NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Welfare Costs of Consumption Uncertainty

Robert J. Barro

NBER Working Paper No. 12763
Issued in December 2006
NBER Program(s):   EFG   ME   PE

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.

download in pdf format
   (184 K)

email paper

This paper is available as PDF (184 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12763

Users who downloaded this paper also downloaded these:
Lorenzoni w12898 News Shocks and Optimal Monetary Policy
Uhlig w15072 A Model of a Systemic Bank Run
Ilut and Schneider w17900 Ambiguous Business Cycles
Uhlig w16416 Economics and Reality
Livshits, MacGee, and Tertilt w17448 Costly Contracts and Consumer Credit
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us