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An Analytical Approach to the Welfare Cost of Business Cycles and the Benefit from Activist Monetary Policy
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Michael T. Kiley
Veröffentlicht/Copyright:
26. März 2003
A closed-form solution for quantity and asset-price movements in a dynamic general equilibrium model with non-state-separable preferences shows that the welfare cost of fluctuations and the equity premium can be large in such a model. But a large welfare loss from cycles does not imply a large gain from good monetary policy. Although monetary policy can implement the optimal allocation in a sticky-price version of the model, the gain from such activism is trivial because the optimal allocation continues to imply volatile consumption in response to productivity shocks. This highlights a distinction between recent models and older Keynesian-style models: In recent models, fluctuations are largely an efficient response to shocks and inefficiencies stem from price distortions associated with price rigidity, i.e., Harberger triangles. In the older literature, fluctuations were viewed as inherently inefficient with large costs, i.e., Okun's gaps.
Published Online: 2003-3-26
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Artikel in diesem Heft
- Topics Article
- Balance of Payments Constrained Non-Scale Growth and the Population Puzzle
- The Human Capital Constraint: Of Increasing Returns, Education Choice and Coordination Failure
- ``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare
- How Prudent are Community Representative Consumers?
- Price Distribution in a Symmetric Economy
- The Role of Stock Markets in Current Account Dynamics: a Time Series Approach
- Shiftwork, Adjustment Costs and Uncertainty
- How Do Future Constraints Affect Current Investment?
- The Politics of Endogenous Growth
- Sticky Prices, Coordination and Enforcement
- Fractional Integration with Bloomfield Disturbances in the Specification of Real Output in the G7 Countries
- Monetary Policy When the Nominal Short-Term Interest Rate is Zero
- High-Tech Human Capital: Do the Richest Countries Invest the Most?
- Substitution Elasticities and Investment Dynamics in Two-Country Business Cycle Models
- Contributions Article
- On Modeling the Effects of Inflation Shocks: Comments and Some Further Evidence
- Optimal Monetary Policy and the Correlation between Prices and Output
- Are Banking Supervisory Data Useful for Macroeconomic Forecasts?
- An Analytical Approach to the Welfare Cost of Business Cycles and the Benefit from Activist Monetary Policy
- Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules
- Idle Capital and Long-Run Productivity
- The Money Metric, Price and Quantity Aggregation and Welfare Measurement
- Parente and Prescott's Theory May Work in Practice But Does Not Work in Theory
- Explaining Movements in the Labor Share
- Endogenous Growth with Intertemporally Dependent Preferences
- On the Friedman Rule in Search Models with Divisible Money
- Finance Causes Growth: Can We Be So Sure?
- Advances Article
- Where Is the Natural Rate? Rational Policy Mistakes and Persistent Deviations of Inflation from Target
- Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index
Schlagwörter für diesen Artikel
Non-expected utility;
Business cycles;
Stabilization policy;
Asset pricing
Artikel in diesem Heft
- Topics Article
- Balance of Payments Constrained Non-Scale Growth and the Population Puzzle
- The Human Capital Constraint: Of Increasing Returns, Education Choice and Coordination Failure
- ``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare
- How Prudent are Community Representative Consumers?
- Price Distribution in a Symmetric Economy
- The Role of Stock Markets in Current Account Dynamics: a Time Series Approach
- Shiftwork, Adjustment Costs and Uncertainty
- How Do Future Constraints Affect Current Investment?
- The Politics of Endogenous Growth
- Sticky Prices, Coordination and Enforcement
- Fractional Integration with Bloomfield Disturbances in the Specification of Real Output in the G7 Countries
- Monetary Policy When the Nominal Short-Term Interest Rate is Zero
- High-Tech Human Capital: Do the Richest Countries Invest the Most?
- Substitution Elasticities and Investment Dynamics in Two-Country Business Cycle Models
- Contributions Article
- On Modeling the Effects of Inflation Shocks: Comments and Some Further Evidence
- Optimal Monetary Policy and the Correlation between Prices and Output
- Are Banking Supervisory Data Useful for Macroeconomic Forecasts?
- An Analytical Approach to the Welfare Cost of Business Cycles and the Benefit from Activist Monetary Policy
- Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules
- Idle Capital and Long-Run Productivity
- The Money Metric, Price and Quantity Aggregation and Welfare Measurement
- Parente and Prescott's Theory May Work in Practice But Does Not Work in Theory
- Explaining Movements in the Labor Share
- Endogenous Growth with Intertemporally Dependent Preferences
- On the Friedman Rule in Search Models with Divisible Money
- Finance Causes Growth: Can We Be So Sure?
- Advances Article
- Where Is the Natural Rate? Rational Policy Mistakes and Persistent Deviations of Inflation from Target
- Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index
