 Welfare Implications of Sunspot FluctuationsCERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague Abstract: The usual conclusion in the literature is that sunspots reduce welfare because of the agents' risk aversion. However, if sunspots can lead to escape from an inferior steady state (poverty trap), this conclusion does not necessarily hold. Escaping trajectories can have much higher welfare than those remaining in the poverty trap. The ex-post welfare effect can be positive for initial conditions such that the probability of escape is sufficiently close to one. Numerical simulations of the model support this conjecture. The distance from the poverty trap boundary to the initial condition point is of critical importance where the escape is concerned. I consider a model in which government has an influence on the exact location of the boundary. Implementing a policy that moves the boundary to the initial condition point greatly increases both the probability of escape and the expected welfare gain. Keywords: development trap; indeterminacy; sunspots; welfare (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp204 Access Statistics for this paper More papers in CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague Contact information at EDIRC. |
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