Abstract
How large are welfare costs related to economic aggregate fluctuations is a topic of great concern among economists at least since Lucas's (1987) model. Our analysis assesses the magnitude of such costs for Turkey by means of two approaches: aggregate and disaggregate. The former approach uses aggregate data employing three alternative trend-cycle decomposition methods which are Lucas' classical set-up with deterministic linear trend for consumption, Hodrick and Prescott filter and one in which consumption trend is stochastic and whose implementation is performed using Beveridge–Nelson decomposition. The results of both approaches suggest that Turkey has high welfare costs associated with business cycles.
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