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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.
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.
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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