Working Paper

Additional Welfare Gains From Stabilization Policy

To determine the possible welfare gains from macroeconomic stabilization policy, we adapt the ap-

proach of Lucas (2003) with a risk-averse representative agent. However, instead of using a General Equilibrium model, we apply an agent-based macro model, thus relaxing the assumption of perfect ex ante coordination brought about by the Walrasian auctioneer. We find that the ACE macro model allows for a higher average level of employment when economic activity is stabilized. Therefore, the welfare gain of perfect stabilization at an optimal level of production is approximately 16 times higher than Lucas estimated. It consists of reduced variability and also in a higher level of average consumption.

Authors

Matthias Lengnick