Welfare Costs and Long Run Consumption Risk in a Production Economy,”Unpublished paper

The main goal of this paper is to measure the welfare costs of business cycles in a production economy in which the representative agent has low risk aversion and- at the same time- the equity premium and the co-movements of aggregate quantities and market returns are comparable to what observed in historical data. In order to do so, I consider a production economy in which the representative agent has Epstein-Zin-Weil(1989) preferences, productivity has a Long Run Risk component and there are capital adjustment costs. In this way, I try to bridge the gap between the current Long Run Risk asset pric-ing literature, in which quantities are taken as exogenous, and the standard macroeconomic business cycle models. Preliminary results from a benchmark exchange economy suggest that when there is a Long Run Consumption Risk and the representative agent prefers early resolution of uncertainty, the im-plied total welfare costs of the consumption uncertainty range from 12 % t