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How Beneficial was the Great Moderation After All?

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  • Pancrazi, Roberto

    (Department of Economics, University of Warwick)

Abstract

In this paper I compute the welfare effect of the Great Moderation, using a consumption based asset pricing model. The Great Moderation is modelled according to the data properties of consumption and dividend growth, which display a reduction of their innovation-volatility and increased persistence. The theoretical model (a long-run risk model), calibrated to match average asset pricing variables in the data, is able to capture the two features of the Great Moderation, and it predicts a welfare loss caused by the Great Moderation (-0.9 percent), due mainly to the utility cost of a late uncertainty resolution. JEL classification: Great Moderation ; welfare ; long-run risk ; asset pricing. JEL codes: E32, G10

Suggested Citation

  • Pancrazi, Roberto, "undated". "How Beneficial was the Great Moderation After All?," The Warwick Economics Research Paper Series (TWERPS) 1016, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:1016
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    References listed on IDEAS

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    Cited by:

    1. Giuliano Curatola & Michael Donadelli & Patrick Grüning & Christoph Meinerding, 2016. "Investment-Specific Shocks, Business Cycles, and Asset Prices," Bank of Lithuania Working Paper Series 36, Bank of Lithuania.
    2. Guglielmo Maria Caporale & Michael Donadelli & Alessia Varani, 2014. "International Capital Markets Structure, Preferences and Puzzles: The US-China Case," Discussion Papers of DIW Berlin 1362, DIW Berlin, German Institute for Economic Research.
    3. Curatola, Giuliano & Donadelli, Michael & Gioffré, Alessandro & Grüning, Patrick, 2014. "Austerity, fiscal volatility, and economic growth," SAFE Working Paper Series 56, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    4. Nlemfu Mukoko, Jean Blaise, 2016. "On the Welfare Costs of Monetary Policy," MPRA Paper 72479, University Library of Munich, Germany, revised Jul 2016.
    5. Pancrazi, Roberto, 2015. "The heterogeneous Great Moderation," European Economic Review, Elsevier, vol. 74(C), pages 207-228.
    6. Donadelli, Michael & Paradiso, Antonio, 2014. "Does financial integration affect real exchange rate volatility and cross-country equity market returns correlation?," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 206-220.
    7. Pancrazi, Roberto & Vukotic, Marija, 2013. "Technology Persistence and Monetary Policy," The Warwick Economics Research Paper Series (TWERPS) 1013, University of Warwick, Department of Economics.
    8. Caporale, Guglielmo Maria & Donadelli, Michael & Varani, Alessia, 2015. "International capital markets structure, preferences and puzzles: A “US–China World”," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 85-99.
    9. Curatola, Giuliano & Donadelli, Michael & Grüning, Patrick, 2015. "Matching the BRIC equity premium: A structural approach," Emerging Markets Review, Elsevier, vol. 22(C), pages 65-75.
    10. Eurilton Araújo, 2016. "Monetary Policy Credibility and the Comovement between Stock Returns and Inflation," Working Papers Series 449, Central Bank of Brazil, Research Department.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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