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 , non-clearing markets , dynamic general equilibrium

JEL(s): C63 , C68 , E32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4799.asp

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.