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Business Cycle Uncertainty and Economic Welfare

Author

Listed:
  • Jang-Ok Cho

    (Sogang University)

  • Thomas Cooley

    (New York University)

  • Hyung Seok Kim

    (Korea Advanced Institute of Science and Technology)

Abstract

We study the welfare implications of uncertainty in business cycle models. In the modern business cycle literature, multiplicative real shocks to production and/or preferences play an important role as the impulses that produce aggregate fluctuations. Introducing shocks in this way has the implication that fluctuating economies may enjoy higher welfare than their steady state counterparts. This occurs because purposeful agents make use of uncertainty in their favor. The result holds for a range of reasonable parameter values and in many models considered in the business cycle literature. One implication is that the welfare cost estimates which have been obtained in the literature using only consumption series may be biased and possibly seriously. (Copyright: Elsevier)

Suggested Citation

  • Jang-Ok Cho & Thomas Cooley & Hyung Seok Kim, 2015. "Business Cycle Uncertainty and Economic Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 185-200, April.
  • Handle: RePEc:red:issued:11-17
    DOI: 10.1016/j.red.2014.05.002
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    References listed on IDEAS

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    Cited by:

    1. Xu, Shaofeng, 2017. "Volatility risk and economic welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 17-33.
    2. Dissou, Yazid & Karnizova, Lilia, 2016. "Emissions cap or emissions tax? A multi-sector business cycle analysis," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 169-188.
    3. repec:eee:macchp:v2-527 is not listed on IDEAS
    4. repec:eee:inecon:v:111:y:2018:i:c:p:143-158 is not listed on IDEAS
    5. Amir Yaron & Steffen Hitzemann, 2017. "Welfare Costs of Oil Shocks," 2017 Meeting Papers 1381, Society for Economic Dynamics.
    6. Fernández-Villaverde, J. & Rubio-Ramírez, J.F. & Schorfheide, F., 2016. "Solution and Estimation Methods for DSGE Models," Handbook of Macroeconomics, Elsevier.
    7. repec:eee:ecolet:v:158:y:2017:i:c:p:30-33 is not listed on IDEAS

    More about this item

    Keywords

    Business cycles; Welfare costs; Mean effect; Fluctuations effect; Multiplicate productivity shocks;

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • 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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