Keywords: Utility-based welfare criterion, capital accumulation.
Abstract: This paper extends the utility-based welfare criterion developed by Rotemberg
and Woodford (1997) and Woodford (2003) to a model with endogenous capital
accumulation. The welfare criterion obtained for this model shares several
features with the corresponding expressions that have been derived in simpler
models without capital accumulation. In particular, a criterion can be specified
such that welfare losses depend solely on quadratic functions of the model's
variables, thus confirming that policy should be oriented toward stabilization
of macroeconomic aggregates, rather than toward attaining particular levels of
those aggregates. That said, an important difference that obtains in this case
is that the composition of output directly affects welfare in the endogenous-capital
model--a result that is not present in standard treatments.
Full paper (331 KB PDF)
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Last update: January 8, 2004