    19. Agnello, Luca & Sousa, Ricardo M., 2009. "The determinants of public deficit volatility," Working Paper Series 1042, European Central Bank.
    20. Ravi Bansal & Marcelo Ochoa, 2011. "Welfare Costs of Long-Run Temperature Shifts," NBER Working Papers 17574, National Bureau of Economic Research, Inc.
    21. Fischer, Carolyn & Springborn, Michael, 2011. "Emissions targets and the real business cycle: Intensity targets versus caps or taxes," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 352-366.
    22. David Wilcox, 2005. "Discussion of 'What Caused the Decline in US Business Cycle Volatility?'," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & David Norman (ed.),The Changing Nature of the Business Cycle, Reserve Bank of Australia.
    23. Yılmaz, Oğuzhan, 2024. "Financial development and declining growth volatility: Explanations and an empirical study with the latest FD index," Structural Change and Economic Dynamics, Elsevier, vol. 70(C), pages 457-470.

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