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Risk Preferences and the Welfare Cost of Business Cycles

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  • Jim Dolmas

    (Southern Methodist University)

Abstract

This paper reexamines the "cost of business cycle" calculations made by Lucas ("Models of Business Cycles," Basil Blackwell, New York, 1987) and Imrohoroglu (J. Polit. Econ. 97 (1989), 1364-1383) under alternative specifications of individuals' risk preferences and using alternative specifications of the stochastic process for per capita consumption. I find that for a class of preferences used by Epstein and Zin (J. Monetary Econom. 26 (1990), 387-407), in an analysis of the equity premium puzzle, which display "first-order" risk aversion, the welfare cost of business cycles is potentially much larger than previous estimates. (Copyright: Elsevier)

Suggested Citation

  • Jim Dolmas, 1998. "Risk Preferences and the Welfare Cost of Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 646-676, July.
  • Handle: RePEc:red:issued:v:1:y:1998:i:3:p:646-676 DOI: 10.1006/redy.1998.0020
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    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    3. Uzi Segal & Avia Spivak, 1988. "First Order Versus Second Order Risk Aversion," UCLA Economics Working Papers 540, UCLA Department of Economics.
    4. Segal, Uzi & Spivak, Avia, 1990. "First order versus second order risk aversion," Journal of Economic Theory, Elsevier, vol. 51(1), pages 111-125, June.
    5. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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    This item is featured on the following reading lists or Wikipedia pages:
    1. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)

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