A note on wealth in a volatile economy

Details A note on wealth in a volatile economy A note on wealth in a volatile economy

2008-04-17

arxiv.org/abs/0804.2772v1

Economy

Quantitative Finance

General Finance

7 pages no figures

Scientific paper

I show that if the capital accumulation dynamics is stochastic a new term, in addition to that given by accounting prices, has to be introduced in order to derive a correct estimate of the genuine wealth of an economy. In a simple model with multiplicative accumulation dynamics I show that: 1) the value function is always a decreasing function of volatility 2) the accounting prices are affected by volatility 3) the new term always gives a negative contribution to wealth changes. I discuss results for models with constant elasticity utility functions. When the elasticity of marginal utility is larger than one, accounting prices increase with volatility whereas when it is less than one accounting prices decrease with volatility. These conclusions are not altered when adopting optimal saving rates.

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