IDEAS home Printed from https://ideas.repec.org/p/cre/crefwp/124.html
   My bibliography  Save this paper

Magnitude X on the Richter Scale: Welfare Cost of Business Cycles in Developing Countries

Author

Abstract

Economic fluctuations are much stronger in developing countries than in the United States. Yet, while a large literature debates what constitutes a reasonable estimate of the welfare cost of business cycles in the US, it remains an open question how large that cost is in developing countries. Using several model economies, we provide such a measure for a large number of low--income countries. Our first main result is that the welfare cost of output fluctuations per se is far from trivial in those countries, and typically averages 15 to 30 times the corresponding estimate for the US. Our second major result is that, in many poor countries, that cost may in fact exceed the welfare cost of significantly lower growth.

Suggested Citation

  • Stephane Pallage & Michel Robe, 2000. "Magnitude X on the Richter Scale: Welfare Cost of Business Cycles in Developing Countries," Cahiers de recherche CREFE / CREFE Working Papers 124, CREFE, Université du Québec à Montréal.
    • Handle: RePEc:cre:crefwp:124
    as

    Download full text from publisher

    File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah124.ps
    File Function: Main text
    Download Restriction: no
    File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah124.pdf
    File Function: Main text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-1151, December.
    2. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-137, February.
    3. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    4. Jim Dolmas, 1998. "Risk Preferences and the Welfare Cost of Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 646-676, July.
    5. Stéphane Pallage & Michel A. Robe, 2001. "Foreign Aid and the Business Cycle," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 641-672, November.
    6. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August.
    7. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
    8. Philippe Weil, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 29-42.
    9. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    10. 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.
    11. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
    12. 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.
    13. Gadi Barlevy, 2000. "Evaluating the Costs of Business Cycles in Models of Endogenous Growth," Discussion Papers 1287, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    14. Pritchett, Lant, 2000. "Understanding Patterns of Economic Growth: Searching for Hills among Plateaus, Mountains, and Plains," The World Bank Economic Review, World Bank, vol. 14(2), pages 221-250, May.
    15. Pemberton, James, 1996. "Growth trends, cyclical fluctuations, and welfare with non-expected utility preferences," Economics Letters, Elsevier, vol. 50(3), pages 387-392, March.
    16. Mendoza, Enrique G., 1997. "Terms-of-trade uncertainty and economic growth," Journal of Development Economics, Elsevier, vol. 54(2), pages 323-356, December.
    17. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," The World Bank Economic Review, World Bank, vol. 14(2), pages 251-285, May.
    18. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-1383, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Winston Moore, 2014. "Managing The Process Of Removing Capital Controls: What Does The Literature Suggest?," Journal of Economic Surveys, Wiley Blackwell, vol. 28(2), pages 209-237, April.
    2. Boucekkine, Raouf & Martinez, Blanca, 2003. "Replacement, adoption and economic dynamics: lessons from a canonical creative destruction model," Structural Change and Economic Dynamics, Elsevier, vol. 14(3), pages 339-359, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Houssa, Romain, 2013. "Uncertainty about welfare effects of consumption fluctuations," European Economic Review, Elsevier, vol. 59(C), pages 35-62.
    2. Stéphane Pallage & Michel A. Robe & Catherine Bérubé, 2006. "The Potential of Foreign Aid as Insurance," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1-5.
    3. Ricardo Reis, 2009. "The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuations," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 722-753, June.
    4. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
    5. Ricardo Reis, 2009. "The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuations," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 722-753, June.
    6. Satyajit Chatterjee & Dean Corbae, 2003. "On the welfare gains of eliminating a small likelihood of economic crises: A case for stabilization policies?," Working Papers 03-20, Federal Reserve Bank of Philadelphia.
    7. Anne Epaulard & Aude Pommeret, 2003. "Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 672-684, July.
    8. Keith Blackburn & Alessandra Pelloni, 2005. "Growth, cycles, and stabilization policy," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 262-282, April.
    9. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
    10. Stephane Pallage & Michel A. Robe, 2002. "The States vs. the states: On the Welfare Cost of Business Cycles in the U.S," Cahiers de recherche du Département des sciences économiques, UQAM 20-17, Université du Québec à Montréal, Département des sciences économiques, revised Oct 2002.
    11. repec:pri:wwseco:dp233 is not listed on IDEAS
    12. Ensar Yılmaz, 2014. "Welfare Costs of Business Cycles in Turkey," Metroeconomica, Wiley Blackwell, vol. 65(2), pages 195-211, May.
    13. Fábio Augusto Reis Gomes & Leandro Gonçalves do Nascimento, 2004. "A Welfare Analysis Of Economic Fluctuations In South America," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32nd Brazilian Economics Meeting] 045, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    14. Guillen, Osmani Teixeira Carvalho & Issler, João Victor & Franco Neto, Afonso Arinos de Mello, 2012. "On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 734, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    15. 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.
    16. Issler, João Victor & Guillen, Osmani Teixeira Carvalho, 2003. "On the welfare costs of business cycles in the 20th century," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 481, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    17. Satyajit Chatterjee & Dean Corbae, 2000. "On the welfare gains of reducing the likelihood of economic crises," Working Papers (Old Series) 0015, Federal Reserve Bank of Cleveland.
    18. Issler, Joao Victor & de Mello Franco-Neto, Afonso Arinos & de Carvalho Guillen, Osmani Teixeira, 2008. "The welfare cost of macroeconomic uncertainty in the post-war period," Economics Letters, Elsevier, vol. 98(2), pages 167-175, February.
    19. Márcio Antônio Salvato & João Victor Issler & Angelo Mont'alverne Duarte, 2005. "Are Business Cycles All Alike In Europe?," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 031, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    20. M. Ayhan Kose & Raymond Riezman, 2013. "Trade shocks and macroeconomic fluctuations in Africa," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 19, pages 369-394, World Scientific Publishing Co. Pte. Ltd..
    21. Giuliano, Paola & Turnovsky, Stephen J., 2003. "Intertemporal substitution, risk aversion, and economic performance in a stochastically growing open economy," Journal of International Money and Finance, Elsevier, vol. 22(4), pages 529-556, August.

    More about this item

    Keywords

    business cycles; consumption volatility; welfare cost;
    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cre:crefwp:124. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Stéphane Pallage (email available below). General contact details of provider: https://edirc.repec.org/data/crefeca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.