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Two Equations on the Pareto-Efficient Sharing of Real GDP Risk

Author

Listed:
  • Eagle, David M.
  • Christensen, Lars

Abstract

For 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.

Suggested Citation

  • Eagle, David M. & Christensen, Lars, 2012. "Two Equations on the Pareto-Efficient Sharing of Real GDP Risk," MPRA Paper 41051, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:41051
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    File URL: https://mpra.ub.uni-muenchen.de/41051/1/MPRA_paper_41051.pdf
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    References listed on IDEAS

    as
    1. David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, EconWPA.
    2. David Eagle & Dale Domian, 2005. "Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing," Finance 0509017, EconWPA.
    3. Blundell, Richard & M. Stoker, Thomas, 1999. "Consumption and the timing of income risk," European Economic Review, Elsevier, vol. 43(3), pages 475-507, March.
    4. Koenig, Evan F., 2011. "Monetary policy, financial stability, and the distribution of risk," Working Papers 1111, Federal Reserve Bank of Dallas.
    5. Anonymous, 2003. "Competing in the 21st Century," Amber Waves, United States Department of Agriculture, Economic Research Service, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    risk sharing; Pareto efficiency; nominal GDP targeting; quasi-real indexing; inflation indexing;

    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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