Markups, Gaps, and the Welfare Costs of Business Fluctuations
Jordi Gali (),
Mark Gertler () and
David Lopez-Salido ()
The Review of Economics and Statistics, 2007, vol. 89, issue 1, pages 44-59
We present a simple theory-based measure of the variations in aggregate economic efficiency: the gap between the marginal product of labor and the household's consumption leisure tradeoff. We show that this indicator corresponds to the reciprocal of the markup of price over social marginal cost, and give some evidence in support of this interpretation. We then show that, with some auxiliary assumptions, our gap variable may be used to measure the efficiency costs of business fluctuations. We find that the latter costs are modest on average. However, to the extent that the flexible price equilibrium is distorted, the gross efficiency losses from recessions and gains from booms may be large. Indeed, we find that the major recessions involved large efficiency losses. These results hold for reasonable parameterizations of the Frisch elasticity of labor supply, the relative risk aversion, and steady-state distortions. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
References: Add references at CitEc
Citations View citations in EconPapers (66) Track citations by RSS feed
Downloads: (external link)
http://www.mitpressjournals.org/doi/pdf/10.1162/rest.89.1.44 link to full text (application/pdf)
Access to full text is restricted to subscribers.
Working Paper: Markups, gaps and the welfare costs of business fluctuations (2005)
Working Paper: Markups, Gaps, and the Welfare Costs of Business Fluctuations (2003)
Working Paper: Mark-ups, Gaps and the Welfare Costs of Business Fluctuations (2003)
Working Paper: Markups, gaps, and the welfare costs of business fluctuations (2002)
Working Paper: Markups, Gaps and the Welfare Costs of Business Fluctuations (2002)
Working Paper: Markups, Gaps, and the Welfare Costs of Business Fluctuations (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:tpr:restat:v:89:y:2007:i:1:p:44-59
Ordering information: This journal article can be ordered from
http://mitpress.mit. ... me.tcl?issn=00346535
Access Statistics for this article
The Review of Economics and Statistics is currently edited by Daron Acemoglu, George J. Borjas, Dani Rodrik and Julio J. Rotemberg
More articles in The Review of Economics and Statistics from MIT Press
Series data maintained by Anna Pollock-Nelson ().