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The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period

  • João Victor Issler

    (Graduate School of Economics - EPGE, Getulio Vargas Foundation)

  • Afonso Arinos de Mello Franco

    (Graduate School of Economics - EPGE, Getulio Vargas Foundation)

  • Osmani Teixeira de Carvalho Guillén

    (IBMEC Business School - Rio de Janeiro and Banco Central do Brasil)

Lucas (1987) has shown the surprising result that the welfare cost of business cycles is quite small. Using standard assumptions on preferences and a fully-fledged econometric model we computed the welfare costs of macroeconomic uncertainty for the post-WWII era using the multivariate Beveridge-Nelson decomposition for trends and cycles, which considers not only business-cycle uncertainty but also uncertainty from the stochastic trend in consumption. The post-WWII period is relatively quiet, with the welfare costs of uncertainty being about 0.9% of per-capita consumption. Although changing the decomposition method changed substantially initial results, the welfare cost of uncertainty is qualitatively small in the post-WWII era - about $175.00 a year per-capita in the U.S. We also computed the marginal welfare cost of macroeconomic uncertainty using this same technique. It is about twice as large as the welfare cost - $350.00 a year per-capita.

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Paper provided by Economics Research Group, IBMEC Business School - Rio de Janeiro in its series IBMEC RJ Economics Discussion Papers with number 2006-02.

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Date of creation: 02 Jan 2006
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Handle: RePEc:ibr:dpaper:2006-02
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