English, Article, Journal or magazine article edition: The Welfare Gains from Stabilization in a Stochastically Growing Economy with Idiosyncratic Shocks and Flexible Labor Supply Stephen J. Turnovsky; Marcelo Bianconi

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Bookmark: http://trove.nla.gov.au/version/201078
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • The Welfare Gains from Stabilization in a Stochastically Growing Economy with Idiosyncratic Shocks and Flexible Labor Supply
Author
  • Stephen J. Turnovsky
  • Marcelo Bianconi
Physical Description
  • preprint
Notes
  • Welfare gains, idiosyncratic shocks, labor supply
  • RePEc:sce:scecf3:277
  • Stochastic models with economy-wide shocks imply that the welfare costs of aggregate volatility are negligible. In reality idiosyncratic shocks are important, and empirical evidence suggests that their volatility is several times that of aggregate shocks. This paper introduces both types of shocks. We find that if in the process of eliminating aggregate risk the policymaker can reduce idiosyncratic risk by a modest amount, in accordance with available empirical evidence, the welfare gains from aggregate stabilization can become significant. The introduction of idiosyncratic risk has important implications for asset pricing, and in particular may reduce the risk-free rate substantially, through the precautionary savings motive. Many of our results are sensitive both to the degree of risk aversion, and to the flexibility of labor supply. The paper highlights the tradeoffs involved in analyzing the effects of risk on growth and welfare, on the one hand, and on asset pricing, on the other, clarifying the need to examine these issues within a unified stochastic general equilibrium framework.
  • RePEc:tuf:tuftec:0413
  • RePEc:udb:wpaper:uwec-2004-08-p
Language
  • English
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