=4 c = 0.015 k = 0.1 0=6% 1=4% a. First, in terms of the cost
Question:
θ =4 σ∆c = 0.015 k = 0.1 π0=6% π1=4%
a. First, in terms of the cost of business cycles, consider the Lucas calculation where the rep- resentative agent is characterized by CRRA preferences U(C) = C^(1−θ)/(1-θ) .
Using a second-order cost of business cycles is: L = (θ /2).(σc/C ̄)^2
(b) Noting the values of θ and. σ∆c, where c = lnC, and that the standard deviation of consumption due to short-run fluctuations is σC = σ∆c × C ̄, compute the maximum welfare gain that could be achieved from eliminating consumption variability as a percentage of average consumption (report percentage to 3 decimals).
(c) Given your answer above, explain Lucas's argument about the role of stabilization policy.
Applied Regression Analysis and Other Multivariable Methods
ISBN: 978-1285051086
5th edition
Authors: David G. Kleinbaum, Lawrence L. Kupper, Azhar Nizam, Eli S. Rosenberg