Volatility risk and economic welfare: FB3-5/2017-20E-PDF

“This paper examines the effects of time-varying volatility on welfare. I construct a tractable endogenous growth model with recursive preferences, stochastic volatility, and capital adjustment costs. The model shows that a rise in volatility can decelerate growth in the absence of any level shocks. In contrast to level risk, which is always welfare reducing for a risk-averse household, volatility risk can increase or decrease welfare, depending on model parameters. When calibrated to U.S. data, the model finds that the welfare cost of volatility risk is largely negligible under plausible model parameterizations"--Abstract, p. ii.

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Department/Agency Bank of Canada.
Title Volatility risk and economic welfare
Series Title Bank of Canada staff working paper,
Publication Type Series - View Master Record
Language [English]
Format Electronic
Electronic Document

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Note "May 2017."
Date 2017.
Number of Pages ii, 29 p. :
Catalogue Number
  • FB3-5/2017-20E-PDF
Subject Terms Economic analysis, Modelling