Recursive utility, endogenous growth, and the welfare cost of volatility

Épaulard, Anne; Pommeret, Aude

doi:10.1016/s1094-2025(03)00016-4

Cited by 85 publications

(76 citation statements)

References 9 publications

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“…Ramey and Ramey (1993) explore this mechanism in a model where firms have to pre-commit to a specific technology before starting production. Stabilization may also increase welfare through its effect on capital accumulation (Matheron and Maury (2000), Epaulard and Pommeret (2003) and Barlevy (2004)). Finally, a very recent paper by Jung and Kuester (2008) emphasizes the non-linear relation between unemployment and the job finding rate.…”

Section: Introductionmentioning

confidence: 99%

Matching frictions, unemployment dynamics and the cost of business cycles

Hairault

Langot

Osotimehin

2010

Review of Economic Dynamics

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We investigate the welfare cost of business cycles implied by matching frictions. First, using the reduced-form of the matching model, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry increases average unemployment, which leads to substantial business cycles costs. Moreover, the structural matching model embeds other non-linearities, which alter the average job finding rate and consequently the welfare cost of business cycles. Our theory suggests to subsidizing employment in order to dampen the impact of the job finding rate fluctuations on welfare.

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Section: Introductionmentioning

confidence: 99%

Matching frictions, unemployment dynamics and the cost of business cycles

Hairault

Langot

Osotimehin

2010

Review of Economic Dynamics

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“…First of all, such a specification suggests the existence of a complex relationship between the inverse of the intertemporal elasticity of substitution and population growth; very little is known on the nature of such an interaction, thus further analysis is needed in order to shed some light on the reciprocal implications between the elasticity of intertemporal substitution and demographic change. Moreover, the results derived in such a framework suggest that Edweworth's conjecture may hold only in the empirically less plausible case in which the inverse of the intertemporal elasticity of subsitution is smaller than one; such a conclusion is likely to be due to the fact that we cannot distinguish between the relative risk aversion and the intertemporal elasticity of substitution coefficients, thus it might be worthwhile to consider a recursive utility formulation as in Epaulard and Pommeret (2003) in order to allow for such a differentiation. Finally, our model's specification is extremely simplistic, thus it is natural to wonder whether and how our results would differ in a more complex setup, as a multi-sector model; specifically, extending the analysis in order to consider a two sector model driven by human capital accumulation as in Robertson (2002) or an endogenous R&D model as in Bucci (2008) would allow to further clarify the mutual relationship between growth, (human) capital accumulation, demography and uncertainty.…”

Section: Resultsmentioning

confidence: 99%

“…The figure shows that for any value of θ < 1, there exists a range of values for σ confirming Edgeworth's hypothesis; however, in order to ensure this, the variance of population change should be not too small. By changing the value of n it is possible to show that this conclusion is robust: in order for the Millian principle to imply a better economic performance than the Benthamite criterion, the variance parameter has to be large enough 9 .…”

Section: Exogenous Population Growthmentioning

confidence: 99%

“…This explains why in the deterministic case Edgeworth's conjecture cannot hold (see Proposition 2): when σ = 0, the intertemporal elasticity of substitution should get so small to become (unrealistically) negative in order for the Millian to exceed the Benthamite growth rate. 9 To the best of our knowledge, clear empirical estimates of the variance of population change are not present in the literature, and this is related to the widely diffused view that it may be changing over time and from country to country. Indeed, in population projections based upon Bayesian methods, as those developed by the UN, the variance parameter is generally assumed to be time dependent and related to the level of population growth, in order to distinguish between short run and long run trends which are associated to different phases of the demographic transition (UN, 2013).…”

Section: Exogenous Population Growthmentioning

confidence: 99%

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Reassessing Edgeworth’s conjecture when population dynamics is stochastic

Marsiglio

2014

Journal of Macroeconomics

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We analyze the implications of different welfare criteria on economic and population growth in the case of stochastic population change. Edgeworth (1925) argues that total utilitarianism leads to a lower economic performance and a larger population size than average utilitarianism. Following works show that while his intuition holds in a static framework, the result is unclear in a dynamic setting of endogenous growth. We show that if population dynamics is stochastic, Edgeworth's conjecture may or may not hold. In particular, which utilitarian criterion implies larger economic and population growth rates depends on the value of the inverse of the intertemporal elasticity of substitution, the features of the random process driving demographic change and the magnitude of the (linear) dilution coefficient. We also characterize the size of the range of parameter values supporting Edgeworth's conjecture; such a range is wide if the dilution parameter is large enough while it is particularly narrow (but still non-empty) if the parameter is small. Reassessing Edgeworth's Conjecture when Population Dynamics is StochasticSimone Marsiglio * Forthcoming in the Journal of Macroeconomics AbstractWe analyze the implications of different welfare criteria on economic and population growth in the case of stochastic population change. Edgeworth (1925) argues that total utilitarianism leads to a lower economic performance and a larger population size than average utilitarianism. Following works show that while his intuition holds in a static framework, the result is unclear in a dynamic setting of endogenous growth. We show that if population dynamics is stochastic, Edgeworth's conjecture may or may not hold. In particular, which utilitarian criterion implies larger economic and population growth rates depends on the value of the inverse of the intertemporal elasticity of substitution, the features of the random process driving demographic change and the magnitude of the (linear) dilution coefficient. We also characterize the size of the range of parameter values supporting Edgeworth's conjecture; such a range is wide if the dilution parameter is large enough while it is particularly narrow (but still non-empty) if the parameter is small.

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“…Gourio,2012) and that volatility in general and such risks in particular are associated with welfare losses (see e.g. Barro, 2009 or Epaulard and Pommeret, 2003).…”

Section: Introductionmentioning

confidence: 99%

Debt and Macroeconomic Stability: Debt and the Business Cycle

Ziemann

2012

OECD Economics Department Working Papers

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JT03332420Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Using a large panel of OECD countries this paper studies the link between debt and macroeconomic stability by comparing the evolution of balance sheet aggregates and economic output in high-and lowdebt environments. While the relationship between debt and economic growth has been extensively studied in the literature, only little attention has been paid to the impact of debt on volatility and higher moments of output growth distributions. This paper fills in this gap. Debt-fuelled expansions are found to typically last longer but to culminate in a more sizeable downturn. The greater amplitude of business cycles in high-debt environments reflects higher macroeconomic volatility but also higher tail risks and adverse asymmetries in output growth distributions. The induced welfare losses justify policy interventions aiming at preventing excessive build-ups in debt ex-ante.JEL classification: C23; E32; E44; F34; G01; H63

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Recursive utility, endogenous growth, and the welfare cost of volatility

Cited by 85 publications

References 9 publications

Matching frictions, unemployment dynamics and the cost of business cycles

Matching frictions, unemployment dynamics and the cost of business cycles

Reassessing Edgeworth’s conjecture when population dynamics is stochastic

Debt and Macroeconomic Stability: Debt and the Business Cycle

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