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Article Dans Une Revue Journal of Money, Credit and Banking Année : 2012

Markups and the Welfare Cost of Business Cycles: A Reappraisal

Résumé

Gali et al. (2007) have recently shown quantitatively that fluctuations in the efficiency of resource allocation do not generate sizable welfare costs. In their economy, which is distorted by monopolistic competition in the steady state, we show that they underestimate the welfare cost of these fluctuations by ignoring the negative effect of aggregate volatility on average consumption and leisure. As monopolistic suppliers, both firms and workers aim to preserve their expected markups; the interaction between aggregate fluctuations and price-setting behavior results in average consumption and employment levels that are lower than their counterparts in the flexible-price economy. This level effect increases the efficiency cost of business cycles. It is all the more sizable with the degree of inefficiency in the steady state, lower labor-supply elasticities, and when prices instead of wages are rigid.
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Dates et versions

hal-00623281 , version 1 (13-09-2011)

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Jean-Olivier Hairault, François Langot. Markups and the Welfare Cost of Business Cycles: A Reappraisal. Journal of Money, Credit and Banking, 2012, 44 (5), pp.995-1014. ⟨10.1111/j.1538-4616.2012.00519.x⟩. ⟨hal-00623281⟩
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