Welfare cost of business cycles in economies with individual consumption risk
AbstractThe welfare cost of random consumption fluctuations is known from De Santis (2007) to be increasing in the level of individual consumption risk in the economy. It is also known from Barillas et al. (2009) to increase if agents in the economy care about robustness to model misspecification. In this paper, we combine these two effects and calculate the cost of business cycles in an economy with consumers who face individual consumption risk and who fear model misspecification. We find that individual risk has a greater impact on the cost of business cycles if agents already have a preference for robustness. Correspondingly, we find that endowing agents with concerns about a preference for robustness is more costly if there is already individual risk in the economy. The combined effect exceeds the sum of the individual effects.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 25/2012.
Length: 19 pages
Date of creation: 30 Jul 2012
Date of revision:
cost of business cycles; idiosyncratic risk; model uncertainty; robustness;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Welfare cost of business cycles in economies with individual consumption risk
by Christian Zimmermann in NEP-DGE blog on 2012-08-26 03:29:32
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