Markups and the Welfare Cost of Business Cycles: A Reappraisal

Jean-Olivier Hairault and Francois Langot

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Gali et al. (2007) have recently shown in a quantitative way that inefficient fluctuations in the allocation of resources do not generate sizable welfare costs. In this note, we show that their evaluation underestimates the welfare costs of inefficient fluctuations and propose a biased estimate of the impact of structural distortions on business cycle costs. As monopolistic suppliers, both firms and households aim at preserving their expected markups ; the interaction between aggregate fluctuations in the efficiency gap and price-setting behaviors results in making average consumption and employment lower than their counterparts in the flexible price economy. This level increases the welfare cost of business cycles. It is all the more sizable in that the degree of inefficiency is structurally high at the steady state.

Keywords: new-Keynesian macroeconomics; Business cycle costs; inefficiency gap; new-Keynesian macroeconomics. (search for similar items in EconPapers)
Date: 2010-03
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00492204v1
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Published in 2010

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Related works:
Journal Article: Markups and the Welfare Cost of Business Cycles: A Reappraisal (2012)
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)
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