Economic volatility in developed countries: how much would consumers pay to eliminate it?
Georgarakos et al., in this paper, examine households’ willingness to pay (WTP) to eliminate business cycles and bring inflation to desired levels across 13 countries, namely the U.S., Korea, Austria, Belgium, Germany, Greece, Spain, Finland, France, Ireland, Italy, Netherlands, and Portugal. The surveys were constructed using three main sources: a) the ECB Consumer Expectations Survey (CES) for the euro area countries, b) the Nielsen Homescan Panel for the United States, and c) the Macromill Embrain Panel for Korea. The surveys were conducted in May-June 2024 and were formulated to elicit households’ economic expectations, risk preferences, and exposure to business cycles. The authors estimated the WTP to eliminate business cycles and achieve desired inflation rates directly through hypothetical scenarios.
Key findings:
- Business cycles
– On average, households are willing to sacrifice 5-6% of their lifetime consumption to eliminate business cycle fluctuations.
– WTP is higher in countries with greater historical volatility (e.g., 7.8% in Korea, 6.1% in the U.S.).
– WTP is positively correlated with uncertainty about future economic conditions and individual exposure to business cycles.
- Inflation
– Households would sacrifice about 5% of consumption to bring inflation to their desired rate.
– The average desired inflation rate is negative (-2% to -3%), suggesting a preference for mild deflation.
– WTP for inflation reduction is positively correlated with the gap between expected and desired inflation rates.
- Comparison and correlations
– WTP for eliminating business cycles and reducing inflation are of similar magnitude, contrary to some theoretical predictions.
– The acceptable sacrifice ratio to reduce inflation (in terms of unemployment or GDP growth) is approximately 0.5, lower than empirical estimates.
These findings suggest that households perceive much higher costs of macroeconomic fluctuations than traditional economic models imply, highlighting the importance of considering public perceptions in policy design.
How Costly are Business Cycle Volatility and Inflation? A Vox Populi Approach
Authors: Dimitris Georgarakos, Kwang Hwan Kim, Olivier Coibion, Myungkyu Shim, Myunghwan Andrew Lee, Yuriy Gorodnichenko, Geoff Kenny, Seowoo Han, Michael Weber
From: European Central Bank, Yonsei University, UT Austin, New York University, UC Berkeley, Chicago Booth
Economic volatility in developing countries: what are the differences with the developed countries?
In this paper, Lucía Casal and Rafael Guntin examine why emerging economies experience higher business cycle volatility compared to developed economies. The authors develop a multisector small open economy model with heterogeneous firms and production linkages. They derive a decomposition of aggregate output volatility into four channels: aggregate, sectoral, firm-level, and international prices. The decomposition depends on observable sufficient statistics that can be measured using sector-level, firm-level, and international trade data. Finally, Casal and Guntin quantify the contribution of each channel using data across 34 sectors from 36 countries:
Emerging economies: Argentina, Brazil, Chile, Colombia, Costa Rica, Indonesia, India, South Korea, Morocco, Mexico, Malaysia, Peru, Philippines, Portugal, Thailand, Turkey, South Africa
Developed economies: Australia, Austria, Belgium, Canada, Switzerland, Germany, Denmark, Spain, Finland, France, United Kingdom, Greece, Israel, Italy, Japan, Netherlands, Norway, New Zealand, Sweden
Key findings:
- Differences in sectoral composition between emerging and developed economies can explain up to 75% of the excessive business cycle volatility in emerging economies.
- The firm-level channel accounts for up to 10% of the volatility differences.
- The role of international prices shocks is negligible.
- The sectoral channel is closely tied to the structural transformation process, as economic activity shifts from volatile sectors (agriculture, manufacturing) to less volatile ones (services) as economies develop.
- The paper finds that if firm-level TFP shocks in emerging economies are moderately more volatile than in developed ones, the contribution of the firm-level channel could be substantially higher.
- The results suggest that while a significant portion of the excessive business cycle volatility in emerging economies may be inherent to the economic development process, its decline over the last 30-40 years was likely due to other factors such as improved macroeconomic management.
The Business Cycle Volatility Puzzle Emerging vs Developed Economies
Authors: Lucía Casal, Rafael Guntin
From: Cornell University, University of Rochester
Both papers highlight the importance of heterogeneity
- The first paper shows large variation across countries and individuals in willingness to pay to reduce volatility, related to factors like historical volatility and individual exposure to business cycles.
- The second paper emphasizes how differences in sectoral composition and firm size distribution between emerging and developed economies drive volatility differences.
