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The States vs. the states: On the Welfare Cost of Business Cycles in the U.S

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  • Michel A. Robe
  • Stephane Pallage

Abstract

Extant estimates of the welfare cost of business cycles suggest that this cost is quite low and might well be minuscule. Those estimates are based on consumption data for the United States as a whole. The volatility of aggregate consumption, however, is much stronger at the state level. We argue that, because interstate risk sharing is imperfect, much information about actual consumption volatility is lost by averaging consumption figures across all 50 U.S. states. Using state-level consumption data, we show that the welfare cost of macroeconomic volatility is in fact very substantial. In many states, the welfare gain from eliminating business cycles can exceed the gain from increasing the long-term growth rate by 1% forever. Our results have implications for several key issues in economics and finance

Suggested Citation

  • Michel A. Robe & Stephane Pallage, 2004. "The States vs. the states: On the Welfare Cost of Business Cycles in the U.S," Econometric Society 2004 North American Winter Meetings 164, Econometric Society.
    • Handle: RePEc:ecm:nawm04:164
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    3. Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc.
    4. Eswar S. Prasad & Kenneth Rogoff & Shang-Jin Wei & M. Ayhan Kose, 2007. "Financial Globalization, Growth and Volatility in Developing Countries," NBER Chapters, in: Globalization and Poverty, pages 457-516, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Business cycles; Consumption volatility; Growth; Welfare; Regional data;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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