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The Welfare Cost of Business Cycles with Heterogeneous Trading Technologies

Author

Listed:
  • Chien, YiLi

    (Federal Reserve Bank of St. Louis)

Abstract

The author investigates the welfare cost of business cycles in an economy where households have heterogeneous trading technologies. In an economy with aggregate risk, the different portfolio choices induced by heterogeneous trading technologies lead to a larger consumption inequality in equilibrium, while this source of inequality vanishes in an economy without business cycles. Put simply, the heterogeneity in trading technologies amplifies the effect of aggregate output fluctuation on consumption inequality. The welfare cost of business cycles is, therefore, larger in such an economy. In the benchmark economy with a reasonably low risk aversion rate, the business cycle cost is 6.49 percent per- period consumption for an average household when the model is calibrated to match the risk premium.

Suggested Citation

  • Chien, YiLi, 2015. "The Welfare Cost of Business Cycles with Heterogeneous Trading Technologies," Review, Federal Reserve Bank of St. Louis, vol. 97(1), pages 67-85.
  • Handle: RePEc:fip:fedlrv:00037
    as

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    File URL: https://files.stlouisfed.org/files/htdocs/publications/review/2015/q1/67-86Chien.pdf
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    References listed on IDEAS

    as
    1. YiLi Chien & Harold Cole & Hanno Lustig, 2012. "Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?," American Economic Review, American Economic Association, vol. 102(6), pages 2859-2896, October.
    2. Yili Chien & Harold Cole & Hanno Lustig, 2011. "A Multiplier Approach to Understanding the Macro Implications of Household Finance," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 199-234.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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