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The Cost of Business Cycles with Heterogeneous Trading Technologies

This paper investigates the welfare cost of business cycles in an economy where households have heterogeneous trading technologies. In an economy with aggregate risk, the different portfolio choices induced by heterogeneous trading technologies lead to a larger consumption inequality in equilibrium, while this source of inequality vanishes in an economy without business cycles. Put simply, the heterogeneity in trading technologies amplifies the effect of aggregate output fluctuation on consumption inequality. The welfare cost of business cycles is, therefore, larger in such an economy. In the benchmark economy with a reasonable low risk aversion rate, the business cycle costs 6.49% per period consumption for an average household when I calibrate this model to match the risk premium.

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