DP4799 The Welfare Cost of Business Cycles in an Economy with Non-Clearing Markets

Author(s): Franck Portier, Luis Puch
Publication Date: December 2004
Keyword(s): cost of business cycles, dynamic general equilibrium, non-clearing markets
JEL(s): C63, C68, E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4799

In this Paper we measure the welfare cost of fluctuations in a simple representative agent economy with non-clearing markets. The market friction we consider involves price rigidities and a voluntary exchange-rationing scheme. These features are incorporated into an otherwise standard neoclassical growth model. We show that the frictions we introduce make the losses from fluctuations much bigger than in a frictionless environment.