Busts Hurt More Than Booms Help

How do macroeconomic fluctuations affect individual welfare? Nobel laureate Robert Lucas famously suggested that the cost of business cycles in terms of consumption is insignificant (Lucas 1987, 2003). Such findings paved the way for a straightforward growth policy that tends to be evaluated on the basis of how much the economy has grown rather than how the economy has grown. Yet, the psychological impact of the growth trajectory – whether volatile or smooth – is understudied even though it is felt strongly by ordinary citizens and results in markedly different reports of life satisfaction.

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