Publication:
Growth and welfare effects of monetary volatility
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Date
2001
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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 infation 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 suffcient to change the direction of the infuence of volatility on growth and welfare an issue currently challenging the profession.
Keywords
Growth , Welfare effects , Monetary volatility
Citation
Evans, L. & Kenc, T. (2001). Growth and welfare effects of monetary volatility. The Manchester School, 69 (5), pp. 509-533.
Publisher
Blackwell Publisher Ltd