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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' aim in this paper is to obtain a measure of the potential benefit of reducing the likelihood of economic crises. The authors define an economic crisis as a Depression-style collapse of economic activity. Based on the observed frequency of Depression-like events, the authors estimate this likelihood to be approximately once every 83 years for the United States. Even for this small probability of moving into a Depression-like state, the welfare gain from setting it to zero can range between 1.05 percent and 6.59 percent of annual consumption, in perpetuity. These large gains arise because even though the probability of encountering a Depression-like state is small, it is highly persistent once it occurs. The authors also find that for some calibrations of the model, uninsured unemployment risk contributes significantly to the size of these gains.

Suggested Citation

  • Satyajit Chatterjee & Dean Corbae, 2000. "On the welfare gains of reducing the likelihood of economic crises," Working Papers 00-14, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:00-14
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    Cited by:

    1. 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.
    2. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
    3. Turnovsky, Stephen J. & Bianconi, Marcelo, 2005. "Welfare Gains From Stabilization In A Stochastically Growing Economy With Idiosyncratic Shocks And Flexible Labor Supply," Macroeconomic Dynamics, Cambridge University Press, vol. 9(3), pages 321-357, June.
    4. Huberto M. Ennis & Todd Keister, 2003. "Aggregate demand management with multiple equilibria," Working Paper 03-04, Federal Reserve Bank of Richmond.
    5. Gadi Barlevy, 2005. "The cost of business cycles and the benefits of stabilization," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 29(Q I), pages 32-49.

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