American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Welfare Cost of Business Cycles with Idiosyncratic Consumption Risk and a Preference for Robustness
American Economic Journal: Macroeconomics
vol. 7,
no. 2, April 2015
(pp. 40–57)
Abstract
The welfare cost of random consumption fluctuations is known from De Santis (2007) to be increasing in the level of uninsured idiosyncratic consumption risk. It is known from Barillas, Hansen, and Sargent (2009) to increase if agents care about robustness to model misspecification. We calculate the cost of business cycles in an economy where agents face idiosyncratic consumption risk and fear model misspecification, finding that idiosyncratic risk has a greater impact on the cost of business cycles if agents already fear model misspecification. Correspondingly, endowing agents with fears about misspecification is more costly when there is already idiosyncratic risk. (JEL D81, E13, E21, E32)Citation
Ellison, Martin, and Thomas J. Sargent. 2015. "Welfare Cost of Business Cycles with Idiosyncratic Consumption Risk and a Preference for Robustness." American Economic Journal: Macroeconomics, 7 (2): 40–57. DOI: 10.1257/mac.20130098Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- E13 General Aggregative Models: Neoclassical
- E21 Macroeconomics: Consumption; Saving; Wealth
- E32 Business Fluctuations; Cycles
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