Model uncertainty, economic development, and welfare costs of business cycles

Masakatsu Okubo

Journal of Macroeconomics, 2023, vol. 76, issue C

Abstract: Some researchers argue that the welfare gains from eliminating consumption fluctuations for the United States are not small once model uncertainty is taken into account. This paper presents new evidence on the welfare gains from eliminating model uncertainty using a data set from a broad range of countries. It quantifies exactly the effect of model uncertainty on the welfare gains using an analytical formula. The results indicate that most countries derive much larger gains from the reduction of model uncertainty compared with the United States. Countries at higher stages of economic development tend to have lower welfare gains because their gains from eliminating model uncertainty become smaller. This relationship does not depend on country size or trade openness.

Keywords: Consumption risk; Detection error probability; Model uncertainty; Welfare costs (search for similar items in EconPapers)
JEL-codes: D81 E21 E32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:76:y:2023:i:c:s0164070423000149

DOI: 10.1016/j.jmacro.2023.103514

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