Journal
JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION
Volume 217, Issue -, Pages 240-260Publisher
ELSEVIER
DOI: 10.1016/j.jebo.2023.11.007
Keywords
Ex post welfare; Heterogeneous beliefs; Rational belief; Social welfare; Volatility
Categories
Ask authors/readers for more resources
This paper examines the relationship between macroeconomic indicators (such as GDP) and market price volatility indices and social welfare, and it points out that there are significant discrepancies between these indicators and actual welfare when heterogeneous beliefs are present.
This paper examines how closely aggregate macroeconomic indices such as the Gross Domestic Product (GDP) and market price volatility indices are associated with social welfare when heterogeneous beliefs are present. While it is widely recognised that the GDP fails to capture distributional effects, volatility measures are often argued to supplement the GDP with this regard. Although heterogeneous beliefs are known to be capable of generating large economic and/or price fluctuations, it is not straightforward whether volatility is closely associated with welfare when heterogeneous beliefs are present. By constructing a simulation model of a financial economy with production and credit constraints that allows for heterogeneous beliefs, we show that major discrepancies between aggregate measures, including volatility measures, and ex post welfare are not the exception, but the rule. Also, the paper analyses the mechanism that causes the discrepancies. Our results strongly suggest welfare be measured by observing the distribution of realised consumption across agents and over time - in particular, its lower tail. In short, macroeconomic indices may well easily become a fool's gold.
Authors
I am an author on this paper
Click your name to claim this paper and add it to your profile.
Reviews
Recommended
No Data Available