We hope to be able to provide answers to the following questions: 1) Has there been a structural break in postwar U.S. real GDP growth toward more stabilization? 2) If so, when would it have been? 3) What's the nature of the structural break? For this purpose, we employ a Bayesian approach to dealing with structural break at an unknown changepoint in a Markov-switching model of business cycle. Empirical results suggest that there has been a structural break in U.S. real GDP growth toward more stabilization, with the posterior mode of the break date around 1984:1. Furthermore, we #nd a narrowing gap between growth rates during recessions and booms is at least as important as a decline in the volatility of shocks. Key Words: Bayes Factor, Gibbs sampling, Marginal Likelihood, Markov-Switching, Stabilization, Structural Break. JEL Classi#cations: C11, C12, C22, E32. 1. Introduction In the literature, the issue of postwar stabilization of the U.S. economy relative to the prewar period has...

In this paper, I consider whether postwar fiscal policy has helped stabilize the U.S. economy. I do this by adding to the stochastic growth model fiscal policy feedback rules estimated from postwar data. These rules allow fiscal policies to respond to current and lagged output and labor hours. I use the estimated policy rules to see if postwar fiscal policy reduces output volatility and/or lengthens expansions and shortens recessions. I find that fiscal policy in general provides little stability on either count. I also find that the endogenous feedback links, by themselves, can provide some stabilization.

Our aim in this paper is to obtain a measure of the potential benefit of re- ducing the likelihood of economic crises. We define an economic crisis as a Depression-style collapse of economic activity. Based on the observed frequency of Depression-like events, we estimate this likelihood to be approximately once every 83 years for the US. Even for this small probability of transiting into a Depression-like state, the welfare gain from setting it to zero can range between 1.05 percent and 6.59 percent of annual consumption, in perpetuity. These large gains arise because even though the probability of encountering a Depression- like state is small, it is highly persistent once it occurs. We also find that for some calibrations of the model, uninsured unemployment risk contributes significantly to the size of these gains.

: The sign of the relationship between expected stock market returns and volatility appears to vary over time, a result that seems at odds with basic notions of risk and return. In this paper we construct an economy where production involves the use of both labor and capital as inputs. We show that when capital investment is "sticky," the sign of the relation between stock market risk and return varies in accordance with the supply of labor but requires no time variation in preferences. In particular, we show that for asset market equilibria where firms face an elastic supply of labor, the traditional positive risk-return relation obtains. Conversely, a negative relation obtains for asset market equilibria where there is positive probability that labor supply will be highly inelastic. A nice feature of our model is that, unlike earlier work, the sign of the stock market risk-return relation can be associated with observable features of the business cycle. Post--World War II macroecono...

this paper. I received helpful comments from Doug Diamond, Eugene Fama, Mark Watson, and Jack Wilson

This paper analyses the effects of business cycle volatility on measures of subjective well-being, including self-reported happiness and life satisfaction. I find robust evidence that high inflation and, to a greater extent, unemployment lower perceived well-being. Greater macroeconomic volatility also undermines well-being. These effects are moderate but important: eliminating unemployment volatility would raise well-being by an amount roughly equal to that from lowering the average level of unemployment by a quarter of a percentage point. The effects of inflation volatility on well-being are less easy to detect and are likely smaller.

Procyclical TFP growth has been a persisting feature of the US economy for more than a century. Everything else equal, a reduction of one percentage point in the unemployment rate has added approximately.9 percentage points to the TFP growth rate, and consequently to the rate of growth of total output, and an increase of one percentage point in the unemployment rate has done the reverse. This relationship is estimated on data for the private nonfarm economy from 1890 through 2004 and is stable across subperiods during which the trend growth rate of TFP has been quite different. This paper lays out the empirical evidence for this regularity, discusses its implications for our understanding of the much weaker cyclicality of growth in output per hour, and considers why the sources of procyclical TFP differ from those that fuel secular advance. 2

We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into the Great Depression after 1929 in a unified framework. The model combines monopolistic product market competition with search frictions in the labor market, allowing for both individual and collective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. A shift from individual to collective bargaining presents as a recession, involving declines in output and asset values, and increases in unemployment and real wages. The pro-union provisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I, leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Court decisions in late 1921 induced a shift back to individual bargaining, leading the economy out of the recession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributing substantially to the stock market crash. We model the onset of the Great Depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices and moderate increases in real wages.

1 We are very grateful to Hide Ichimura and Narayana Kocherlakota for help on this project and to an anonymous referee for suggesting several improvements. We also

www.stanford.edu/people/jwolfers This paper analyzes the effects of business cycle volatility on measures of subjective wellbeing, including self-reported happiness and life satisfaction. I find robust evidence that inflation, and particularly unemployment, lower perceived wellbeing. Conditional on levels of unemployment and inflation, greater macroeconomic volatility undermines wellbeing. These effects are moderate but important: eliminating unemployment volatility would raise wellbeing by an amount roughly equal to that from lowering unemployment by a quarter of a percentage point. The effects of inflation volatility on wellbeing are less easy to detect and are likely smaller.