NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Cost of Business Cycles Under Endogenous Growth

Gadi Barlevy

NBER Working Paper No. 9970
Issued in September 2003
NBER Program(s):   EFG

In his famous monograph, Lucas (1987) put forth an argument that the welfare gains from reducing the volatility of aggregate consumption are negligible. Subsequent work that revisited Lucas' calculation continued to find only small benefits from reducing the volatility of consumption, further reinforcing the perception that business cycles don't matter. This paper argues instead that fluctuations can affect welfare by affecting the growth rate of consumption. I present an argument for why fluctuations can reduce growth starting from a given initial consumption, which could imply substantial welfare effects as Lucas (1987) already observed in his calculation. Empirical evidence and calibration exercises suggest that the welfare effects are likely to be substantial, about two orders of magnitude greater than Lucas' original estimates.

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Document Object Identifier (DOI): 10.3386/w9970

Published: Barlevy, Gadi. "The Cost Of Business Cycles Under Endogenous Growth," American Economic Review, 2004, v94(4,Sep), 964-990. citation courtesy of

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