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Two Equations on the Pareto-Efficient Sharing of Real GDP Risk

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  • Eagle, David M.
  • Christensen, Lars

Abstract

For a pure-exchange, closed economy without storage, Eagle and Domian (2005) and Koenig (2011) derive similar but different equations of Pareto-efficient risk sharing. We confirm that both equations are correct. We also generalize and reinterpret Koenig’s equation. We find that Koenig’s equation as the superior one when we use the harmonic mean to compute average relative risk aversion. Our reinterpretation of Koenig’s generalized equation is that Pareto efficiency requires that the consumption of an individual with average relative risk should be proportional to the real GDP.

Suggested Citation

  • Eagle, David M. & Christensen, Lars, 2012. "Two Equations on the Pareto-Efficient Sharing of Real GDP Risk," MPRA Paper 41051, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:41051
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    File URL: https://mpra.ub.uni-muenchen.de/41051/1/MPRA_paper_41051.pdf
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    References listed on IDEAS

    as
    1. David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, University Library of Munich, Germany.
    2. Stefano G. Athanasoulis & Robert J. Shiller, 2001. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities," American Economic Review, American Economic Association, vol. 91(4), pages 1031-1054, September.
    3. Shiller, Robert J., 1995. "Aggregate income risks and hedging mechanisms," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 119-152.
    4. Blundell, Richard & M. Stoker, Thomas, 1999. "Consumption and the timing of income risk," European Economic Review, Elsevier, vol. 43(3), pages 475-507, March.
    5. Unknown, 2003. "Competing in the 21st Century," Amber Waves:The Economics of Food, Farming, Natural Resources, and Rural America, United States Department of Agriculture, Economic Research Service, pages 1-2, April.
    6. Robert J. Shiller, 2002. "Indexed Units of Account: Theory and Assessment of Historical Experience," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.),Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 4, pages 105-134, Central Bank of Chile.
    7. David Eagle & Dale Domian, 2005. "Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing," Finance 0509017, University Library of Munich, Germany.
    8. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    9. Evan F. Koenig, 2011. "Monetary policy, financial stability, and the distribution of risk," Working Papers 1111, Federal Reserve Bank of Dallas.
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    Cited by:

    1. Eagle, David M, 2012. "Liquidity Traps and the Price (In)Determinacy of Monetary Rules," MPRA Paper 42416, University Library of Munich, Germany.

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    More about this item

    Keywords

    risk sharing; Pareto efficiency; nominal GDP targeting; quasi-real indexing; inflation indexing;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D60 - Microeconomics - - Welfare Economics - - - General

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