Markups and the Welfare Cost of Business Cycles : A Reappraisal
Gali et al. (2007) have recently shown in a quantitative way that inefficient fluctuations in the allocation of resources do not generate sizable welfare costs. In this note, we show that their evaluation underestimates the welfare costs of inefficient fluctuations and propose a biased estimate of the impact of structural distortions on business cycle costs. As monopolistic suppliers, both firms and households aim at preserving their expected markups ; the interaction between aggregate fluctuations in the efficiency gap and price-setting behaviors results in making average consumption and employment lower than their counterparts in the flexible price economy. This level increases the welfare cost of business cycles. It is all the more sizable in that the degree of inefficiency is structurally high at the steady state.
|Date of creation:||Mar 2010|
|Date of revision:|
|Note:||View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00492204|
|Contact details of provider:|| Web page: http://hal.archives-ouvertes.fr/|
When requesting a correction, please mention this item's handle: RePEc:hal:cesptp:halshs-00492204. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.