TY  - JOUR
AU  - Gali,Jordi
AU  - Gertler,Mark
AU  - Lopez-Salido,J. David
TI  - Markups, Gaps, and the Welfare Costs of Business Fluctuations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8850
PY  - 2002
Y2  - March 2002
UR  - http://www.nber.org/papers/w8850
L1  - http://www.nber.org/papers/w8850.pdf
N1  - Author contact info:
Jordi Gali
Centre de Recerca en Economia Internacional (CREI)
Ramon Trias Fargas 25
08005 Barcelona
SPAIN
Tel: 011-34-93-5422754
Fax: 011-34-93-5421860
E-Mail: jgali@crei.cat

Mark Gertler
Department of Economics
New York University
269 Mercer Street, 7th Floor
New York, NY 10003
Tel: 212/998-8931
Fax: 212/995-4186
E-Mail: mark.gertler@nyu.edu
AB  - In this paper we present a simple, theory-based measure of the variations in aggregate economic efficiency associated with business fluctuations. We decompose this indicator, which we refer to as 'the gap', into two constituent parts: a price markup and a wage markup, and show that the latter accounts for the bulk of the fluctuations in our gap measure. Finally, we derive a measure of the welfare costs of business cycles that is directly related to our gap variable, and which takes into account explicitly the existence of a varying aggregate inefficiency. When applied to postwar U.S. data, for plausible parametrizations, our measure suggests welfare losses of fluctuations that are of a higher order of magnitude than those derived by Lucas (1987). It also suggests that the major postwar recessions involved substantial efficiency costs.
ER  -