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FY 2008/2009 Research Topic: 4-16
Costs of Business Cycles in Developing Countries


Fluctuation of Income generally causes fluctuation of consumption. Risk averse agent prefer less volatile consumption. Hence, when we compare two economies, economies with and without consumption fluctuation, social welfare of the economy without consumption fluctuation is larger. We call the difference in social welfare in these two economies ‘Cost of Business Cycles.’
Lucas (1987) and others reveal that the costs of the business cycles of industrial countries are rather small, when a ordinary filter for measuring economic variable’s fluctuation are employed. On the other hand, Pallage and Robe (2003) show that the costs in developing countries are much larger than in industrial countries, when the same filter is utilized.
By contrast, Rand and Tarp (2002) suggest, by adopting a special filter adjusted for developing countries, fluctuation in output is larger in developing countries than in industrial countries, but they also shows that the difference between these two groups are relatively small.
This result might imply developing countries’ costs of business cycles, which are closely related to consumption fluctuations, could be also much smaller if we adopt an appropriately adjusted filter in measuring consumption fluctuations.
On the basis of these conjecture, we re-examine the cost of business cycles in developing countries.


KODAMA Masahiro

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KODAMA Masahiro


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