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Pricing the Planet's FutureThe Economics of Discounting in an Uncertain World$
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Christian Gollier

Print publication date: 2012

Print ISBN-13: 9780691148762

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691148762.001.0001

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Parametric Uncertainty and Fat Tails

Parametric Uncertainty and Fat Tails

Chapter:
(p.84) 6 Parametric Uncertainty and Fat Tails
Source:
Pricing the Planet's Future
Author(s):

Christian Gollier

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691148762.003.0006

This chapter shows how the probability distribution for economic growth is subject to some parametric uncertainty. There is a limited data set for the dynamics of economic growth, and the absence of a sufficiently large data set to estimate the long-term growth process of the economy implies that its parameters are uncertain and subject to learning in the future. This problem is particularly crucial when its parameters are unstable, or when the dynamic process entails low-probability extreme events. Thus, the rarer the event, the less precise the estimate of its likelihood. This builds a bridge between the problem of parametric uncertainty, and the one of extreme events.

Keywords:   parametric uncertainty, extreme events, economic growth, long-term growth, fat tails

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