On the Welfare Cost of Business Cycles in Developing Countries

20 Pages Posted: 10 Sep 2001

See all articles by Michel A. Robe

Michel A. Robe

University of Illinois at Urbana-Champaign

Stephane Pallage

University of Quebec at Montreal - Department of Economics; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Date Written: September 2001

Abstract

Economic fluctuations are much stronger in developing countries than in the United States. Yet, while a large literature debates what constitutes a reasonable estimate of the welfare cost of business cycles in the US, it remains an open question how large that cost is in developing countries. Using several model economies, we provide such a measure for a large number of low--income countries. Our first main result is that the welfare cost of consumption volatility per se is far from trivial in those countries, and always averages a substantial multiple of the corresponding estimate for the US. Our second major result is that, in many poor countries, the welfare gain from eliminating that volatility may in fact exceed the welfare gain from an additional 1 percentage point of growth in perpetuity.

JEL Classification: E32, E60

Suggested Citation

Robe, Michel A. and Pallage, Stephane, On the Welfare Cost of Business Cycles in Developing Countries (September 2001). Available at SSRN: https://ssrn.com/abstract=283002 or http://dx.doi.org/10.2139/ssrn.283002

Michel A. Robe (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Stephane Pallage

University of Quebec at Montreal - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada
514-987-3000 ext. 8730 (Phone)
514-987-8494 (Fax)

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

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