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Volatility, growth, and welfare

  • Wang, Peng-fei
  • Wen, Yi

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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