Federal Reserve Bank of St. Louis
The Welfare Cost of Business Cycles with Heterogeneous Trading Technologies
The author investigates the welfare cost of business cycles in an economy where households have heterogeneous trading technologies. In an economy with aggregate risk, the different portfolio choices induced by heterogeneous trading technologies lead to a larger consumption inequality in equilibrium, while this source of inequality vanishes in an economy without business cycles. Put simply, the heterogeneity in trading technologies amplifies the effect of aggregate output fluctuation on consumption inequality. The welfare cost of business cycles is, therefore, larger in such an economy. In the benchmark economy with a reasonably low risk aversion rate, the business cycle cost is 6.49 percent per- period consumption for an average household when the model is calibrated to match the risk premium.
Cite this item
YiLi Chien, "The Welfare Cost of Business Cycles with Heterogeneous Trading Technologies"
, Federal Reserve Bank of St. Louis, Review, volume 97, issue 1, pages 67-85, 2015.
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This item with handle RePEc:fip:fedlrv:00037
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