Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility

By A. Epaulard, Aude Pommeret. Social Science Research Network, 2003

116 citations recorded by the source corpus.

This paper proposes a measure of the welfare cost of volatility derived from a stochastic endogenous growth model extended to the case of a recursive utility function which disentangles risk aversion from intertemporal elasticity of substitution. The measure of the welfare cost of volatility takes into account not only the direct effect of volatility on expected utility but also the link between volatility and growth. It thus encompasses a direct welfare cost of fluctuations and a welfare cost due to the endogeneity of the consumption. We obtain a closed form solution for these two costs and show that the total welfare cost of volatility increases with both the risk aversion and the intertemporal elasticity of substitution. For plausible values of the agent's preference parameters, the cost of volatility may be greater than measures based on an exogenous process for consumption. However, when applied to the US economy, our measure shows little differences compared to the one derived under the assumption that the consumption process is exogenous. Yet, we show that this may not be the case for more volatile economies. (Copyright: Elsevier)

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/0aa1bca5239c0d07d8d75fb7dde971233d2c0483

How researchers see this paper

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In Economics and Econometrics

1. Jean Imbs
2. Dani Rodrik
3. D. Lederman
4. Thomas Helbling
5. B. Klinger
6. M. Bordo

Citations in the corpus

• Disasters Risk and Business Cycles (2012, unknown): “The example of this secton is related to work by Epaulard and Pommeret (2003).”
• Fiscal policy responsiveness, persistence, and discretion (2010, unknown): “1 Regarding the relationship between output volatility, growth and welfare, see, for example, Ramey and Ramey (1995), Epaulard and Pommeret (2003) , Fatas and Mihov (2003, 2006), Barlevy (2004), Furceri (2007, 2009a) and Imbs (2007).”
• Growth and Volatility (2007, background): “26See among many others Mendoza (1997), Jones, Manuelli and Stacchetti (1999), or Epaulard and Pommeret (2003).”