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Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility

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  • Aude Pommeret
  • Anne Epaulard

Abstract

This paper proposes a measure of the welfare cost of volatitliy derived from an endogenous growth model (AK) under uncertainty extended to the case of a recursive utility function which disentangles risk aversion from intertemporal elasticity of substitution. It encompasses a direct welfare cost of fluctuations and a welfare cost due to the endogeneity of the consumption. The total welfare cost of volatility increases with both the risk aversion and the intertemporal elasticity of substitution. For plausible values of the agent's preference parameters, the cost of volatility may be greater than measures bases on an exogenous process for consumption.

Suggested Citation

  • Aude Pommeret & Anne Epaulard, 2001. "Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility," IMF Working Papers 01/5, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:01/5
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Consumption; Welfare Cost of Fluctuations; Recursive Utility; Endogenous Growth; Risk; elasticity of substitution; growth rate; business cycles; growth model; Macroeconomic Policy; Macroeconomic Aspects of Public Finance; and General Outlook: General;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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