Working Paper

On the aggregate welfare cost of Great Depression unemployment

Abstract: The potential benefit of policies that eliminate a small likelihood of economic crises is calculated. An economic crisis is defined as an increase in unemployment of the magnitude observed during the Great Depression. For the U.S., the maximum-likelihood estimate of entering a depression is found to be about once every 83 years. The welfare gain from setting this small probability to zero can range between 1 and 7 percent of annual consumption in perpetuity. For most estimates, more than half of these large gains result from a reduction in individual consumption volatility. ; This paper supersedes Working Paper 03-20.

Keywords: Depressions; Unemployment;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2006

Number: 06-18