Christopher
Heiberger, Alfred Maußner
Business
Cycle Uncertainty and Economic Welfare Revisited
Abstract:
Cho,
Cooley, and Kim (RED, 2015) (CCK) consider the welfare effects of
removing multiplicative productivity shocks from real business cycle
models. In a model that admits an analytical solution they argue
convincingly that the positive welfare effect of removing uncertainty
can be dominated by a negative mean effect arising from the optimal
response of household labor supply. While the presentation of this
model is quite elaborate, the details of their subsequent quantitative
analysis of several versions of the standard real business cycle model
remain vague. We lay out the general procedure of computing
second-order accurate approximations of welfare gains or losses in the
canonical dynamic stochastic general equilibrium model. In order to be
able to consider mean preserving increases in the size of shocks we
extend the computation of second-order approximations of the policy
functions pioneered by Schmitt-Grohé and Uribe (JEDC, 2004).
Our
computations show that different from the results reported in CCK the
mean effect never dominates the fluctuations effect. Welfare measures
computed from weighted residuals methods confirm the logic behind our
perturbation approach and verify the accuracy of our estimates.
JEL: C63, D60, E32
Paper:
Paper available as pdf-file.
Beitrag Nr. 335, Volkswirtschaftliche Diskussionsreihe, Institut
für
Volkswirtschaftslehre der Universität Augsburg
Contact:
Christopher
Heiberger, University of Augsburg, Department of Economics,
D-86135
Augsburg,
Germany, phone +49-821-598-4189, fax +49-821-598-4231,
email: christopher.heiberger@wiwi.uni-augsburg.de
Alfred
Maußner, University of Augsburg, Department of
Economics,
D-86135
Augsburg,
Germany, phone +49-821-598-4187, fax +49-821-598-4231,
email: alfred.maussner@wiwi.uni-augsburg.de
Bo.,
13.06.2018