Markups, Gaps, and the Welfare Costs of Business Fluctuations

Jordi Galí, Mark Gertler and David Lopez-Salido

No 8850, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we present a simple, theory-based measure of the variations in aggregate economic efficiency associated with business fluctuations. We decompose this indicator, which we refer to as 'the gap', into two constituent parts: a price markup and a wage markup, and show that the latter accounts for the bulk of the fluctuations in our gap measure. Finally, we derive a measure of the welfare costs of business cycles that is directly related to our gap variable, and which takes into account explicitly the existence of a varying aggregate inefficiency. When applied to postwar U.S. data, for plausible parametrizations, our measure suggests welfare losses of fluctuations that are of a higher order of magnitude than those derived by Lucas (1987). It also suggests that the major postwar recessions involved substantial efficiency costs.

JEL-codes: E3 (search for similar items in EconPapers)
Date: 2002-03
New Economics Papers: this item is included in nep-dge
Note: EFG ME
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Citations: View citations in EconPapers (99)

Published as Jordi Galí & Mark Gertler & J. David López-Salido, 2007. "Markups, Gaps, and the Welfare Costs of Business Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 44-59, November.

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Related works:
Working Paper: Markups, Gaps, and the Welfare Costs of Business Fluctuations (2015)
Working Paper: Mark-ups, Gaps and the Welfare Costs of Business Fluctuations (2003)
Working Paper: Markups, gaps, and the welfare costs of business fluctuations (2002)
Working Paper: Markups, Gaps and the Welfare Costs of Business Fluctuations (2002)
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