Welfare Costs in the Long Run

Croce, Mariano (Max) Massimiliano

doi:10.2139/ssrn.2060997

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Welfare Costs in the Long Run

UNC Kenan-Flagler Research Paper No. 2013-3

29 Pages Posted: 18 May 2012 Last revised: 12 Nov 2013

See all articles by Mariano (Max) Massimiliano Croce

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Date Written: November 11, 2013

Abstract

This study provides general methods to measure and characterize the welfare costs of long-run consumption uncertainty with Epstein and Zin (1989) preferences. I find that long-run uncertainty can create significant welfare costs even when risk aversion is moderate and the short-run consumption volatility low. These findings are relevant for the assessment of policies that require a trade-off between short- and long-run stabilization.

Keywords: Welfare Costs, Long-Run Risk, Asset Pricing, Recursive Utility

JEL Classification: E32, G12, D81

Suggested Citation: Suggested Citation

Croce, Mariano Massimiliano, Welfare Costs in the Long Run (November 11, 2013). UNC Kenan-Flagler Research Paper No. 2013-3, Available at SSRN: https://ssrn.com/abstract=2060997 or http://dx.doi.org/10.2139/ssrn.2060997