Individual Consumption Risk and the Welfare Cost of Business Cycles

2005 ◽  
Author(s):  
Massimiliano De Santis
Keyword(s):  
Business Cycles ◽  
Welfare Cost ◽  
Individual Consumption ◽  
Consumption Risk

Individual Consumption Risk and the Welfare Cost of Business Cycles

2007 ◽  
Vol 97 (4) ◽  
pp. 1488-1506 ◽  
Author(s):  
Massimiliano De Santis
Keyword(s):  
Business Cycles ◽  
Idiosyncratic Risk ◽  
Welfare Cost ◽  
Aggregate Fluctuations ◽  
Welfare Gain ◽  
Aggregate Consumption ◽  
Consumption Insurance ◽  
Consumption Risk ◽  
Consumption Fluctuations ◽  
Overall Risk

We measure the welfare gain from removing aggregate consumption fluctuations in a model where each individual faces incomplete consumption insurance. We show that, because this welfare gain is a convex function of the overall consumption risk—aggregate plus idiosyncratic—each individual faces, to gauge the magnitude of the gain, it is important to match individuals' overall risk prior to any policy. In an economy calibrated to match individuals' overall risk, even removing 10 percent of aggregate fluctuations can result in a large welfare gain. Further, large gains do not necessarily depend on the countercyclical nature of idiosyncratic risk. (JEL E21, E32)

scholarly journals Welfare Cost of Business Cycles with Idiosyncratic Consumption Risk and a Preference for Robustness

2015 ◽  
Vol 7 (2) ◽  
pp. 40-57 ◽  
Author(s):  
Martin Ellison ◽  
Thomas J. Sargent
Keyword(s):  
Business Cycles ◽  
Model Misspecification ◽  
Idiosyncratic Risk ◽  
Welfare Cost ◽  
Consumption Risk ◽  
The Cost ◽  
Consumption Fluctuations

The welfare cost of random consumption fluctuations is known from De Santis (2007) to be increasing in the level of uninsured idiosyncratic consumption risk. It is known from Barillas, Hansen, and Sargent (2009) to increase if agents care about robustness to model misspecification. We calculate the cost of business cycles in an economy where agents face idiosyncratic consumption risk and fear model misspecification, finding that idiosyncratic risk has a greater impact on the cost of business cycles if agents already fear model misspecification. Correspondingly, endowing agents with fears about misspecification is more costly when there is already idiosyncratic risk. (JEL D81, E13, E21, E32)

Layoff Risk, the Welfare Cost of Business Cycles, and Monetary Policy

2015 ◽  
Author(s):  
David Berger ◽  
Ian Dew-Becker ◽  
Lawrence D. W. Schmidt ◽  
Yuta Takahashi
Keyword(s):  
Monetary Policy ◽  
Business Cycles ◽  
Welfare Cost
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