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Examining the role of risk aversion in calculating the welfare cost of consumption fluctuations

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  • Chun-Yu Ho
  • Wai-Yip Alex Ho
  • Dan Li

Abstract

This note examines the role of risk aversion in computing the welfare cost of consumption fluctuations under different utility and consumption process specifications. We find that the welfare cost of consumption fluctuations under a Constant-Relative-Risk-Aversion (CRRA) utility specification does not necessarily increase with the degree of relative risk aversion unless it fulfils certain conditions. The case of China is used as an illustration.

Suggested Citation

  • Chun-Yu Ho & Wai-Yip Alex Ho & Dan Li, 2012. "Examining the role of risk aversion in calculating the welfare cost of consumption fluctuations," Applied Economics Letters, Taylor & Francis Journals, vol. 19(9), pages 801-806, June.
    • Handle: RePEc:taf:apeclt:v:19:y:2012:i:9:p:801-806
    DOI: 10.1080/13504851.2010.548773
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    References listed on IDEAS

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    1. Stephane Pallage & Michel A. Robe, 2003. "On the Welfare Cost of Economic Fluctuations in Developing Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 677-698, May.
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