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Barro, Robert J. 2009. "Rare Disasters, Asset Prices, and Welfare Costs."
,
99(1): 243-64.
Show Article Details
DOI: 10.1257/aer.99.1.243
Abstract:A representative-consumer model with Epstein-Zin-Weil preferences and i.i.d.
shocks, including rare disasters, accords with observed equity premia and
risk-free rates if the coefficient of relative risk aversion equals 3-4. If the intertemporal
elasticity of substitution exceeds one, an increase in uncertainty lowers
the price-dividend ratio for equity, and a rise in the expected growth rate
raises this ratio. Calibrations indicate that society would willingly reduce GDP
by around 20 percent each year to eliminate rare disasters. The welfare cost
from usual economic fluctuations is much smaller, though still important, corresponding
to lowering GDP by about 1.5 percent each year. (JEL E13, E21,
E22, E32)
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Authors:
Barro, Robert J. (Harvard U)
JEL Classifications:
E13: General Aggregative Models: Neoclassical
E21: Macroeconomics: Consumption; Saving; Wealth
E22: Capital; Investment; Capacity
E32: Business Fluctuations; Cycles
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