THE COSTS OF RECESSION

The paper measures the cost of business cycles by asking what proporti on of consumption representative households, whose head is currently e mployed, would be prepared to give up to avoid the risk of unemploymen t. Previous estimates by Lucas suggested that the costs of macroeconom ic fluctuations measured in this way are surprisingly small. The first part of the paper presents a critique of the Lucas aggregate method s howing that his estimates are not robust. An alternative disaggregated framework is then developed and shows that the costs of macroeconomic fluctuations are significantly higher than those obtained by Lucas. C onsequently, the view that inflation 'matters' whereas business cycles are unimportant events is questioned.