Working Paper
On the welfare gains of eliminating a small likelihood of economic crises: A case for stabilization policies?
Abstract: In this paper the authors estimate the potential benefit of policies that eliminate a small likelihood of economic crises. They define an economic crisis as a Depression-style collapse of economic activity. For the U.S., based on the observed frequency of Depression-like events, the authors estimate the likelihood of encountering a depression to be about once every 83 years. Even for this small probability of moving into a Depression-like state, the welfare gain from setting it to zero can range between 1 and 7 percent of annual consumption, in perpetuity. These estimates are large in comparison to welfare costs typically found for microeconomic distortions and suggest that there may be a net benefit to policies directed toward preventing economic instability.
Keywords: Depressions;
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File(s): File format is application/pdf https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2003/wp03-20.pdf
Authors
Bibliographic Information
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 2003
Number: 03-20