Paper #836

Título:

Markups, gaps and the welfare costs of business fluctuations

Autores:

Jordi Galí, Mark Gertler y J. David López-Salido

Fecha:

Mayo 2005

Resumen:

In this paper we present a simple theory-based measure of the variations in aggregate economic efficiency: the gap between the marginal product of labor and the household�s consumption/leisure tradeoff. We show that this indicator corresponds to the inverse of the markup of price over social marginal cost, and give some evidence in support of this interpretation. We then show that, with some auxilliary assumptions our gap variable may be used to measure the efficiency costs of business fluctuations. We find that the latter costs are modest on average. However, to the extent the flexible price equilibrium is distorted, the gross efficiency losses from recessions and gains from booms may be large. Indeed, we find that the major recessions involved large efficiency losses. These results hold for reasonable parameterizations of the Frisch elasticity of labor supply, the coefficient of relative risk aversion, and steady state distortions.

Palabras clave:

Business Cycles, Countercyclical Markups, Welfare Costs

Códigos JEL:

E32

Área de investigación:

Macroeconomía y Economía Internacional

Publicado en:

The Review of Economics and Statistics, February 2007, Vol. 89, No. 1, pp. 44-59

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