Disasters Everywhere: The Costs of Business Cycles Reconsidered

36 Pages Posted: 13 Apr 2020

See all articles by Òscar Jordà

Òscar Jordà

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Alan M. Taylor

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2020

Abstract

Business cycles are costlier and stabilization policies could be more beneficial than widely thought. This paper introduces a new test to show that all business cycles are asymmetric and resemble “mini-disasters.” By this we mean that growth is pervasively fat-tailed and non-Gaussian. Using long-run historical data, we show empirically that this is true for advanced economies since 1870. Focusing on peacetime eras, we develop a tractable local projection framework to estimate consumption growth paths for normal and financial-crisis recessions. Introducing random coefficient local projections (RCLP) we get an easy and transparent mapping from the estimates to a calibrated simulation model with disasters of variable severity. Simulations show that substantial welfare costs arise not just from the large rare disasters, but also from the smaller but more frequent mini-disasters in every cycle. On average, and in post-WW2 data, even with low risk aversion, households would sacrifice about 15 percent of consumption to avoid such cyclical fluctuations.

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Suggested Citation

Jordà, Òscar and Schularick, Moritz and Taylor, Alan M., Disasters Everywhere: The Costs of Business Cycles Reconsidered (April 2020). NBER Working Paper No. w26962, Available at SSRN: https://ssrn.com/abstract=3574427

Òscar Jordà (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

Moritz Schularick

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alan M. Taylor

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1572 (Phone)
530-752-9382 (Fax)

HOME PAGE: http://www.econ.ucdavis.edu/faculty/amtaylor/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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HOME PAGE: http://cepr.org

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