Mark-ups, Gaps and the Welfare Costs of Business Fluctuations

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

No 4134, 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 that is based on the difference between the marginal product of labour and the household’s consumption/leisure trade-off. We show that this indicator corresponds to the inverse of the mark-up of price over social marginal cost and give some evidence in support of this interpretation. We then show that this indicator may be used to measure the efficiency costs of business fluctuations. We find that the efficiency costs of fluctuations are modest on average. The major recessions involve significant welfare losses, however, even after netting out the gains from the preceding boom. These results hold for reasonable parameterizations of both the Frisch elasticity of labour supply and the coefficient of relative risk aversion.

Keywords: Business Cycles; Countercyclical Mark-ups; Welfare Costs (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2003-12
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Related works:
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)
Working Paper: Markups, Gaps, and the Welfare Costs of Business Fluctuations (2005)
Journal Article: Markups, Gaps, and the Welfare Costs of Business Fluctuations (2007)
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