How Benefcial Was the Great Moderation After All?

In this paper I compute the welfare e§ect of the Great Moderation, using a consumption based asset pricing model. The Great Moderation is modelled according to the data properties of consumption and dividend growth, which display a reduction of their innovation-volatility and increased persistence. The theoretical model (a long-run risk model), calibrated to match average asset pricing variables in the data, is able to capture the two features of the Great Moderation, and it predicts a welfare loss caused by the Great Moderation (-0.9 percent), due mainly to the utility cost of a late uncertainty resolution.


Issue Date:
Jul 10 2013
Publication Type:
Working or Discussion Paper
Record Identifier:
http://ageconsearch.umn.edu/record/270533
Language:
English
Total Pages:
42
JEL Codes:
E32; G10
Series Statement:
WERP 1016




 Record created 2018-04-03, last modified 2018-04-03

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