Markups, Gaps and the Welfare Costs of Business Fluctuations

46 Pages Posted: 3 Jan 2004

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

David Lopez-Salido

Board of Governors of the Federal Reserve System

Multiple version iconThere are 4 versions of this paper

Date Written: December 2003

Abstract

In this Paper, we present a simple, theory-based measure of the variations in aggregate economic efficiency that is based on the difference between the marginal product of labour and the household's consumption/leisure trade-off. We show that this indicator corresponds to the inverse of the mark-up of price over social marginal cost and give some evidence in support of this interpretation. We then show that this indicator may be used to measure the efficiency costs of business fluctuations. We find that the efficiency costs of fluctuations are modest on average. The major recessions involve significant welfare losses, however, even after netting out the gains from the preceding boom. These results hold for reasonable parameterizations of both the Frisch elasticity of labour supply and the coefficient of relative risk aversion.

JEL Classification: E32

Suggested Citation

Gali, Jordi and Gertler, Mark and Lopez-Salido, David, Markups, Gaps and the Welfare Costs of Business Fluctuations (December 2003). CEPR Discussion Paper No. 4134. Available at SSRN: https://ssrn.com/abstract=481241

Jordi Gali (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

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HOME PAGE: http://www.econ.upf.es/~gali

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

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