Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098585 | Journal of Economic Dynamics and Control | 2014 | 20 Pages |
Abstract
This paper explores the relationship between volatility and welfare. Even though households prefer smooth streams of consumption and leisure, welfare can be increasing in the volatility of an exogenous driving force if factor supply is sufficiently elastic. We provide some analytical results for a model without capital, and do some quantitative exercises in a model with capital and a variety of shocks. Welfare is greater in high shock volatility regimes under plausible parameter values. Augmenting the model with features that increase the elasticity of factor supply extends the range of parameters over which higher volatility results in greater welfare.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Robert Lester, Michael Pries, Eric Sims,