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Volatility, growth, and welfare

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  • Wang, Peng-fei
  • Wen, Yi

Abstract

This paper constructs an endogenous growth model driven by self-fulfilling expectation shocks to explain the stylized fact that the average growth rate of GDP is related negatively to volatility and positively to capacity utilization. The implied welfare gain from further stabilizing the U.S. economy is about a quarter of annual consumption, which is consistent in order of magnitude with estimates based on the empirical studies of Ramey and Ramey (1995) and Alvarez and Jermann (2004). Hence, policies designed to reduce fluctuations can generate large welfare gains because smaller fluctuations are associated with permanently higher rates of growth.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 10 (October)
Pages: 1696-1709

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:10:p:1696-1709

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Related research

Keywords: Endogenous growth Welfare cost of business cycle Stabilization policy Sunspots Imperfect competition Coordination failures;

References

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Cited by:
  1. Jetter, Michael, 2013. "Volatility and Growth: Governments are Key," IZA Discussion Papers 7826, Institute for the Study of Labor (IZA).
  2. Barbara Annicchiarico & Alessandra Pelloni, 2013. "Productivity Growth and Volatility: How Important Are Wage and Price Rigidities?," Working Paper Series 02_13, The Rimini Centre for Economic Analysis.
  3. Pengfei Wang & Yi Wen, 2013. "Financial development and long-run volatility trends," Working Papers 2013-003, Federal Reserve Bank of St. Louis.

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