The Cost of Business Cycles under Endogenous Growth
نویسنده
چکیده
In his famous monograph, Lucas (1987) put forth an argument that the welfare gains from reducing the volatility of aggregate consumption are negligible. Subsequent work that revisited Lucas’ calculation continued to find only small benefits from reducing the volatility of consumption, further reinforcing the perception that business cycles don’t matter. This paper argues instead that fluctuations can affect welfare by affecting the growth rate of consumption. I present an argument for why fluctuations can reduce growth starting from a given initial consumption, which could imply substantial welfare effects as Lucas (1987) already observed in his calculation. Empirical evidence and calibration exercises suggest that the welfare effects are likely to be substantial, about two orders of magnitude greater than Lucas’ original estimates. First Version: February, 2000 Current Version: August, 2003 ∗I have benefitted from comments on this and an earlier version of the paper by Fernando Alvarez, Marco Bassetto, Larry Christiano, Elhanan Helpman, Zvi Hercowitz, Sam Kortum, Robert Lucas, Alex Monge, Assaf Razin, Helene Rey, and seminar participants at Northwestern, Wisconsin, Harvard, Columbia GSB, NYU, Princeton, Maryland, Ohio State, the Canadian Macro Study Group, Society of Economic Dynamics, and the National Bureau of Economic Research. I am also grateful to Valerie Ramey for supplying me with the data and the original code from her paper. The views expressed here do not necessarily reflect the position of the Federal Reserve Bank of Chicago or the Federal Reserve System.
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