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Publicação
Asset liquidity and the welfare costs of business cycles
Orientador(es)
Resumo(s)
In this paper, we revisit the question of what the welfare costs of business cycles
are with new insights. The seminal paper by Lucas (1987) found welfare costs
to be negligible at around 1%, but subsequent literature focused on finding mechanisms
that could rationalize larger welfare costs. Our study builds on recent research
that incorporates incomplete markets, adjustment costs, and marginal propensities
to consume to show that welfare costs can be substantial. Our calculations indicate
that eliminating business cycle fluctuations would result in a 1.25% increase in welfare,
as measured in consumption equivalents. Furthermore, using a 2-asset HANK
model, we find a welfare cost of 2.6%. This result arises from considering portfolio
adjustment costs, which generate a distribution of marginal propensities to consume
along the income dimension that is empirically plausible and produces a share of
(rich and poor) hand-to-mouth households that is consistent with recent findings. In
periods of recession, these values rise to 11.1%. These results are particularly driven
by effects from the price rigidity.
Descrição
Palavras-chave
Welfare costs Business cycles Liquidity Hand-to-mouth
Contexto Educativo
Citação
Brinca, Pedro, Duarte, João, Ferreira, Ana Melissa, Nóbrega, Valter. Asset liquidity and the welfare costs of business cycles. (October 2024) Nova SBE Working Paper Series No. 667
Editora
Nova School of Business and Economics