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|Title:||The welfare cost of excess volatility in incomplete markets with sunspots||Authors:||Kang, Minwook||Keywords:||Social sciences::Economic theory||Issue Date:||2019||Source:||Kang, M. (2019). The welfare cost of excess volatility in incomplete markets with sunspots. Macroeconomic Dynamics, 23(3), 1062-1073. https://dx.doi.org/10.1017/S1365100517000141||Project:||RG171/14||Journal:||Macroeconomic Dynamics||Abstract:||In an incomplete markets economy with sunspots, the Pareto-criterion cannot rank sunspot equilibria of different levels of excess price-level volatility. Therefore, I propose a measure of excess volatility cost in terms of a period-0 endowment good. Ex-ante endowment subsidies are provided, in theory, to each consumer, so that the resulting equilibrium allocation of the higher volatility is Pareto-equivalent to the original benchmark equilibrium with a lower volatility level. The aggregate volatility cost is computed as the sum of all consumers' subsidies. Focusing on local analysis that considers small variations around a given volatility level, I show that the aggregate cost strictly increases in volatility even though each individual cost does not necessarily have this property.||URI:||https://hdl.handle.net/10356/151357||ISSN:||1365-1005||DOI:||10.1017/S1365100517000141||Rights:||© 2017 Cambridge University Press. All rights reserved.||Fulltext Permission:||none||Fulltext Availability:||No Fulltext|
|Appears in Collections:||SSS Journal Articles|
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