The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period∗

Lucas(1987) has shown the surprising result that the welfare cost of business cycles is quite small. Using standard assumptions on preferences and a fully-fledged econometric model we computed the welfare costs of macroeconomic uncertainty for the post-WWII era using the multivariate Beveridge-Nelson decomposition for trends and cycles, which considers not only business-cycle uncertainty but also uncertainty from the stochastic trend in consumption. The post-WWII period is relatively quiet, with the welfare costs of uncertainty being about 0.9 % of per-capita consumption. Although changing the decomposition method changed substantially initial results, the welfare cost of uncertainty is qualitatively small in the post-WWII era