DYNAMIC WELFARE COST OF STAGNATION: AN ALTERNATIVE MEASURE TO THE LUCAS–OBSTFELD MODEL

Abstract

The present paper proposes an alternative measure to the Lucas–Obstfeld model to analyze the welfare costs of stagnation, and provides a practical illustration of both the Lucas–Obstfeld model and the alternative model. Compared with the Lucas–Obstfeld model, the alternative model can evaluate: (i) whether policy was implemented in a timely fashion; (ii) whether the policy cost was expensive compared with the cost of stagnation; and (iii) whether the policy implemented was effective or whether an additional policy is required.