Using a subsistence consumption-augmented real business cycle model, we show that, for any given exogenous growth rates or parameter values, high initial subsistence levels increase the welfare cost of business cycles. This happens because subsistence consumption increases consumption volatility. Our finding suggests that eliminating economic fluctuations can be more beneficial to less-developed economies in which subsistence consumption is a high fraction of aggregate consumption. However, fast-growing economies exhibit a lower discrepancy of welfare costs between rich and poor countries, a result that also highlights the importance of growth-enhancing policies.
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The authors gratefully acknowledge the constructive comments made by the editor, Pierre-Daniel Sarte, and an anonymous referee. The authors thank Yongsung Chang, Sun-Bin Kim, Lei Ning, Choonsung Park, and Hee-Seung Yang for their helpful comments. Yongheng Wen gratefully acknowledges the financial support from SUFE (Graduate Students’ Innovation Fund of SUFE (CXJJ-2015-356)).
© 2017 Elsevier B.V.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics