Magnitude X on the Richter Scale: Welfare Cost of Business Cycles in Developing Countries

Stephane Pallage () and Michel Robe ()

No 124, Cahiers de recherche CREFE / CREFE Working Papers from CREFE, Université du Québec à Montréal

Abstract: Economic fluctuations are much stronger in developing countries than in the United States. Yet, while a large literature debates what constitutes a reasonable estimate of the welfare cost of business cycles in the US, it remains an open question how large that cost is in developing countries. Using several model economies, we provide such a measure for a large number of low--income countries. Our first main result is that the welfare cost of output fluctuations per se is far from trivial in those countries, and typically averages 15 to 30 times the corresponding estimate for the US. Our second major result is that, in many poor countries, that cost may in fact exceed the welfare cost of significantly lower growth.

Keywords: business cycles; consumption volatility; welfare cost (search for similar items in EconPapers)
JEL-codes: E32 E60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2000-10
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Forthcoming in the International Economic Review, 2002, new title On the Welfare Cost of Economic Fluctuations in Developing Countries

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