On the Aggregate Welfare Cost of Great Depression Unemployment

29 Pages Posted: 8 Nov 2006

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

Abstract

The potential benefit of policies that eliminate a small likelihood of economic crises is calculated. An economic crisis is defined as an increase in unemployment of the magnitude observed during the Great Depression. For the U.S., the maximum-likelihood estimate of entering a depression is found to be about once every 83 years. The welfare gain from setting this small probability to zero can range between 1 and 7 percent of annual consumption in perpetuity. For most estimates, more than half of these large gains result from a reduction in individual consumption volatility.

Keywords: Depression, Unemployment, Welfare Cost

JEL Classification: D52, E32, E63

Suggested Citation

Chatterjee, Satyajit and Corbae, Philip Dean, On the Aggregate Welfare Cost of Great Depression Unemployment. Journal of Monetary Economics, Forthcoming; FRB of Philadelphia Working Paper No. 06-18. Available at SSRN: https://ssrn.com/abstract=940413

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)

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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