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American Economic Review: Vol. 94 No. 4 (September 2004)
AER Volume. 94, Issue 4 | 
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The Cost of Business Cycles Under Endogenous Growth
Article Citation
Barlevy, Gadi. 2004. "The Cost of Business Cycles Under Endogenous Growth."
The American Economic Review,
94(4): 964-990.
DOI: 10.1257/0002828042002615
DOI: 10.1257/0002828042002615
Abstract
Robert E. Lucas, Jr. argued that the welfare gains from reducing aggregate consumption volatility are negligible. Subsequent work that revisited his calculation continued to find small welfare benefits, further reinforcing the perception that business cycles do not matter. This paper argues instead that fluctuations can affect welfare, by affecting the growth rate of consumption. I show that fluctuations can reduce growth starting from a given initial consumption, which can imply substantial welfare effects as Lucas himself observed. Empirical evidence suggests the welfare effects are likely to be substantial, about two orders of magnitude greater than Lucas' original estimates.
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Barlevy, Gadi
