This article studies the welfare cost of business cycles fluctuation in Brazil. We use a model, due to Imrohoroglu (1989), in which agents are ex-post heterogeneous with respect to employment and cannot smooth perfectly consumption as they are credit restricted. This is highly relevant as the evidence is that at least 75% of Brazilian population has no access to credit markets so that their consumption path tend to be highly sensitive to economic variability. Our simulations show that in fact welfare losses due to output fluctuations are significant in Brazil and much higher than the losses found for the US economy. We introduce in the model public policies that tend to complete markets and act as an (imperfect) insurance. With a very simple tax and transfer mechanism we show that the government can increase considerably welfare.
business cycles; welfare cost; credit restriction