Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/241118
Authors: 
Jordà, Òscar
Schularick, Moritz
Taylor, Alan M.
Year of Publication: 
2020
Series/Report no.: 
Staff Report No. 925
Abstract: 
Business cycles are costlier and stabilization policies more beneficial than widely thought. This paper shows that all business cycles are asymmetric and resemble mini "disasters." By this we mean that growth is pervasively fat-tailed and non-Gaussian. Using long-run historical data, we show empirically that this is true for all advanced economies since 1870. Focusing on the peacetime sample, we develop a tractable local projection framework to estimate consumption growth paths for normal and financial-crisis recessions. Using random coefficient local projections we get an easy and transparent mapping from the estimates to the calibrated simulation model. Simulations show that substantial welfare costs arise not just from the large rare disasters, but also from the smaller but more frequent mini-disasters in every cycle. In postwar America, households would sacrifice more than 10 percent of consumption to avoid such cyclical fluctuations.
Subjects: 
fluctuations
asymmetry
local projections
random coefficients
macroprudential policy
JEL: 
E13
E21
E22
E32
Document Type: 
Working Paper

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