Volatility and welfare

Robert Lester (), Michael Pries () and Eric Sims ()

Journal of Economic Dynamics and Control, 2014, vol. 38, issue C, 17-36

Abstract: This paper explores the relationship between volatility and welfare. Even though households prefer smooth streams of consumption and leisure, welfare can be increasing in the volatility of an exogenous driving force if factor supply is sufficiently elastic. We provide some analytical results for a model without capital, and do some quantitative exercises in a model with capital and a variety of shocks. Welfare is greater in high shock volatility regimes under plausible parameter values. Augmenting the model with features that increase the elasticity of factor supply extends the range of parameters over which higher volatility results in greater welfare.

Keywords: Volatility; Welfare cost of business cycles (search for similar items in EconPapers)
JEL-codes: E32 E37 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (50)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:38:y:2014:i:c:p:17-36

DOI: 10.1016/j.jedc.2013.08.012

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