Working Paper

The Welfare Costs of Business Cycles Unveiled: Measuring the Extent of Stabilization Policies


Abstract: How can we measure the welfare benefit of ongoing stabilization? We develop a methodology to calculate the welfare cost of business cycles taking into account that observed consumption is partially smoothed. We propose a decomposition that disentangles consumption in a mix of laissez-faire (absent policies) and riskless components. With a novel identification strategy, we estimate the span of stabilization power. Our results show that the welfare cost of total fluctuations is 5.81 percent of lifetime consumption, in which 80 percent is smoothed by the status quo, yielding a residual 1.05 percent to be tackled by policy.

Keywords: business cycles; consumption; stabilization; macroeconomic history;

JEL Classification: E32; E21; E63; N10;

https://doi.org/10.26509/frbc-wp-202114

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2021-07-30

Number: 2021-14