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A welfare comparison of pre- and post-WWII business cycles: some implications for the role of postwar macroeconomic policies

  • Satyajit Chatterjee
  • Dean Corbae

The authors compute the potential economic benefits that would accrue to a typical pre-WWII era U.S. worker from the post-WWII macroeconomic policy regime. The authors assume that workers face undiversifiable income risk but can self-insure by saving in nominal assets. The worker's average utility is computed for two eras: pre-WWII (1875-1941) and post-WWII. In the pre-WWII era, the worker endured business cycles that were large in amplitude and quite volatile, a procyclical aggregate price level with large cyclical amplitude, a high average unemployment rate, and virtually no trend in the aggregate price level. In the post-WWII era, the same worker would have encountered business cycles with smaller amplitude and less volatility, a countercyclical aggregate price level with small cyclical amplitude, a much lower mean unemployment rate, and a positive trend in the aggregate price level. Depending on what is assumed about the effects of macroeconomic policies on the mean and var iance of the unemployment rate, the potential gain in the worker's welfare ranges between -0.9 (if policies affected the inflation rate but not the mean or variance of the aggregate unemployment rate) to 4.19 percent of consumption (if policies affected the inflation rate and lowered the mean and variance of the aggregate unemployment rate).

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 99-2.

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Date of creation: 1999
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Handle: RePEc:fip:fedpwp:99-2
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  1. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 187-218 National Bureau of Economic Research, Inc.
  2. Gary D. Hansen & Ayse Imrohoroglu, 1990. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," UCLA Economics Working Papers 583, UCLA Department of Economics.
  3. Cooley, Thomas F. & Ohanian, Lee E., 1991. "The cyclical behavior of prices," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 25-60, August.
  4. Per Krusell & Anthony A. Smith, Jr., . "On the Welfare Effects of Eliminating Business Cycles," GSIA Working Papers 243, Carnegie Mellon University, Tepper School of Business.
  5. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  6. J. Bradford De Long & Lawrence H. Summers, . "How Does Macroeconomic Policy Matter?," J. Bradford De Long's Working Papers _130, University of California at Berkeley, Economics Department.
  7. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
  8. Ethel D. Hoover, 1960. "Retail Prices after 1850," NBER Chapters, in: Trends in the American Economy in the Nineteenth Century, pages 141-190 National Bureau of Economic Research, Inc.
  9. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, June.
  10. Romer, Christina D, 1986. "Is the Stabilization of the Postwar Economy a Figment of the Data?," American Economic Review, American Economic Association, vol. 76(3), pages 314-34, June.
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