DP4799 | The Welfare Cost of Business Cycles in an Economy with Non-Clearing Markets

Publication Date

23/12/2004

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

Abstract

In this Paper we measure the welfare cost of fluctuations in a simple representative agent economy with non-clearing markets. The market friction we consider involves price rigidities and a voluntary exchange-rationing scheme. These features are incorporated into an otherwise standard neoclassical growth model. We show that the frictions we introduce make the losses from fluctuations much bigger than in a frictionless environment.