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How Beneficial was the Great Moderation After All?

  • Pancrazi, Roberto

    (Department of Economics, University of Warwick)

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: E32 ; G10

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2013/twerp_1016_pancrazi.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1016.

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Date of creation: 2013
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Handle: RePEc:wrk:warwec:1016
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