Welfare Costs in the Long Run
29 Pages Posted: 18 May 2012 Last revised: 12 Nov 2013
Date Written: November 11, 2013
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