On the business cycle implications of alternative risk aversion formulations

In this paper, I investigate the effects of alternative risk aversion formulations on business cycle properties of an otherwise standard real business cycle economy. I first report on the implications of different risk aversion formulations on impulse response functions of real variables, and show that when risk aversion coefficient co-moves counter-cyclically, responses of real variables vary sizeably due to additional wedges both in the intratemporal and the intertemporal margin. Next, I show that formulating the risk aversion coefficient as random walk instead of a deep structural parameter generates better fit with observed volatilities of real variables. Finally, I report that modelling risk aversion coefficient in an endogenously-driven counter-cyclical way improves match with data on real variable correlations.

Kaynakça

Bai, Y., Rios-Rull, J.-V., Storesletten, K., 2012. Demand Shocks as Productivity Shocks. Federal Reserve Board of Minneapolis.

Bucciol, A., Zarri, L., 2013. Financial Risk Aversion and Personal Life History. Mimeo. Chetty, R., Guren, A., Manoli, D., Weber, A., 2011. Are micro and macro labor supply elasticities Consistent? A review of evidence on the intensive and extensive margins. Am. Econ. Rev. 101 (3), 471e475.

Cho, J.-O., Cooley, T.F., 1994. Employment and hours over the business cycle. J. Econ. Dynam. Contr. 18 (2), 411e432.

Eeckhoudt, L., Gollier, C., Schlesinger, H., 1996. Changes in background risk and risk taking behavior. Econometrica: J. Econ. Soc. 683e689.

Epstein, L.G., Zin, S.E., 1989. Substitution, risk aversion, and the temporal behavior of consumption and asset returns: a theoretical framework. Econometrica 57 (4), 937e969.

Fernandez-Villaverde, J., Rubio-Ramírez, J.F., 2007. Estimating macroeconomic models: a likelihood approach. Rev. Econ. Stud. 74 (4), 1059e1087.

Gandelman, N., Hernandez-Murillo, R., 2015. Risk aversion at the country level. Fed. Res. Bank of St. Louis Res. Pap. Ser. Rev. 97 (1), 53e66.

Giuliano, Paola, Spilimbergo, Antonio, 2014. Growing up in a recession. Rev. Econ. Stud. 81 (2), 787e817. https://doi.org/10.1093/restud/rdt040.

Guiso, L., Sapienza, P., Zingales, L., 2013. Time Varying Risk Aversion. Technical report. National Bureau of Economic Research.

Hanaoka, C., Shigeoka, H., Watanabe, Y., 2015. Do Risk Preferences Change? Evi-dence from Panel Data before and after the Great East japan Earthquake. Working Paper 21400. National Bureau of Economic Research.

Hansen, G.D., 1985. Indivisible labor and the business cycle. J. Monetary Econ. 16 (3), 309e327.

Hodrick, R.J., Prescott, E.C., 1997. Postwar us business cycles: an empirical investi-gation. J. Money Credit Bank. 1e16.

King, R.G., Rebelo, S.T., 1999. Resuscitating real business cycles. Handb. Macroecon. 1, 927e1007.

Kydland, F.E., Prescott, E.C., 1982. Time to build and aggregate fluctuations. Econ-ometrica 1345e1370.

Layard, R., Mayraz, G., Nickell, S., 2008. The marginal utility of income. J. Publ. Econ. 92 (8), 1846e1857.

Malmendier, U., Nagel, S., 2011. Depression babies: do macroeconomic experiences affect risk taking? Q. J. Econ. 126 (1), 373e416.

Mengel, F., Tsakas, E., Vostroknutov, A., 2016. Past experience of uncertainty affects risk aversion. Exp. Econ. 19 (1), 151e176.

Roemer, J.E., 1994. A Future for Socialism. Harvard University Press.

Rogerson, R., 1988. Indivisible labor, lotteries and equilibrium. J. Monetary Econ. 21 (1), 3e16.

Schmitt-Grohe, S., Uribe, M., 2004. Solving dynamic general equilibrium models using a second-order approximation to the policy function. J. Econ. Dynam. Contr. 28 (4), 755e775.

Kaynak Göster