Markups, Gaps, and the Welfare Costs of Business Fluctuations / Jordi Gali, Mark Gertler, J. David Lopez-Salido.

Format:

Book

Author/Creator:

Gali, Jordi.

Contributor:

National Bureau of Economic Research.

Gertler, Mark.

Lopez-Salido, J. David.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8850.

NBER working paper series no. w8850

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

In this paper we present a simple, theory-based measure of the variations in aggregate economic efficiency associated with business fluctuations. We decompose this indicator, which we refer to as 'the gap', into two constituent parts: a price markup and a wage markup, and show that the latter accounts for the bulk of the fluctuations in our gap measure. Finally, we derive a measure of the welfare costs of business cycles that is directly related to our gap variable, and which takes into account explicitly the existence of a varying aggregate inefficiency. When applied to postwar U.S. data, for plausible parametrizations, our measure suggests welfare losses of fluctuations that are of a higher order of magnitude than those derived by Lucas (1987). It also suggests that the major postwar recessions involved substantial efficiency costs.

Notes:

Print version record

March 2002.