On the Welfare Costs of Business-Cycle Fluctuations and Economic-Growth Variation in the 20th Century

Osmani Guillény, João Issler and Afonso Franco-Neto
Authors registered in the RePEc Author Service: Afonso Arinos Mello Franco Neto and Osmani Teixeira de Carvalho Guillén

No 284, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Lucas(1987) has shown a surprising result in business-cycle research: the welfare cost of business cycles are very small. Our paper has several original contributions. First, in computing welfare costs, we propose a novel setup that separates the effects of uncertainty stemming from business-cycle fluctuations and economic-growth variation. Second, we extend the sample from which to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence. So, we employ also pre-WWII data. Third, we take an econometric approach and compute explicitly the asymptotic standard deviation of welfare costs using the Delta Method.

Date: 2012-07
New Economics Papers: this item is included in nep-dge, nep-his and nep-mac
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Related works:
Working Paper: On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century (2012)
Working Paper: On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century (2012)
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