TY - JOUR
T1 - Welfare cost of business cycles with idiosyncratic consumption risk and a preference for robustness
AU - Ellison, Martin
AU - Sargent, Thomas J.
PY - 2015
Y1 - 2015
N2 - The welfare cost of random consumption fluctuations is known from De Santis (2007) to be increasing in the level of uninsured idiosyncratic consumption risk. It is known from Barillas, Hansen, and Sargent (2009) to increase if agents care about robustness to model misspecification. We calculate the cost of business cycles in an economy where agents face idiosyncratic consumption risk and fear model misspecification, finding that idiosyncratic risk has a greater impact on the cost of business cycles if agents already fear model misspecification. Correspondingly, endowing agents with fears about misspecification is more costly when there is already idiosyncratic risk. (JEL D81, E13, E21, E32).
AB - The welfare cost of random consumption fluctuations is known from De Santis (2007) to be increasing in the level of uninsured idiosyncratic consumption risk. It is known from Barillas, Hansen, and Sargent (2009) to increase if agents care about robustness to model misspecification. We calculate the cost of business cycles in an economy where agents face idiosyncratic consumption risk and fear model misspecification, finding that idiosyncratic risk has a greater impact on the cost of business cycles if agents already fear model misspecification. Correspondingly, endowing agents with fears about misspecification is more costly when there is already idiosyncratic risk. (JEL D81, E13, E21, E32).
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U2 - 10.1257/mac.20130098
DO - 10.1257/mac.20130098
M3 - Article
AN - SCOPUS:84928387912
SN - 1945-7707
VL - 7
SP - 40
EP - 57
JO - American Economic Journal: Macroeconomics
JF - American Economic Journal: Macroeconomics
IS - 2
ER -