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The welfare cost of structural uncertainty
![□ Motivations and main questions of this paper ○ What if the structure behind economic fluctuations were not fixed-known but variable with some probability distribution? ─ The structure may not be fixed but may be characterized by some degree of uncertainty. ─ The uncertainty associated with the structure may be called high-order risk in contrast to the normal risk of economic fluctuations given the structure. ○ How much of additional welfare losses would be incurred by the structural uncertainty? ─ The additional component, the structural uncertainty may entail additional welfare losses. ─ How much would be the additional amount of welfare costs?
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□ Related literature ○ Previous studies on the welfare costs of business cycles ─ Lucas (2003): “Macroeconomic Priorities,” AER ─ Barro (2009): “Rare Disasters, Asset Prices, and Welfare Costs,” AER ─ Martin (2008): “Disasters and the Welfare Cost of Uncertainty,” AER P&P ○ Previous studies on the structural uncertainty (high-order risk) ─ Weitzman (2007): “Subjective Expectations and Asset-Returns Puzzles,” AER
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2. Analytical framework for macroeconomic welfare analysis
□ Welfare measure ○ The welfare may be measured as the expected present value of the streams of future utilities as (1) (1) W(C ; P)=E [∑∞ eρ U(C )]
□ Welfare-equivalent transformation ○ The welfare gains/costs may be computed as compensating changes in consumption (λ) to attain the same level of welfare given changes in economic conditions from P to](/image.do?type=idas&timeFile=/asset/2019/08/13/DOC/PREVIEW/04201908130152154032136.jpg "□ Motivations and main questions of this paper ○ What if the structure behind economic fluctuations were not fixed-known but variable with some probability distribution? ─ The structure may not be fixed but may be characterized by some degree of uncertainty. ─ The uncertainty associated with the structure may be called high-order risk in contrast to the normal risk of economic fluctuations given the structure. ○ How much of additional welfare losses would be incurred by the structural uncertainty? ─ The additional component, the structural uncertainty may entail additional welfare losses. ─ How much would be the additional amount of welfare costs?
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□ Related literature ○ Previous studies on the welfare costs of business cycles ─ Lucas (2003): “Macroeconomic Priorities,” AER ─ Barro (2009): “Rare Disasters, Asset Prices, and Welfare Costs,” AER ─ Martin (2008): “Disasters and the Welfare Cost of Uncertainty,” AER P&P ○ Previous studies on the structural uncertainty (high-order risk) ─ Weitzman (2007): “Subjective Expectations and Asset-Returns Puzzles,” AER
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2. Analytical framework for macroeconomic welfare analysis
□ Welfare measure ○ The welfare may be measured as the expected present value of the streams of future utilities as (1) (1) W(C ; P)=E [∑∞ eρ U(C )]
□ Welfare-equivalent transformation ○ The welfare gains/costs may be computed as compensating changes in consumption (λ) to attain the same level of welfare given changes in economic conditions from P to")
| Title |
The welfare cost of structural uncertainty
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|---|---|
| Material Type | Proceeding |
| Author(English) |
Kim, Young Il |
| Publisher |
Seoul : Korea Development Institute |
| Date | 2013-08 |
| Pages | 20 |
| Subject Country | South Korea(Asia and Pacific) |
| Language | English |
| File Type | Documents |
| Original Format | |
| Subject | Economy < General Economy < Financial Policy |
| Holding | KDI; KDI School of Public Policy and Management |
| License |  |
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The welfare cost of structural uncertainty
Kim, Young Il
/ 2013-08
/ Seoul
:
Korea Development Institute
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