The welfare cost of business cycles in an economy with nonclearing markets

Abstract

In this paper we measure the welfare cost of fluctuations in a simple representative
agent economy with nonclearing markets. The market friction we consider involves
price rigidities and a voluntary exchange rationing scheme. These features are incorporated
into an otherwise standard neoclassical growth model. We show that the
frictions we introduce make the losses from fluctuations much bigger than in a frictionless
environment.