An Analytical Approach to the Welfare Cost of Business Cycles and the Benefit from Activist Monetary Policy
A closed-form solution for quantity and asset-price movements in a dynamic general equilibrium model with non-state-separable preferences shows that the welfare cost of fluctuations and the equity premium can be large in such a model. But a large welfare loss from cycles does not imply a large gain from good monetary policy. Although monetary policy can implement the optimal allocation in a sticky-price version of the model, the gain from such activism is trivial because the optimal allocation continues to imply volatile consumption in response to productivity shocks. This highlights a distinction between recent models and older Keynesian-style models: In recent models, fluctuations are largely an efficient response to shocks and inefficiencies stem from price distortions associated with price rigidity, i.e., Harberger triangles. In the older literature, fluctuations were viewed as inherently inefficient with large costs, i.e., Okun's gaps.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 3 (2003)
Issue (Month): 1 (March)
|Contact details of provider:|| Web page: http://www.degruyter.com|
|Order Information:||Web: http://www.degruyter.com/view/j/bejm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bénassy, Jean-Pascal, 1993.
"Money and wage contracts in an optimizing model of the business cycle,"
CEPREMAP Working Papers (Couverture Orange)
- Benassy, Jean-Pascal, 1995. "Money and wage contracts in an optimizing model of the business cycle," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 303-315, April.
- L. Epstein & S. Zin, 2010.
"First order risk aversion and the equity premium puzzle,"
Levine's Working Paper Archive
1400, David K. Levine.
- Epstein, Larry G. & Zin, Stanley E., 1990. "'First-order' risk aversion and the equity premium puzzle," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 387-407, December.
- William Poole, 1999.
"Monetary policy rules?,"
81, Federal Reserve Bank of St. Louis.
- Andrew B. Abel, 2002.
"The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security,"
NBER Working Papers
9210, National Bureau of Economic Research, Inc.
- Andrew B. Abel, 2003. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," Econometrica, Econometric Society, vol. 71(2), pages 551-578, March.
- Andrew B. Abel, 2002. "The effects of a baby boom on stock prices and capital accumulation in the presence of Social Security," Working Papers 03-2, Federal Reserve Bank of Philadelphia.
- Hercowitz, Zvi & Sampson, Michael, 1991.
"Output Growth, the Real Wage, and Employment Fluctuations,"
American Economic Review,
American Economic Association, vol. 81(5), pages 1215-37, December.
- Hercovitz, Z. & Sampson, M., 1989. "Output Growth, The Real Wage, And Employment Fluctuations," RCER Working Papers 179, University of Rochester - Center for Economic Research (RCER).
- TallariniJr., Thomas D., 2000.
"Risk-sensitive real business cycles,"
Journal of Monetary Economics,
Elsevier, vol. 45(3), pages 507-532, June.
- Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, June.
- Basu, Parantap, 1987. "An Adjustment Cost Model of Asset Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 609-21, October.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
- Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
- Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000.
"The Welfare Cost of Business Cycles Revisited: Finite Lives and Cyclical Variation in Idiosyncratic Risk,"
NBER Working Papers
8040, National Bureau of Economic Research, Inc.
- Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 2001. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk," European Economic Review, Elsevier, vol. 45(7), pages 1311-1339.
- John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
When requesting a correction, please mention this item's handle: RePEc:bpj:bejmac:v:contributions.3:y:2003:i:1:n:4. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.