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Spectral Welfare Cost Functions
Author(s) -
Otrok Christopher
Publication year - 2001
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00113
Subject(s) - volatility (finance) , economics , econometrics , consumption (sociology) , separable space , welfare , measure (data warehouse) , microeconomics , computer science , mathematics , market economy , mathematical analysis , social science , database , sociology
If preferences are not time‐separable, economic agents care not only about the magnitude of fluctuations in consumption but also about the persistence and other temporal characteristics of those fluctuations. This paper extends and develops the theory of spectral utility functions, which measure utility frequency by frequency, to illustrate the interaction between consumption volatility and time‐non‐separable preferences. To highlight the economic implications of the interaction, spectral welfare cost functions are developed to provide a quantitative measure of the importance to economic agents of the temporal delivery of consumption volatility.