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Federal Reserve Bank of Philadelphia
Working Papers
On the aggregate welfare cost of Great Depression unemployment
Satyajit Chatterjee
Dean Corbae
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.


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Satyajit Chatterjee & Dean Corbae, On the aggregate welfare cost of Great Depression unemployment, Federal Reserve Bank of Philadelphia, Working Papers 06-18, 2006.
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Keywords: Depressions ; Unemployment
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