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On the Welfare Costs of Consumption Uncertainty

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  • Robert J. Barro

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12763.

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Date of creation: Dec 2006
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Handle: RePEc:nbr:nberwo:12763

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Cited by:
  1. Jesús Fernández-Villaverde, 2009. "The Econometrics of DSGE Models," NBER Working Papers 14677, National Bureau of Economic Research, Inc.
  2. Juan Blyde & Christian Daude & Eduardo Fernández-Arias, 2010. "Output collapses and productivity destruction," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 146(2), pages 359-387, June.
  3. 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.
  4. Ivan Jaccard, 2010. "Asset Pricing and Housing Supply in a Production Economy," 2010 Meeting Papers 605, Society for Economic Dynamics.
  5. Jang-Ok Cho & Thomas Cooley & Hyung Seok Kim, . "Business Cycle Uncertainty and Economic Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.

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