Publication:
It’s a small small welfare cost of fluctuations

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2005
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Instituto Complutense de Análisis Económico. Universidad Complutense de Madrid
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Lucas [1987] has shown that in a representative agent framework, the potential welfare gain from stabilizing consumption around its mean is small. We provide an example and some insight for why Lucas’ measure is an upper bound of the welfare cost of fluctuations in walrasian economies.
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Cooley, T., and G. Hansen (1992): “Tax distortions in a Neoclassical Monetary Economy,” Journal of Economic Theory, 58, 2090–316. Den Haan, W., and A. Marcet (1990): “Solving the Stochastic Growth Model by Parametrizing Epectations,” Journal of Business and Economic Statistics, 8, 31–34. Krussell, P., and A. Smith (1999): “On the welfare effects of eliminating business cycles,” Review of Economic Dynamics, 2(1), 245–272. Lucas, R. (1987): Models of Business Cycles. Basil Blackwell, Oxford. Marcet, A., and G. Lorenzoni (1998): “Parameterized Expectations Approach: Some Practical Issues,” in Computational Methods for the Study of Dynamic Economies, ed. by R. Marimon, and A. Scott. Oxford University Press, Oxford. McCallum, B. (1989): “Real Business Cycles Models,” in Modern Business Cycle Theories, ed. by R. Barro. Harvard University Press, Boston.