Macroeconomic Priorities and Crash States

Kevin Salyer ()

No 73, Working Papers from University of California, Davis, Department of Economics

Abstract: This paper reproduces Lucas's analysis of the costs of business cycles in an economy with a low probability, crash state in consumption growth. For reasonable parameter values, it is shown that the presence of a crash state dramatically increases the costs ofconsumption volatility. Specifically, for relative risk aversion around 5, households in the US economy would, in aggregate, pay over $60 billion (approximately 3% of consumption in 2001) to eliminate consumption uncertainty. The conclusion is that stabilization policy is important not for its effects on second moments but inreducing kurtosis by lowering both the probability and severity of a crash state.

Keywords: business cycles; crash states (search for similar items in EconPapers)
JEL-codes: E1 E32 E6 (search for similar items in EconPapers)
Pages: 12
Date: 2005-07-05
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repec.dss.ucdavis.edu/files/yb6mbtsQ5orp4DaSYVNdbJ9d/05-5.pdf (application/pdf)

Related works:
Journal Article: Macroeconomic priorities and crash states (2007)
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:cda:wpaper:73

Access Statistics for this paper

More papers in Working Papers from University of California, Davis, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Letters and Science IT Services Unit ().