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Welfare Costs of Business Cycles in South America

Leandro Nascimento and Fábio Gomes

No 158, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: How large are welfare costs related to economic aggregate fluctuations is a topic of great concern among economists at least since Robert Lucas’ well-known and thoughtprovoking exercise in the late 1980s. Our analysis assesses the magnitude of such costs for 11 countries in South America by means of two approaches: Lucas’ classical setup with deterministic linear trend for consumption, and one in which consumption trend is stochastic and whose implementation is performed using Beveridge-Nelson decomposition. The latter approach is motivated by a substantial theoretical literature and empirical evidence. Our results suggest South American countries have welfare costs associated with economic fluctuations notably higher than the US economy, hence eliminating cyclical variability in consumption to some extent may be desirable in those countries

Keywords: business cycles; welfare costs; consumption; Beveridge-Nelson decomposition (search for similar items in EconPapers)
JEL-codes: E20 E32 E60 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-dge and nep-mac
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