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Table 4.2: Welfare Cost of Business-Cycle Fluctuations (1947-2012) –% Consumption
PANEL A ( 12 6= 0)
Welfare Cost
Marginal Welfare Cost
1 5 10 20 1 5 10 20
0.95 -0.01 -0.03 -0.07 -0.14 -0.01 -0.07 -0.14 -0.27
0.97 -0.01 -0.03 -0.07 -0.14 -0.01 -0.07 -0.14 -0.27
0.99 -0.01 -0.03 -0.07 -0.14 -0.01 -0.07 -0.14 -0.27
PANEL B ( 12 = 0)
Welfare Cost
Marginal Welfare Cost
1 5 10 20 1 5 10 20
0.95 0.002 0.01 0.02 0.04 0.004 0.02 0.04 0.07
0.97 0.002 0.01 0.02 0.04 0.004 0.02 0.04 0.07
0.99 0.002 0.01 0.02 0.04 0.004 0.02 0.04 0.07
Note: 12 is the covariance between " t (permanent shocks) and t (transitory
shocks) de…ned in equation (2.9)
sumption for reasonable discount values and preference parameters ( = 0:985; = 5), US$ 208:98
at 2009 prices. Marginal welfare costs – 0 T
(0) – are about twice the size of total welfare costs
for reasonable discount values and preference parameters ( = 0:985; = 5): 1:32% of per-capita
consumption.
In Table 4.4, panel A, we present total and marginal welfare cost of all macroeconomic uncertainty.
For D , our results are very close to those of the welfare costs of economic growth for
( = 0:985; = 5) – 0:65% of consumption. We …nd the same regarding marginal welfare costs
0 D
(0): they are 1:34% of consumption for identical parameter values.
In panel B of Tables 4.2, 4.3, and 4.4, we present results of total and marginal welfare costs
when we impose the constraint that 12 = 0 in estimating the parameters in (2.6). They cover
the post-war period, 1947-2012, and are all based on structural-time-series model estimates, which
was discussed in Section 4.3. From the work of Morley, Nelson, and Zivot (2003) on GDP, one
should expect that imposing 12 = 0 yields a much smoother trend than the one found when we
let the data estimate freely 12 , i.e., the VAR-based approach of Section 4.2. Roughly speaking,
this should reduce the welfare cost of economic-growth variation and increase the welfare costs of
business cycles.
Indeed, these are exactly our …ndings. Comparing panels A and B of Table 4.2 for ( = 0:985; = 5),
shows that although the welfare costs of business cycles are negative for VAR-based estimates
( 12 6= 0), reaching 0:03% of consumption, our estimate when 12 = 0 is imposed is 0:01% of
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