Macroeconomic priorities and crash states

Arbeitspapier

This paper reproduces Lucas's analysis of the costs of business cycles in an economy with a low probability, crash state in consumption growth. For reasonable parameter values, it is shown that the presence of a crash state dramatically increases the costs ofconsumption volatility. Specifically, for relative risk aversion around 5, households in the US economy would, in aggregate, pay over $60 billion (approximately 3% of consumption in 2001) to eliminate consumption uncertainty. The conclusion is that stabilization policy is important not for its effects on second moments but inreducing kurtosis by lowering both the probability and severity of a crash state.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 05-5

Classification and Topics

• Classification: Wirtschaft ; General Aggregative Models: General ; Business Fluctuations; Cycles ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
• Subject: Makroökonomik ; Konjunktur ; Soziale Kosten ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Salyer, Kevin D.
• Event: Veröffentlichung
• (who): University of California, Department of Economics
• (where): Davis, CA
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/31339
• Last update: 10.03.2025, 11:42 AM CET