The Role of Stabilization Policy in Sweden: A comparative welfare cost analysis

Abstract: In Robert Lucas’ 1987 monograph, Models of Business Cycles, he attempted to measure the cost of business cycles in the post-war U.S. At a time when we are experiencing ever more costs associated with economic downturns, this essay endeavors to quantitatively answer what cost the average Swedish individual would accept to live in an environment free of business cycle fluctuations. That is, to live in a condition of steady consumption growth. Using Lucas’ work as a starting point, we expand by drawing on more advanced economic research in the field to reach a relatively similar conclusion. Based on our results, an individual, on average, would not give up much in order to smooth economic cycles, at most they would forfeit a non-trivial 1 percent of lifetime consumption. We conclude that our results suggest no further governmental stabilization policy is warranted.