On the aggregate welfare cost of Great Depression unemployment

Satyajit Chatterjee and P. Dean Corbae

No 06-18, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The potential benefit of policies that eliminate a small likelihood of economic crises is calculated. An economic crisis is defined as an increase in unemployment of the magnitude observed during the Great Depression. For the U.S., the maximum-likelihood estimate of entering a depression is found to be about once every 83 years. The welfare gain from setting this small probability to zero can range between 1 and 7 percent of annual consumption in perpetuity. For most estimates, more than half of these large gains result from a reduction in individual consumption volatility. ; This paper supersedes Working Paper 03-20.

Keywords: Depressions; Unemployment (search for similar items in EconPapers)
Date: 2006
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