The Economic and Policy Consequences of Catastrophes
AbstractWhat is the likelihood that the U.S. will experience a devastating catastrophic event over the next few decades – something that would substantially reduce the capital stock, GDP and wealth? What does the possibility of such an event imply for the behavior of economic variables such as investment, interest rates, and equity prices? And how much should society be willing to pay to reduce the probability or likely impact of such an event? We address these questions using a general equilibrium model that describes production, capital accumulation, and household preferences, and includes as an integral part the possible arrival of catastrophic shocks. Calibrating the model to average values of economic and financial variables yields estimates of the implied expected mean arrival rate and impact distribution of catastrophic shocks. We also use the model to calculate the tax on consumption society would accept to reduce the probability or impact of a shock.
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Bibliographic InfoPaper provided by Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research in its series Working Papers with number 0912.
Date of creation: Sep 2009
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Other versions of this item:
- Robert S. Pindyck & Neng Wang, 2013. "The Economic and Policy Consequences of Catastrophes," American Economic Journal: Economic Policy, American Economic Association, vol. 5(4), pages 306-39, November.
- Robert S. Pindyck & Neng Wang, 2009. "The Economic and Policy Consequences of Catastrophes," NBER Working Papers 15373, National Bureau of Economic Research, Inc.
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- G01 - Financial Economics - - General - - - Financial Crises
- H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-10 (All new papers)
- NEP-DGE-2010-01-10 (Dynamic General Equilibrium)
- NEP-ENE-2010-01-10 (Energy Economics)
- NEP-MAC-2010-01-10 (Macroeconomics)
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