Asset Bubbles and the Cost of Economic Fluctuations

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Asset Bubbles and the Cost of Economic Fluctuations

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dc.contributor.author Chauvin, Kyle
dc.contributor.author Laibson, David I.
dc.contributor.author Mollerstrom, Johanna Britta
dc.date.accessioned 2012-11-21T21:58:21Z
dc.date.issued 2011
dc.identifier.citation Chauvin, Kyle, David I. Laibson, and Johanna Britta Mollerstrom. 2011. Asset bubbles and the cost of economic fluctuations. Journal of Money, Credit and Banking 43(S1): 233–260. en_US
dc.identifier.issn 0022-2879 en_US
dc.identifier.issn 1538-4616 en_US
dc.identifier.uri http://nrs.harvard.edu/urn-3:HUL.InstRepos:9938146
dc.description.abstract Lucas (1987, 2003) estimates that the cost of economic fluctuations is low; a social planner would pay no more than 0.1% of (permanent) consumption to eliminate all future business cycle fluctuations. The current paper extends Lucas’ calculations by studying the costs of fluctuations arising from asset bubbles. We estimate two classes of costs: consumption volatility due to asset bubbles in a representative agent economy and consumption volatility that arises because households have heterogeneous exposure to the bubble assets. We show that the magnitude of welfare costs is primarily driven by the existence of heterogeneity. Our benchmark calibration implies that the asset bubbles of the last decade generated a social welfare cost equal to a permanent 3% reduction in the level of national consumption. If assets are held proportionately across the population, these welfare costs fall by an order of magnitude. Our calculations are sensitive to the details of the calibration, including the degree of balance sheet and trading heterogeneity, the coefficient of relative risk aversion, and the magnitude of the asset bubble. Our preferred specifications generate welfare costs ranging from 1% to 10% of (permanent) national consumption. en_US
dc.description.sponsorship Economics en_US
dc.language.iso en_US en_US
dc.publisher Wiley en_US
dc.relation.isversionof doi:10.1111/j.1538-4616.2011.00416.x en_US
dash.license OAP
dc.subject welfare costs en_US
dc.subject fluctuations en_US
dc.subject asset bubbles en_US
dc.subject heterogeneity en_US
dc.title Asset Bubbles and the Cost of Economic Fluctuations en_US
dc.type Journal Article en_US
dc.description.version Author's Original en_US
dc.relation.journal Journal of Money, Credit and Banking en_US
dash.depositing.author Laibson, David I.
dc.date.available 2012-11-21T21:58:21Z

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  • FAS Scholarly Articles [7106]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University

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