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On the welfare gains of reducing the likelihood of economic crises

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  • Satyajit Chatterjee
  • Dean Corbae

Abstract

The authors seek to measure the potential benefit of reducing the likelihood of economic crises (defined as Depression-style collapses of economic activity). Based on the observed frequency of Depression-like events, they estimate this likelihood to be approximately one in every 83 years for the U.S. The welfare gain of reducing even this small probability of crisis to zero can range between 1.05 percent and 6.59 percent of annual consumption in perpetuity. These large gains occur because although the probability of entering a Depression-like state is small, once the state is entered it is highly persistent. The authors also find that for some calibrations of the model, uninsured unemployment risk contributes significantly to the size of the gains.

Suggested Citation

  • Satyajit Chatterjee & Dean Corbae, 2000. "On the welfare gains of reducing the likelihood of economic crises," Working Paper 0015, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:0015
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    References listed on IDEAS

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    Cited by:

    1. Stephen Turnovsky & Marcelo Bianconi, "undated". "The Welfare Gains from Stabilization in a Stochastically Growing Economy with Idiosyncratic Shocks and Flexible Labor Supply," Working Papers UWEC-2004-08-P, University of Washington, Department of Economics.
    2. Gadi Barlevy, 2005. "The cost of business cycles and the benefits of stabilization," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 32-49.
    3. 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.
    4. Huberto M. Ennis & Todd Keister, 2003. "Aggregate demand management with multiple equilibria," Working Paper 03-04, Federal Reserve Bank of Richmond.
    5. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.

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    Keywords

    Depressions ; Financial crises ; Business cycles;

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