## Abstract

In an incomplete markets economy with sunspots, the Pareto-criterion cannot rank sunspot equilibria of different levels of excess price-level volatility. Therefore, I propose a measure of excess volatility cost in terms of a period-0 endowment good. Ex-ante endowment subsidies are provided, in theory, to each consumer, so that the resulting equilibrium allocation of the higher volatility is Pareto-equivalent to the original benchmark equilibrium with a lower volatility level. The aggregate volatility cost is computed as the sum of all consumers' subsidies. Focusing on local analysis that considers small variations around a given volatility level, I show that the aggregate cost strictly increases in volatility even though each individual cost does not necessarily have this property.

Original language | English |
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Pages (from-to) | 1062-1073 |

Number of pages | 12 |

Journal | Macroeconomic Dynamics |

Volume | 23 |

Issue number | 3 |

DOIs | |

Publication status | Published - 2017 Apr 27 |

Externally published | Yes |

### Bibliographical note

Publisher Copyright:© 2017 Cambridge University Press.

## Keywords

- Excess Volatility
- Market Incompleteness
- Price-Level Volatility
- Sunspots
- Welfare Cost

## ASJC Scopus subject areas

- Economics and Econometrics