The welfare cost of fluctuations in representative agent economies

Abstract

In this paper we quantify the welfare cost of fluctuations in a representative agent dynamic equilibrium framework. In doing so, we argue that two key features of Intertemporal Stochastic General Equilibrium Models should not be forgotten: non-linearities and dynamics. We think that these features are often disregarded in the existing literature. We propase a structural measure of the welfare cost of fluctuations, and quantify the role played by dinamics and non-linearities in assessing this cost for some versions of the one sector stochastic growth model. We find that non-linearities do not magnify the cost of fluctuations for walrasian growth models, and our structural measure is close to what has been measured in the literature. That difference becomes sharply larger in non-walrasian cases, where fluctuations magnify equilibrium inefficiencies.