The States vs. The States: On the Welfare Cost of Business Cycles in the U.S.

23 Pages Posted: 10 Oct 2002

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 2002

Abstract

Extant estimates of the welfare cost of business cycles suggest that this cost is quite low and might well be minuscule. Those estimates are based on consumption data for the United States as a whole. The volatility of aggregate consumption, however, is much stronger at the state level. We argue that, because interstate risk sharing is imperfect, much information about actual consumption volatility is lost by averaging consumption figures across all 50 U.S. states. Using state-level consumption data, we show that the welfare cost of macroeconomic volatility is in fact very substantial. In many states, the welfare gain from eliminating business cycles can exceed the gain from increasing the long-term growth rate by 1% forever. These figures are relevant because many policies that affect macroeconomic fluctuations are chosen by state authorities or have consequences that vary by state. Our results have implications for several key issues in economics and finance.

Keywords: Business Cycles, Regional Volatility, Growth, Welfare

JEL Classification: E32, E60

Suggested Citation

Robe, Michel A. and Pallage, Stephane, The States vs. The States: On the Welfare Cost of Business Cycles in the U.S. (September 2002). Available at SSRN: https://ssrn.com/abstract=327400 or http://dx.doi.org/10.2139/ssrn.327400

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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