Growth and welfare effects of monetary volatility

In this paper we use a continuous-time, stochastic, dynamic general equilib rium model to provide estimates of the growth and welfare effects of moneta ry volatility. Our primary concern is to highlight the long-run consequence s of different monetary environments in a small open economy. Using UK-rele vant data to set key parameter values in the model, we carry out three poli cy experiments. We find that (i) eliminating monetary growth shocks and (ii ) reducing the inflation rate can each generate positive growth and welfare effects, while (iii) reducing the interest rate depresses growth and is we lfare deteriorating. However, these results are sensitive to the values set for the risk aversion and intertemporal substitution parameters. Most nota bly, in some cases, high degrees of risk aversion are sufficient to change the direction of the influence of volatility on growth and welfare-an issue currently challenging the profession.