If Dupraz et al.’s model is right, the benefits to stabilizing the economy are big, because it’s possible to fight recessions with interest rate cuts and stimulus spending without making any sacrifices in good times. Instead of simply acting as a stabilizing force, the government can actually make unemployment permanently lower. (This is assuming, of course, that low rates don’t somehow lead to wasteful investment.)
Squash recessions as soon as they appear, and everyone is better off.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.