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The States vs. the states: On the Welfare Cost of Business Cycles in the U.S

  • Michel A. Robe
  • Stephane Pallage

Extant estimates of the welfare cost of business cycles suggest that this cost is quite low and might well be minuscule. Those estimates are based on consumption data for the United States as a whole. The volatility of aggregate consumption, however, is much stronger at the state level. We argue that, because interstate risk sharing is imperfect, much information about actual consumption volatility is lost by averaging consumption figures across all 50 U.S. states. Using state-level consumption data, we show that the welfare cost of macroeconomic volatility is in fact very substantial. In many states, the welfare gain from eliminating business cycles can exceed the gain from increasing the long-term growth rate by 1% forever. Our results have implications for several key issues in economics and finance

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 164.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:164
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