Optimal Savings Distortions with Recursive Preferences

Emmanuel Farhi and Iván Werning

No 13720, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper derives an intertemporal optimality condition for economies with private information, focusing on a class of recursive preferences. By comparing it to the situation where agents can freely save in a risk-free asset market, we derive the optimal savings distortions necessary for constrained optimality. Our recursive preferences are homogeneous and satisfy a balanced growth condition, while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution. We perform some quantitative exercises that disentangle the respective roles played by these two parameters play in opt8imal distortions and the implied welfare gains.

JEL-codes: H0 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-dge and nep-upt
Note: EFG PE
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Citations: View citations in EconPapers (12)

Published as Farhi, Emmanuel & Werning, Iván, 2008. "Optimal savings distortions with recursive preferences," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 21-42, January.

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