Examining the role of risk aversion in calculating the welfare cost of consumption fluctuations

This note examines the role of risk aversion in computing the welfare cost of consumption fluctuations under different utility and consumption process specifications. We find that the welfare cost of consumption fluctuations under a Constant-Relative-Risk-Aversion (CRRA) utility specification does not necessarily increase with the degree of relative risk aversion unless it fulfils certain conditions. The case of China is used as an illustration.