Business Cycle Uncertainty and Economic Welfare

Jang-Ok Cho, Thomas Cooley and Hyung Seok Kim
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Hyung Seok Kim: Korea Advanced Institute of Science and Technology

Review of Economic Dynamics, 2015, vol. 18, issue 2, 185-200

Abstract: We study the welfare implications of uncertainty in business cycle models. In the modern business cycle literature, multiplicative real shocks to production and/or preferences play an important role as the impulses that produce aggregate fluctuations. Introducing shocks in this way has the implication that fluctuating economies may enjoy higher welfare than their steady state counterparts. This occurs because purposeful agents make use of uncertainty in their favor. The result holds for a range of reasonable parameter values and in many models considered in the business cycle literature. One implication is that the welfare cost estimates which have been obtained in the literature using only consumption series may be biased and possibly seriously. (Copyright: Elsevier)

Keywords: Business cycles; Welfare costs; Mean effect; Fluctuations effect; Multiplicate productivity shocks (search for similar items in EconPapers)
JEL-codes: D51 E20 E32 E63 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (37)

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DOI: 10.1016/j.red.2014.05.002

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