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Growth and Welfare Effects of Monetary Volatility

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  • Lynne Evans
  • Turalay Kenc

Abstract

In this paper we use a continuous‐time, stochastic, dynamic general equilibrium model to provide estimates of the growth and welfare effects of monetary volatility. Our primary concern is to highlight the long‐run consequences of different monetary environments in a small open economy. Using UK‐relevant data to set key parameter values in the model, we carry out three policy experiments. We find that (i) eliminating monetary growth shocks and (ii) reducing the inflation rate can each generate positive growth and welfare effects, while (iii) reducing the interest rate depresses growth and is welfare deteriorating. However, these results are sensitive to the values set for the risk aversion and intertemporal substitution parameters. Most notably, in some cases, high degrees of risk aversion are sufficient to change the direction of the influence of volatility on growth and welfare—an issue currently challenging the profession.

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  • Lynne Evans & Turalay Kenc, 2001. "Growth and Welfare Effects of Monetary Volatility," Manchester School, University of Manchester, vol. 69(5), pages 509-533, October.
    • Handle: RePEc:bla:manchs:v:69:y:2001:i:5:p:509-533
    DOI: 10.1111/1467-9957.00267
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    Cited by:

    1. Zhiyong Dong & Qingyang Gu & Xiaoming Zhu, 2009. "Recursive Preference, Mood Fluctuation And Welfare Cost Of Reduced Growth," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 54(02), pages 263-281.

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