Working Paper

Real business cycle dynamics under first-order risk aversion

Abstract: This paper incorporates preferences that display first-order risk aversion (FORA) into a standard real business cycle model. Although FORA preferences represent a sharp departure from the expected utility/constant relative risk aversion (EU/CRRA) preferences common in the business cycle literature, the change has only a negligible effect on the model s second moment implications. In fact, for what I argue is an empirically reasonable \"ballpark\" calibration of the FORA preferences, the moment implications are essentially identical to those under EU/CRRA, while the welfare cost of aggregate fluctuations in the model is substantially larger.

Keywords: Business cycles;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2007

Number: 0704