- On the Welfare Costs of Consumption Uncertainty
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- by Barro, Robert J.
- 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 the 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. In contrast, the welfare cost from usual economic fluctuations is much
smaller, though still important—corresponding to lowering GDP by around 1.5% each
- Publication Type: WCFIA Working Paper
- Published Date: January 2007
- Field of Interest: International Economics
- Barro, Robert J. "On the Welfare Costs of Consumption Uncertainty." Working Paper 2008-0008, Weatherhead Center for International Affairs, Harvard University, January 2007.