The welfare cost of macroeconomic uncertainty in the post-war period

Afonso Franco Neto, João Issler and Osmani Guillén

No 605, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: 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-áedged 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 ñ$350.00 a year per-capita.

Date: 2005-12-01
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: The welfare cost of macroeconomic uncertainty in the post-war period (2008)
Working Paper: The welfare cost of macroeconomic uncertainty in the post-war period (2006)
Working Paper: The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:605

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