On the Welfare Cost of Economic Fluctuations in Developing Countries

Abstract

Macroeconomic fluctuations are much stronger in developing countries than in the United States. Yet, while a large literature debates the welfare cost of economic fluctuations in the US, it remains an open question how large that cost is in developing countries. Using several models, we provide such a measure. We find that the welfare cost of consumption volatility per se is far from trivial and averages a substantial multiple of the corresponding US estimate. Moreover, in many poor countries, the welfare gain from eliminating volatility may in fact exceed the welfare gain from an additional percentage point of growth forever.