Code and data files for "Heterogeneous Risk Preferences and the Welfare Cost of Business Cycles"
AbstractI study the welfare cost of business cycles in a complete-markets economy where some people are more risk averse than others. Relatively more risk-averse people buy insurance against aggregate risk, and relatively less risk-averse people sell insurance. These trades reduce the welfare cost of business cycles for everyone. Indeed, the least risk-averse people benefit from business cycles. Moreover, even infinitely risk-averse people suffer only finite and, in my empirical estimates, very small welfare losses. In other words, when there are complete insurance markets, aggregate fluctuations in consumption are essentially irrelevant not just for the average person -- the surprising finding of Lucas (1987) -- but for everyone in the economy, no matter how risk averse they are. If business cycles matter, it is because they affect productivity or interact with uninsured idiosyncratic risk, not because aggregate risk per se reduces welfare. (Copyright: Elsevier)
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Bibliographic InfoSoftware component provided by Review of Economic Dynamics in its series Computer Codes with number 07-133.
Programming language: Stata
Date of creation: 2008
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Postal: Review of Economic Dynamics Academic Press Editorial Office 525 "B" Street, Suite 1900 San Diego, CA 92101
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Other versions of this item:
- Sam Schulhofer-Wohl, 2008. "Heterogeneous Risk Preferences and the Welfare Cost of Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 761-780, October.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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