The Implication Of Subsistence Consumption For Business Cycles And Economic Welfare

This dissertation consists of three essays.In all essays subsistence consumption is a key factor.The first essay investigates the positive implication of subsistence consumption on business cycles across different income level countries.The second and third essays analyze the normative implication of subsistence consumption on economic welfare.The second essay considers the transition economy which includes both technology and population growth,however the third essay only studies the steady state situation.The first essay incorporates subsistence consumption into a real business cycle(RBC)model to explain the different empirical patterns of business cycles across different income level countries.It is well-known in the literature that developed economies and emerging markets have different features of business cycles,however much less is known about how the business cycles empirical patterns vary across different income level countries.The first essay first documents some new stylized facts about these patterns.By exploring a database including 104 countries of all income levels,the first essay finds the volatility of output and the relative volatility of consumption to output are substantially higher in low-income countries than in high-income countries,the relative volatility of employment(hours worked)to output and the correlation between employment(hours worked)and output are substantially lower in low-income countries than in high-income countries.The first essay then argues that an RBC model augmented with subsistence consumption can explain these empirical patterns of business cycles across different income level countries.Using a subsistence consumption-augmented real business cycle model,the second essay shows that,for any given exogenous growth rates or parameter values,high initial subsistence levels increase the welfare cost of business cycles.This happens because subsistence consumption increases consumption volatility.This finding suggests that eliminating economic fluctuations can be more beneficial to less-developed economies in which subsistence consumption is a high fraction of aggregate consumption.However,fast growing economies exhibit a lower discrepancy of welfare costs between rich and poor countries,a result that also highlights the importance of growth-enhancing policies.Positive implications of subsistence consumption on economic growth and fluctuations have been well-documented by previous literature,while studies on the normative implications of such a feature are rare.The third essay fills this gap by studying the implication of subsistence consumption on the welfare cost of business cycles.Within the standard RBC model the third chapter shows that the welfare cost of business cycle is increased with the level of the subsistence consumption and particularly the welfare-improving fluctuations do not exist when the subsistence consumption is high enough.This means the welfare cost of business cycle calculated in the standard RBC model can be underestimated.Our findings hence suggest that stabilization policies can play a more important role in less-developed countries.