The cost of business cycles under endogenous growth
By: Gadi Barlevy.
Series: Working paper series ;; WP-2003-13; Working paper series (Federal Reserve Bank of Chicago. Research Dept. : Online) ;; WP-2003-13.
Publisher: Federal Reserve Bank of Chicago
Published: 2003
Place of publication: [Chicago, Ill.]
Language: eng
Format: Electronic resource
Description: "In his famous 1987 monograph, Robert Lucas argued that further stabilizing the business cycles that persisted in the post-War era was pointless, because these cycles had a negligible effect on societal well- being.  In particular, Lucas demonstrated that society should be willing to pay only a tiny fraction of its consumption expenditures per year to completely eliminate the fluctuations that prevailed over this period.  This conclusion has been largely reaffirmed by subsequent studies, and has been commonly cited as evidence that policymakers should abstain from intervening to offset macroeconomic fluctuations of the magnitude that prevailed over this period.  <P> This paper disputes this conclusion and argues that the business cycles that prevailed over this period were costly, and thus opens the door to the possibility that stabilization policy might be desirable after all.  It does this by demonstrating that business cycles can have a deleterious effect on the rate at which the economy grows over the long run.  The reason is that cycles lead to volatile investment, reducing the efficiency of investment.  Essentially, the fact that investment activity is concentrated in booms rather than spread out uniformly over time creates congestion effects that lower the productivity of investment.  I estimate that eliminating the cyclical fluctuations that prevailed during the post-War period would have increased the growth rate of real GDP per capita in the U.S.  from 2.0% per year to 2.5% per year.  The cost of reduced growth from macroeconomic volatility is computed at a rate of 10% of consumption expenditures per year, over 100 times"--Federal Reserve Bank of Chicago web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 10/1/2004.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.