Price Uncertainty and Consumer Welfare in an Intertemporal Setting
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In this paper we examine how increases in intertemporal price uncertainty affect the welfare of a consumer. In the preference structure of the consumer the coefficient of relative risk aversion and the elasticity of intertemporal substitution (EIS) are parametrically independent. We find that under empirically plausible circumstances, for each given degree of risk aversion an increase in price uncertainty reduces consumer welfare if the EIS is lower than a corresponding threshold value. Overall our results suggest that for parameter estimates found in much of the empirical literature, increases in intertemporal price uncertainty are likely to reduce consumer welfare.
Department of Economics, 2000