On the Welfare Gains of Eliminating a Small Likelihood of Economic Crises: A Case for Stabilization Policies?

FRB of Philadelphia Working Paper No. 03-20

37 Pages Posted: 18 Aug 2004

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Philip Dean Corbae

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Date Written: September 2003

Abstract

In this paper the authors estimate the potential benefit of policies that eliminate a small likelihood of economic crises. They define an economic crisis as a Depression-style collapse of economic activity. For the U.S., based on the observed frequency of Depression-like events, the authors estimate the likelihood of encountering a depression to be about once every 83 years. Even for this small probability of moving into a Depression-like state, the welfare gain from setting it to zero can range between 1 and 7 percent of annual consumption, in perpetuity. These estimates are large in comparison to welfare costs typically found for microeconomic distortions and suggest that there may be a net benefit to policies directed toward preventing economic instability.

Keywords: Depressions, Welfare

Suggested Citation

Chatterjee, Satyajit and Corbae, Philip Dean, On the Welfare Gains of Eliminating a Small Likelihood of Economic Crises: A Case for Stabilization Policies? (September 2003). FRB of Philadelphia Working Paper No. 03-20. Available at SSRN: https://ssrn.com/abstract=574162 or http://dx.doi.org/10.2139/ssrn.574162

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

Philip Dean Corbae

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
512-471-3211 (Phone)
512-471-3510 (Fax)

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