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Asset liquidity and the welfare costs of business cycles

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Resumo:In this paper, we revisit the question of what the welfare costs of business cycles are with new insights. The seminal paper by Lucas (1987) found welfare costs to be negligible at around 1%, but subsequent literature focused on finding mechanisms that could rationalize larger welfare costs. Our study builds on recent research that incorporates incomplete markets, adjustment costs, and marginal propensities to consume to show that welfare costs can be substantial. Our calculations indicate that eliminating business cycle fluctuations would result in a 1.25% increase in welfare, as measured in consumption equivalents. Furthermore, using a 2-asset HANK model, we find a welfare cost of 2.6%. This result arises from considering portfolio adjustment costs, which generate a distribution of marginal propensities to consume along the income dimension that is empirically plausible and produces a share of (rich and poor) hand-to-mouth households that is consistent with recent findings. In periods of recession, these values rise to 11.1%. These results are particularly driven by effects from the price rigidity.
Autores principais:Brinca, Pedro
Outros Autores:Duarte, João B.; Ferreira, Ana Melissa Almeida; Nóbrega, Valter Miguel Sobral
Assunto:Welfare costs Business cycles Liquidity Hand-to-mouth
Ano:2024
País:Portugal
Tipo de documento:working paper
Tipo de acesso:acesso aberto
Instituição associada:Universidade Nova de Lisboa
Idioma:inglês
Origem:Repositório Institucional da UNL

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