The Welfare Cost of Business Cycles for Heterogeneous Consumers: A State-Space Decomposition

The main objective of this paper is to measure the welfare costs related to permanent and transitory shocks for heterogeneous consumers. We use data from the Consumer Expenditure Survey (CEX) and compute the average consumption in three different income groups: low, middle and high income. We sort consumers from the poorest to the richest and we create these three groups using income as a reference. Then, we consider a model where consumers in different groups face different shocks. Our findings indicate that the welfare costs of economic fluctuations are higher than previous works that explore heterogeneous agents argue. Moreover, our estimations indicate that high-income consumers are more sensitive to both transitory and permanent shocks than other classes of consumers.