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Magnitude X on the Richter Scale: Welfare Cost of Business Cycles in Developing Countries

  • Stephane Pallage and Michel A. Robe

Economic fluctuations are much stronger in developing countries than in the United States. Yet, while a large literature debates what constitutes a reasonable estimate of the welfare cost of business cycles in the US, it remains an open question how large that cost is in developing countries. Using several model economies, we provide such a measure for a large number of low--income countries. Our first main result is that the welfare cost of output fluctuations per se is far from trivial in those countries, and typically averages 15 to 30 times the corresponding estimate for the US. Our second major result is that, in many poor countries, that cost may in fact exceed the welfare cost of significantly lower growth.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 97.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:97
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  1. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
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