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The welfare cost of structural uncertainty

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□ 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 [∑∞  eρ 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


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Title The welfare cost of structural uncertainty
Similar Titles
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 pdf
Subject Economy < General
Economy < Financial Policy
Holding KDI; KDI School of Public Policy and Management
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