On the welfare gains of eliminating a small likelihood of economic crises: A case for stabilization policies?

Satyajit Chatterjee () and P. Dean Corbae ()

No 03-20, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: In this paper the authors estimate the potential benefit of policies that eliminate a small likelihood of economic crises. They define an economic crisis as a Depression-style collapse of economic activity. For the U.S., based on the observed frequency of Depression-like events, the authors estimate the likelihood of encountering a depression to be about once every 83 years. Even for this small probability of moving into a Depression-like state, the welfare gain from setting it to zero can range between 1 and 7 percent of annual consumption, in perpetuity. These estimates are large in comparison to welfare costs typically found for microeconomic distortions and suggest that there may be a net benefit to policies directed toward preventing economic instability.

Keywords: Depressions (search for similar items in EconPapers)
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Date: 2003
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