With an intertemporal elasticity of substitution (IES) of two, NSBU found that a coefficient of relative risk aversion, [gamma], of about 6.
We modify the NSBU framework in various dimensions, including the specification of probabilities for world and individual country transitions between normal and disaster states.
As in NSBU, the log of consumption per capita for country i at time t, [c.
We follow NSBU, but with significant modifications, in assuming that rare macroeconomic events involve disaster and normal states.
In order to accurately estimate parameters and unknown quantities, we run four simulation chains, similar to the procedure in NSBU (see Appendix A.
In order to accurately estimate the model and assess convergence, we run four independent simulation chains in a way similar to that of NSBU.