On the Welfare Costs of Consumption Uncertainty

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On the Welfare Costs of Consumption Uncertainty

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Title: On the Welfare Costs of Consumption Uncertainty
Author: Barro, Robert
Citation: Barro, Robert. 2006. On the welfare costs of consumption uncertainty. NBER Working Paper 12763.
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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.
Published Version: http://dx.doi.org/10.3386/w12763
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3224745
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