Working Paper: NBER ID: w9970
Authors: Gadi Barlevy
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E32; D92
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| business cycle fluctuations (E32) | growth rate of consumption (E20) |
| growth rate of consumption (E20) | welfare (I38) |
| business cycle fluctuations (E32) | welfare (I38) |
| eliminating fluctuations (E39) | growth rate of consumption (E20) |