Two Equations on the Pareto-Efficient Sharing of Real GDP Risk
AbstractFor a pure-exchange, closed economy without storage, Eagle and Domian (2005) and Koenig (2011) derive similar but different equations of Pareto-efficient risk sharing. We confirm that both equations are correct. We also generalize and reinterpret Koenig’s equation. We find that Koenig’s equation as the superior one when we use the harmonic mean to compute average relative risk aversion. Our reinterpretation of Koenig’s generalized equation is that Pareto efficiency requires that the consumption of an individual with average relative risk should be proportional to the real GDP.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 41051.
Date of creation: 31 Jan 2012
Date of revision:
risk sharing; Pareto efficiency; nominal GDP targeting; quasi-real indexing; inflation indexing;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- D60 - Microeconomics - - Welfare Economics - - - General
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- Blundell, Richard & M. Stoker, Thomas, 1999.
"Consumption and the timing of income risk,"
European Economic Review, Elsevier,
Elsevier, vol. 43(3), pages 475-507, March.
- Evan F. Koenig, 2011. "Monetary policy, financial stability, and the distribution of risk," Working Papers, Federal Reserve Bank of Dallas 1111, Federal Reserve Bank of Dallas.
- David Eagle & Dale Domian, 2005. "Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing," Finance, EconWPA 0509017, EconWPA.
- David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance, EconWPA 0501009, EconWPA.
- Anonymous, 2003. "Competing in the 21st Century," Amber Waves, United States Department of Agriculture, Economic Research Service, United States Department of Agriculture, Economic Research Service, April.
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