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On the aggregate welfare cost of Great Depression unemployment

  • Satyajit Chatterjee
  • Dean Corbae

The potential benefit of policies that eliminate a small likelihood of economic crises is calculated. An economic crisis is defined as an increase in unemployment of the magnitude observed during the Great Depression. For the U.S., the maximum-likelihood estimate of entering a depression is found to be about once every 83 years. The welfare gain from setting this small probability to zero can range between 1 and 7 percent of annual consumption in perpetuity. For most estimates, more than half of these large gains result from a reduction in individual consumption volatility. ; This paper supersedes Working Paper 03-20.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 06-18.

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Date of creation: 2006
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Handle: RePEc:fip:fedpwp:06-18
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