Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197945 
Authors: 
Year of Publication: 
2017
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2017-20
Publisher: 
Bank of Canada, Ottawa
Abstract: 
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.
Subjects: 
Business fluctuations and cycles
Economic models
JEL: 
E2
E3
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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