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Macroeconomic priorities and crash states

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  • Salyer, Kevin D.

Abstract

This paper reproduces Lucas's analysis of the costs of business cycles in an economy with a low probability, crash state in consumption growth. For reasonable parameter values, it is shown that the presence of a crash state dramatically increases the costs ofconsumption volatility. Specifically, for relative risk aversion around 5, households in the US economy would, in aggregate, pay over $60 billion (approximately 3% of consumption in 2001) to eliminate consumption uncertainty. The conclusion is that stabilization policy is important not for its effects on second moments but inreducing kurtosis by lowering both the probability and severity of a crash state.
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  • Salyer, Kevin D., 2007. "Macroeconomic priorities and crash states," Economics Letters, Elsevier, vol. 94(1), pages 64-70, January.
    • Handle: RePEc:eee:ecolet:v:94:y:2007:i:1:p:64-70
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    Cited by:

    1. Barro, Robert, 2006. "On the Welfare Costs of Consumption Uncertainty," Scholarly Articles 3224745, Harvard University Department of Economics.
    2. Kangni Kpodar & Patrick Imam, 2016. "Does a Regional Trade Agreement Lessen or Worsen Growth Volatility? An Empirical Investigation," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 949-979, November.
    3. D'Orlando, Fabio & Ferrante, Francesco, 2015. "The benefits of stabilization policies revisited," MPRA Paper 67321, University Library of Munich, Germany.
    4. Dorofeenko, Victor & Lee, Gabriel S. & Salyer, Kevin D., 2010. "A new algorithm for solving dynamic stochastic macroeconomic models," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 388-403, March.
    5. Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, vol. 99(1), pages 243-264, March.
    6. Philip Jung & Keith Kuester, 2008. "The (un)importance of unemployment fluctuations for welfare," Working Papers 08-31, Federal Reserve Bank of Philadelphia.
    7. Jung, Philip & Kuester, Keith, 2011. "The (un)importance of unemployment fluctuations for the welfare cost of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1744-1768, October.
    8. Aurland-Bredesen, Kine Josefine, 2021. "The welfare costs of uncertainty: Cross-country evidence," World Development, Elsevier, vol. 146(C).
    9. Tirelli Mario & Turner Sergio, 2010. "Quantifying the Cost of Risk in Consumption," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-33, July.

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    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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