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On the Welfare Costs of Consumption Uncertainty

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  • Barro, Robert

Abstract

Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year.

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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3224745.

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Date of creation: 2006
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Publication status: Published in NBER Working Paper Series
Handle: RePEc:hrv:faseco:3224745

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  1. Gadi Barlevy, 2003. "The Cost of Business Cycles Under Endogenous Growth," NBER Working Papers 9970, National Bureau of Economic Research, Inc.
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  8. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  9. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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  13. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August.
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Cited by:
  1. Fernández-Villaverde, Jesús, 2009. "The Econometrics of DSGE Models," CEPR Discussion Papers 7157, C.E.P.R. Discussion Papers.
  2. Christian Daude & Eduardo Fernández-Arias & Juan S. Blyde, 2009. "Output Collapses and Productivity Destruction," IDB Publications 6759, Inter-American Development Bank.
  3. Ivan Jaccard, 2010. "Asset Pricing and Housing Supply in a Production Economy," 2010 Meeting Papers 605, Society for Economic Dynamics.
  4. Pedro Conceição & Yanchun Zhang, 2010. "Discounting in the context of climate change economics: the policy implications of uncertainty and global asymmetries," Environmental Economics and Policy Studies, Society for Environmental Economics and Policy Studies - SEEPS, vol. 12(1), pages 31-57, June.

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