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Working Paper

On the Welfare Gains of Reducing the Likelihood of Economic Crises

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The authors seek to measure the potential benefit of reducing the likelihood of economic crises (defined as Depression-style collapses of economic activity). Based on the observed frequency of Depression-like events, they estimate this likelihood to be approximately one in every 83 years for the U.S. The welfare gain of reducing even this small probability of crisis to zero can range between 1.05 percent and 6.59 percent of annual consumption in perpetuity. These large gains occur because although the probability of entering a Depression-like state is small, once the state is entered it is highly persistent. The authors also find that for some calibrations of the model, uninsured unemployment risk contributes significantly to the size of the gains.
12.01.2000ISSN 2573-7953 WP 00-15DOI 10.26509/frbc-wp-200015

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Chatterjee, Satyajit, and Dean Corbae. 2000. “On the Welfare Gains of Reducing the Likelihood of Economic Crises.” Federal Reserve Bank of Cleveland, Working Paper No. 00-15. https://doi.org/10.26509/frbc-wp-200015