On the welfare gain from stabilizing cyclical fluctuations

Welfare gains of optimal cyclical fiscal policies as computed from previous dynamic general equilibrium models seem to be small and generally do not e xceed 1% of total consumption if preferences are described by a standard is oelastic utility function. It is demonstrated that the assumption of certai nty equivalence and the negligence of binding constraints results in the un derestimation of the magnitude of potential welfare effects from stabilizat ion.