The Welfare Costs of Business Cycles Unveiled: Measuring the Extent of Stabilization Policies

Fernando Barros (), Fábio Gomes and André Victor Doherty Luduvice
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Fernando Barros: https://www.fearp.usp.br/institucional/docentes/economia/3003-fernando-antonio-de-barros-junior.html

No 21-14R2, Working Papers from Federal Reserve Bank of Cleveland

Abstract: How can we measure the welfare benefit of ongoing stabilization policies? We develop a methodology to calculate the welfare cost of business cycles taking into account that observed consumption is partially smoothed. We propose a decomposition that disentangles consumption in a mix of laissez-faire (absent policies) and riskless components. With a novel identification strategy, we estimate the span of stabilization power. In our preferred specification, we find that the welfare cost of total fluctuations is 11 percent of lifetime consumption, of which 82 percent is smoothed by the status quo policies, yielding a residual 1.8 percent of consumption to be tackled by policymakers.

Keywords: business cycles; consumption; stabilization; macroeconomic history (search for similar items in EconPapers)
JEL-codes: E21 E32 E63 N10 (search for similar items in EconPapers)
Pages: 63
Date: 2021-07-30, Revised 2023-03-02
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-his and nep-mac
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Journal Article: The welfare costs of business cycles unveiled: Measuring the extent of stabilization policies (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:92917

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DOI: 10.26509/frbc-wp-202114r2

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