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

Aude Pommeret and Anne Epaulard

No 2001/005, IMF Working Papers from International Monetary Fund

Abstract: This paper proposes a measure of the welfare cost of volatitliy derived from an endogenous growth model (AK) under uncertainty extended to the case of a recursive utility function which disentangles risk aversion from intertemporal elasticity of substitution. It encompasses a direct welfare cost of fluctuations and a welfare cost due to the endogeneity of the consumption. 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 bases on an exogenous process for consumption.

Keywords: WP; utility function; welfare cost; growth rate; Welfare Cost of Fluctuations; Recursive Utility; Endogenous Growth; Risk; cost of volatility; consumption process; consumption-saving trade-off; saving-consumption trade-off matter; Consumption; Return on investment; Business cycles; Stocks; Capital accumulation (search for similar items in EconPapers)
Pages: 23
Date: 2001-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=3967 (application/pdf)

Related works:
Journal Article: Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2001/005

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().