Spurious welfare reversals in international business cycle models

Jinill Kim, Sunghyun Henry Kim

Research output: Contribution to journalArticle

118 Citations (Scopus)

Abstract

Several papers have documented spurious welfare reversals: incomplete-markets economy produces a higher level of welfare than the complete-markets economy. This paper first demonstrates how conventional linearization can generate approximation errors that can result in welfare reversals. Using a two-country production economy, we argue that spurious welfare reversals are not only possible but also plausible under reasonable values for model parameters. This paper then proposes an approximation method that modifies the conventional linearization by a bias correction. This method can be easily implemented and approximates welfare as accurately as a second-order perturbation method.

Original languageEnglish
Pages (from-to)471-500
Number of pages30
JournalJournal of International Economics
Volume60
Issue number2
DOIs
Publication statusPublished - 2003 Aug
Externally publishedYes

Keywords

  • Bias correction
  • Linearization
  • Risk sharing
  • Stochastic steady state
  • Welfare

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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