Revisiting the Welfare Effects of Eliminating Business Cycles
We investigate the welfare effects of eliminating business cycles in a model with substantial consumer heterogeneity. The heterogeneity arises from uninsurable and idiosyncratic uncertainty in preferences and employment status. We calibrate the model to match the distribution of wealth in U.S. data and features of transitions between employment and unemployment. In comparison with much of the literature, we find rather large effects. For our benchmark model, we find welfare effects that, on average across all consumers, are of a bit more than one order of magnitude larger than those computed by Lucas (1987). When we distinguish long- from short-term unemployment, long-term unemployment being distinguished by poor (and highly procylical) employment prospects and low unemployment compensation, the average gain from eliminating cycles is as much as 1% in consumption equivalents. In addition, in both models, there are large differences across groups: very poor consumers gain a lot when cycles are removed (the long-term unemployed as much as around 30%), as do very rich consumers, whereas the majority of consumers---the "middle class"---sees much smaller gains from removing cycles. Inequality also rises substantially upon removing cycles. (Copyright: Elsevier)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 12 (2009)
Issue (Month): 3 (July)
|Contact details of provider:|| Postal: Marina Azzimonti, Department of Economics, Stonybrook University, 10 Nicolls Road, Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/red/
More information through EDIRC
|Order Information:|| Web: https://www.economicdynamics.org/subscription-information/ Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mukoyama, Toshihiko & Sahin, Aysegul, 2006.
"Costs of business cycles for unskilled workers,"
Journal of Monetary Economics,
Elsevier, vol. 53(8), pages 2179-2193, November.
- Toshihiko Mukoyama & Aysegul Sahin, 2005. "Costs of Business Cycles for Unskilled Workers," Working Papers 05002, Concordia University, Department of Economics.
- MUKOYAMA, Toshihiko & ŞAHIN, Ayşegül, 2005. "Costs of Business Cycles for Unskilled Workers," Cahiers de recherche 15-2005, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Per Krusell & Anthony A. Smith, Jr., .
"Income and Wealth Heterogeneity in the Macroeconomy,"
GSIA Working Papers
1997-37, Carnegie Mellon University, Tepper School of Business.
- Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
- Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
- Tom Krebs, 2006. "Multi-Dimensional Risk and the Cost of Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 640-658, October.
- Wolff, Edward N, 1994. "Trends in Household Wealth in the United States, 1962-83 and 1983-89," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 40(2), pages 143-74, June.
- Tom Krebs, 2003. "Growth and Welfare Effects of Business Cycles in Economies with Idiosyncratic Human Capital Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 846-868, October.
- repec:pri:wwseco:dp235 is not listed on IDEAS
- Andrew Atkeson & Christopher Phelan, 1994.
"Reconsidering the Costs of Business Cycles with Incomplete Markets,"
NBER Working Papers
4719, National Bureau of Economic Research, Inc.
- Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 187-218 National Bureau of Economic Research, Inc.
- Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
- Tom Krebs, 2007.
"Job Displacement Risk and the Cost of Business Cycles,"
American Economic Review,
American Economic Association, vol. 97(3), pages 664-686, June.
- Tom Krebs, 2005. "Job Displacement Risk and the Cost of Business Cycles," 2005 Meeting Papers 188, Society for Economic Dynamics.
- tom krebs, 2004. "welfare cost of business cycles when markets are incomplete," Econometric Society 2004 North American Summer Meetings 283, Econometric Society.
- Per Krusell & Anthony A. Smith, Jr., 1999.
"On the Welfare Effects of Eliminating Business Cycles,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 245-272, January.
- Per Krusell & Anthony A. Smith, Jr., . "On the Welfare Effects of Eliminating Business Cycles," GSIA Working Papers 243, Carnegie Mellon University, Tepper School of Business.
- Sam Schulhofer-Wohl, 2008.
"Heterogeneous Risk Preferences and the Welfare Cost of Business Cycles,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 761-780, October.
- Sam Schulhofer-Wohl, 2008. "Code and data files for "Heterogeneous Risk Preferences and the Welfare Cost of Business Cycles"," Computer Codes 07-133, Review of Economic Dynamics.
When requesting a correction, please mention this item's handle: RePEc:red:issued:08-211. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.