Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

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

Welfare Cost of Business Cycles with Idiosyncratic Consumption Risk and a Preference for... Abstract 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 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

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

Loading next page...
 
/lp/american-economic-association/welfare-cost-of-business-cycles-with-idiosyncratic-consumption-risk-o6pPPKzHih

References (22)

Publisher
American Economic Association
Copyright
Copyright © 2015 by the American Economic Association
Subject
Articles
ISSN
1945-7715
eISSN
1945-7715
DOI
10.1257/mac.20130098
Publisher site
See Article on Publisher Site

Abstract

Abstract 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 )

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Apr 1, 2015

There are no references for this article.