Anne Epaulard

Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility

This paper proposes a measure of the welfare cost of volatility derived from a stochastic endogenous growth model extended to the case of a recursive utility function which disentangles risk aversion from intertemporal elasticity of substitution. The measure of the welfare cost of volatility takes into account not only the direct effect of volatility on expected utility but also the link between volatility and growth. It thus encompasses a direct welfare cost of fluctuations and a welfare cost due to the endogeneity of the consumption. We obtain a closed form solution for these two costs and show that the total welfare cost of volatility increases with both the risk aversion and the intertemporal elasticity of substitution. For plausible values of the agents preference parameters, the cost of volatility may be greater than measures based on an exogenous process for consumption. However, when applied to the US economy, our measure shows little differences compared to the one derived under the assumption that the consumption process is exogenous. Yet, we show that this may not be the case for more volatile economies. (Copyright: Elsevier)

Macroeconomic Performance and Poverty Reduction

This paper investigates the link between macroeconomic performance and the change in the poverty rate among 47 episodes of growth and 52 episodes of economic downturn in developing and transition economies. We show that, on average, (i) the greater the inequality, the lower the elasticity of poverty to growth, and the higher the mean income, the higher the elasticity; (ii) the country-specific elasticity is identical for episodes of economic growth and for episodes of economic downturn; and (iii) higher growth does not bring diminishing returns to poverty reduction. Moreover, we show that very high inflation is associated with a higher elasticity of the poverty rate to economic downturn, but at lower inflation, there is no relationship between inflation and the elasticity of the poverty rate to growth or recession. Trade openness and changes in the terms of trade explain part of the elasticity of the poverty rate to economic downturn.

Optimally eating a stochastic cake: a recursive utility approach

Abstract In this short paper, uncertainties on resource stock and on technical progress are introduced into an intertemporal equilibrium model of optimal extraction of a non-renewable resource. The representative consumer maximizes a recursive utility function which disentangles between intertemporal elasticity of substitution and risk aversion. A closed-form solution is derived for both the optimal extraction and price paths. The value of the intertemporal elasticity of substitution relative to unity is then crucial in understanding extraction. Moreover, this model leads to a non-renewable resource price following a geometric Brownian motion.

Financial Integration, Growth and Volatility

The aim of the paper is to evaluate the welfare gains from financial integration for developing and emerging economies. To do so, we build a stochastic endogenous growth model for a small open economy that can (i) borrow from the rest of the world, (ii) invest in foreign assets, and (iii) receive FDI. The model is calibrated on 32 emerging and developing economies for which we evaluate the upper bound for the welfare gain from financial integration. For plausible values of preference parameters and actual levels of financial integration, the mean welfare gain from financial integration is about 10 percent of the existing wealth. Compared to financial autarky, actual levels of financial integration translate into slightly higher annual growth rates (around 0.4 percentage points per year.)