The Welfare Costs Of Urban-rural Residents’ Economic Fluctuations In China

How much will the welfare be brought by stabilizing the economic fluctuation? The answer to the question not only critiques different theories about the root of economic fluctuation,but also leads government and central bank to choose appropriate economic policies.Based on CRRA,habit formation and recursive utility function,this paper initially uses the standard welfare cost model proposed by Lucas(1987)to estimate the welfare cost of urban-rural economic fluctuation from 1952-2013 in China.However,the standard model proposed by Lucas(1987)is not perfect,especially this models only considers the impact of transitory shocks on welfare cost when assuming data generating process of consumption series and ignores the impact of permanent shocks on welfare cost,which is not consistent with the modern consumption theory.This paper further uses the Beveridge and Nelson method to decompose the consumption series and measures the welfare cost which caused by transitory shocks and permanent shocks.The research outcome shows that: in 1953-1978,the transitory shocks cause more welfare cost to urban residents than to rural residents,on the contrary,the permanent shocks cause more welfare cost to rural residents than to urban residents;the former can be explained by the push of government investment to urban development,the latter can be mainly explained by low levels of agricultural technology.In 1979-1994,the transitory shocks and permanent shocks both cause more welfare cost to urban residents than to rural residents,this phenomena attributes to the policy tilts to rural area,the transformation of rural economic structure and agricultural technical progress.In 1995-2013,the transitory shocks and permanent shocks cause more welfare cost to rural residents than to urban residents,the reason is that natural disaster,imperfect social security and lack of public goods cause permanent shocks to rural residents.Finally,this paper uses urban-rural consumption data of different provinces to estimate the welfare cost of economic fluctuation.The conclusion points out that the permanent shocks cause more urban-rural welfare cost than the transitory shocks,this is a key conclusion in this paper.Indeed,considering the permanent shocks usually caused by supply shocks,it is necessary to reform from supply angle as government,which is correspond to the current supply-front structural reform.So,avoiding the adverse supply factors which cause permanent shocks,it will be valid to reduce the urban-rural welfare loss and enhance urban-rural welfare level.