Markups, Gaps and the Welfare Costs of Business Fluctuations

Jordi Gali (), Mark Gertler () and Lopez-Salido, Jose David

No 3212, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this Paper we present a simple, theory-based measure of the variations in aggregate economic efficiency associated with business fluctuations. We decompose this indicator, which we refer to as ‘the gap’, into two constituent parts: a price markup and a wage markup, and show that the latter accounts for the bulk of the fluctuations in our gap measure. Finally, we derive a measure of the welfare costs of business cycles that is directly related to our gap variable, and which takes into account explicitly the existence of a varying aggregate inefficiency. When applied to postwar US data, for plausible parametrizations, our measure suggests welfare losses of fluctuations that are of a higher order of magnitude than those derived by Lucas (1987). It also suggests that the major postwar recessions involved substantial efficiency costs.

Keywords: business cycles; countercyclical markups; welfare costs (search for similar items in EconPapers)
JEL-codes: E30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2002-02
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Related works:
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 (2005)
Working Paper: Markups, Gaps, and the Welfare Costs of Business Fluctuations (2002)
Journal Article: Markups, Gaps, and the Welfare Costs of Business Fluctuations (2007)
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