The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period

João Issler, Afonso Franco and Osmani Guillén
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Afonso Franco: Graduate School of Economics - EPGE, Getulio Vargas Foundation

No 2006-02, IBMEC RJ Economics Discussion Papers from Economics Research Group, IBMEC Business School - Rio de Janeiro

Abstract: Lucas (1987) has shown the surprising result that the welfare cost of business cycles is quite small. Using standard assumptions on preferences and a fully-fledged econometric model we computed the welfare costs of macroeconomic uncertainty for the post-WWII era using the multivariate Beveridge-Nelson decomposition for trends and cycles, which considers not only business-cycle uncertainty but also uncertainty from the stochastic trend in consumption. The post-WWII period is relatively quiet, with the welfare costs of uncertainty being about 0.9% of per-capita consumption. Although changing the decomposition method changed substantially initial results, the welfare cost of uncertainty is qualitatively small in the post-WWII era - about $175.00 a year per-capita in the U.S. We also computed the marginal welfare cost of macroeconomic uncertainty using this same technique. It is about twice as large as the welfare cost - $350.00 a year per-capita.

Keywords: welfare costs of business cycles; Beveridge-Nelson decomposition (search for similar items in EconPapers)
JEL-codes: C32 C53 E32 (search for similar items in EconPapers)
Date: 2006-01-02
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: The welfare cost of macroeconomic uncertainty in the post-war period (2008)
Working Paper: The welfare cost of macroeconomic uncertainty in the post-war period (2006)
Working Paper: The welfare cost of macroeconomic uncertainty in the post-war period (2005)
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