Markups and the Welfare Cost of Business Cycles: A Reappraisal

Jean-Olivier Hairault and Francois Langot

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Gali et al. (2007) have recently shown quantitatively that fluctuations in the efficiency of resource allocation do not generate sizable welfare costs. In their economy, which is distorted by monopolistic competition in the steady state, we show that they underestimate the welfare cost of these fluctuations by ignoring the negative effect of aggregate volatility on average consumption and leisure. As monopolistic suppliers, both firms and workers aim to preserve their expected markups; the interaction between aggregate fluctuations and price-setting behavior results in average consumption and employment levels that are lower than their counterparts in the flexible-price economy. This level effect increases the efficiency cost of business cycles. It is all the more sizable with the degree of inefficiency in the steady state, lower labor-supply elasticities, and when prices instead of wages are rigid.

Keywords: Business cycle costs; inefficiency gap; New-Keynesian Macroeconomics (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Note: View the original document on HAL open archive server: https://hal.science/hal-00623281v1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Money, Credit and Banking, 2012, 44 (5), pp.995-1014. ⟨10.1111/j.1538-4616.2012.00519.x⟩

Downloads: (external link)
https://hal.science/hal-00623281v1/document (application/pdf)

Related works:
Journal Article: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2012)
Journal Article: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2012)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2012)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2012)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2010)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2010)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-00623281

DOI: 10.1111/j.1538-4616.2012.00519.x

Access Statistics for this paper

More papers in Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL
Bibliographic data for series maintained by CCSD ().