A Welfare Comparison of Pre- and Post-Wwii Business Cycles: Some Implications for the Role of Post-War Macroeconomic Policies

FRB Philadelphia Working Paper No. 99-2

48 Pages Posted: 16 Jul 1999

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Philip Dean Corbae

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Date Written: March 1999

Abstract

The authors compute the potential economic benefits that would accrue to a typical pre-WWII era U.S. worker from the post-WWII macroeconomic policy regime. The authors assume that workers face undiversifiable income risk but can self-insure by saving in nominal assets. The worker's average utility is computed for two eras: pre-WWII (1875-1941) and post-WWII. In the pre-WWII era, the worker endured business cycles that were large in amplitude and quite volatile, a procyclical aggregate price level with large cyclical amplitude, a high average unemployment rate, and virtually no trend in the aggregate price level. In the post-WWII era, the same worker would have encountered business cycles with smaller amplitude and less volatility, a countercyclical aggregate price level with small cyclical amplitude, a much lower mean unemployment rate, and a positive trend in the aggregate price level. Depending on what is assumed about the effects of macroeconomic policies on the mean and variance of the unemployment rate, the potential gain in the worker's welfare ranges between -0.9 (if policies affected the inflation rate but not the mean or variance of the aggregate unemployment rate) to 4.19 percent of consumption (if policies affected the inflation rate and lowered the mean and variance of the aggregate unemployment rate).

JEL Classification: E21, E24, E32, E63, N10

Suggested Citation

Chatterjee, Satyajit and Corbae, Philip Dean, A Welfare Comparison of Pre- and Post-Wwii Business Cycles: Some Implications for the Role of Post-War Macroeconomic Policies (March 1999). FRB Philadelphia Working Paper No. 99-2. Available at SSRN: https://ssrn.com/abstract=159671 or http://dx.doi.org/10.2139/ssrn.159671

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)

HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

Philip Dean Corbae

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
512-471-3211 (Phone)
512-471-3510 (Fax)

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