Welfare costs due to economic fluctuations according to different model setups

Abstract

The topic related to the costs in terms of welfare generated by economic fluctuations was highly debated in the macroeconomic research. Lucas opened the debate in this regard in a seminal paper in 1987 by asking what will be the gain in terms of consumption units by eliminating the economic fluctuations. Some weak assumptions raised several criticisms on the Lucas (1987) work. Reis (2009) proposed a robust approach by assuming the data generating process of consumption is defined through a persistent autoregressive approach without drift. The current paper aims at calculating the welfare cost generating by fluctuations in Romanian economy. As compared with Alupoaiei (2013), here was investigated the relationship between welfare costs and different scenarios regarding the level of consumption volatility and the risk aversion parameter. In that sense were constructed surfaces to emphasize these connections.

Keywords

• Auto-regressive process
• consumption
• costs
• risk aversion
• random walk
• volatility
• welfare