Disasters Everywhere: The Costs of Business Cycles Reconsidered

31 Pages Posted: 18 May 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: May 2020

Abstract

Business cycles are costlier and stabilization policies more beneficial than widely thought. This paper shows 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 all advanced economies since 1870. Focusing on the peacetime sample, we develop a tractable local projection framework to estimate consumption growth paths for normal and financial-crisis recessions. Using random coefficient local projections we get an easy and transparent mapping from the estimates to the calibrated simulation model. 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. In postwar America, households would sacrifice more than 10 percent of consumption to avoid such cyclical fluctuations.

Keywords: fluctuations, asymmetry, local projections, random coefficients, macroprudential policy

JEL Classification: E13, E21, E22, E32

Suggested Citation

Jordà, Òscar and Schularick, Moritz and Taylor, Alan M., Disasters Everywhere: The Costs of Business Cycles Reconsidered (May 2020). FRB of New York Staff Report No. 925, Available at SSRN: https://ssrn.com/abstract=3601961 or http://dx.doi.org/10.2139/ssrn.3601961

Òscar Jordà

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

Moritz Schularick (Contact Author)

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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HOME PAGE: http://nber.org

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://cepr.org

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