Welfare Costs of Business Cycles in South America
How large are welfare costs related to economic aggregate fluctuations is a topic of great concern among economists at least since Robert Lucasâ€™ well-known and thoughtprovoking exercise in the late 1980s. Our analysis assesses the magnitude of such costs for 11 countries in South America by means of two approaches: Lucasâ€™ classical setup with deterministic linear trend for consumption, and one in which consumption trend is stochastic and whose implementation is performed using Beveridge-Nelson decomposition. The latter approach is motivated by a substantial theoretical literature and empirical evidence. Our results suggest South American countries have welfare costs associated with economic fluctuations notably higher than the US economy, hence eliminating cyclical variability in consumption to some extent may be desirable in those countries
|Date of creation:||11 Aug 2004|
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- Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
- Maurice Obstfeld, 1995.
"Evaluating Risky Consumption Paths: The Role of Intertemporal Substitutability,"
NBER Technical Working Papers
0120, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August.
- 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.
- Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
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