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

Author/Editor: Epaulard, Anne | Pommeret, Aude
Authorized for Distribution: January 1, 2001
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
Series: Working Paper No. 01/5
Subject(s): Economic growth | Consumption | Economic models
Author's keyword(s): Welfare cost of fluctuations | recursive utility | endogenous growth | risk
 
English  
    Published:   January 1, 2001        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA0052001   Pages:   23
    Price:   US$15.00
       
     
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