Markups and the Welfare Cost of Business Cycles: A Reappraisal

Jean-Olivier Hairault and Francois Langot

Journal of Money, Credit and Banking, 2012, vol. 44, issue 5, 995-1014

Abstract: Gali, Gertler, and Lopez‐Salido (2007) recently show quantitatively that fluctuations in the efficiency of resource allocation do not generate sizable welfare costs. In their economy, which is distorted by monopolistic competition in the steady state, we show that they underestimate the welfare cost of these fluctuations by ignoring the negative effect of aggregate volatility on average consumption and leisure. As monopolistic suppliers, both firms and workers aim to preserve their expected markups; the interaction between aggregate fluctuations and price‐setting behavior results in average consumption and employment levels that are lower than their counterparts in the flexible‐price economy. This level effect increases the efficiency cost of business cycles. It is all the more sizable with the degree of inefficiency in the steady state, lower labor–supply elasticities, and when prices instead of wages are rigid.

Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1111/j.1538-4616.2012.00519.x

Related works:
Journal Article: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2012)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2012)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2012)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2012)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2010)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2010)
Working Paper: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:44:y:2012:i:5:p:995-1014

Access Statistics for this article

Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

More articles in Journal of Money, Credit and Banking from Blackwell Publishing
Bibliographic data for series maintained by Wiley Content Delivery ().