Risk Preferences and the Welfare Cost of Business Cycles

Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth

“…For instance, on the issue of the welfare costs of economic uncertainty, see 1 A few prominent examples of research in this line are Hansen and Jagannathan (1991), Cochrane and Hansen (1992), Luttmer (1996). Dolmas (1998) and Alvarez and Jermann (2000a); on the issue of the volatility of macroeconomic variables such as consumption, investment, and hours worked, see Hansen (1997); and on the issue of international business cycle comovements, see Baxter and Crucini (1995).…”

On the Potential of Foreign Aid as Insurance

“…Clearly, any change in the sequencing of aid disbursements while maintaining that ratio in the long run will have only a minimal impact on the volatility of consumption in the donor countries. We know from the literature on the welfare cost of business cycles that, in industrialized countries, larger changes in aggregate consumption volatility have only trivial consequences on local residents' welfare, regardless of the model economy used to assess these welfare effects (Lucas, 1987;and Dolmas, 1998). Thus, even if donors had purely selfish preferences (A = 0), adopting policy a* or sticking to their current aid policy would make no difference quantitatively.…”

“…This approach is the same as that taken by Lucas (1987) and many others and provides a floor for the welfare cost of macroeconomic fluctuations in an economy (Dolmas, 1998). This first process, thus parameterized, likewise provides a lower-bound estimate of the welfare gains from using foreign aid as insurance.…”

“…2003. Based on Obstfeld (1994), Dolmas (1998), and Pallage and Robe (2003), the welfare cost of such consumption volatility should be one to two orders of magnitude greater than in industrialized countries. Recent evidence suggests that the shocks experienced by developing countries are mostly exogenous (Köse, 2002) and that developing countries' access to private international financial markets typically dries up precisely when their economies hit the doldrums (Kaminsky, Reinhart, and Végh, 2004).…”

Is Ignorance Bliss? The Cost of Business-Cycle Uncertainty

“…The extension to non-expected utility functions is a natural one and has been widely adopted in the cost of business cycle literature (e.g. in Obstfeld, 1994;Pemberton, 1996;Dolmas, 1998;and Tallarini (2000)). Also, it cannot be addressed within the standard, linear models used in most business cycle research.…”