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Lucas(1987) has shown a surprising result in business-cycle research, that the welfare cost of business cycles are relatively small. Using standard assumptions on preferences and a reasonable reduced form for consumption, we computed these welfare costs for the pre- and post-WWII era, using a trend-cycle decomposition method which allows measuring the welfare cost of business cycles and the welfare cost of economic growth. The post-WWII period is very quiet, with the welfare costs never exceeding 1% of per-capita consumption. However, for the pre-WWII era this basic result is altered, where welfare costs can reach more than 3% of consumption. These results highlight the relevance of the stabilization policies implemented after WWII. Apparently, these policies have had a lasting e¤ects on the behavior of business cycles and on economic growth, although the impact on the former was a bit larger.

Business cycles ‡uctuations, economic growth variation, welfare costs, structural time-series model