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Price uncertainty, saving, and welfare

  • Nocetti, Diego
  • Smith, William T.

We analyze how commodity price uncertainty affects saving behavior and welfare in a dynamic model with multiple commodities, portfolio hedging, and a preference structure that disentangles ordinal preferences, attitudes towards risk, and attitudes towards intertemporal substitution. We show that the effect of price uncertainty on savings boils down to knowing (1) hf degree of resistance to intertemporal substitution and (2) the effect that uncertainty has on the certainty-equivalent real interest rate. We also show that, if the certainty-equivalent real interest rate is lower with uncertainty, consumers' welfare is also lower.

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

Volume (Year): 35 (2011)
Issue (Month): 7 (July)
Pages: 1139-1149

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:7:p:1139-1149
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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