On the Welfare Costs of Consumption Uncertainty
MetadataShow full item record
CitationBarro, Robert. 2006. On the welfare costs of consumption uncertainty. NBER Working Paper 12763.
AbstractSatisfactory 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.
Citable link to this pagehttp://nrs.harvard.edu/urn-3:HUL.InstRepos:3224745
- FAS Scholarly Articles