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On the Welfare Costs of Consumption Uncertainty

  • Robert J. Barro

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 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
Note: EFG ME PE
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  14. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  15. Balke, Nathan S & Gordon, Robert J, 1989. "The Estimation of Prewar Gross National Product: Methodology and New Evidence," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 38-92, February.
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