Revisiting the Welfare Effects of Eliminating Business Cycles: The case of short-term and long-term unemployment
We investigate the welfare effects of eliminating business cycles in a model with substantial consumer heterogeneity. The heterogeneity arises from uninsurable idiosyncratic uncertainty in preferences and employment status. We distinguish between short- and long-term unemployment. Long-term unemployment as a fraction of total unemployment increases during economic slowdowns. We calibrate the model to match the distribution of wealth in the U.S. and the transition probabilities among employment, short-term unemployment, and long-term unemployment. Our experiment takes into account the transition from the original economy with cycles to the new steady state of an economy without cycles. We examine how business cycles affect the welfare of consumers depending on their wealth, employment status, and rate of patience.
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