Bounding the CRRA Utility Functions

Richard M. H. Suen

MPRA Paper from University Library of Munich, Germany

Abstract: The constant-relative-risk-aversion (CRRA) utility function is now predominantly used in quantitative macroeconomic studies. This function, however, is not bounded and thus creates problems when applying the standard tools of dynamic programming. This paper devises a method for "bounding" the CRRA utility functions. The proposed method is based on a set of conditions that can establish boundedness among a broad class of utility functions. These results are then used to construct a bounded utility function that is identical to a CRRA utility function except when consumption is very small or very large. It is shown that the constructed utility function also satisfies the Inada condition and is consistent with balanced growth.

Keywords: Utility Function; Elasticity of Marginal Utility; Boundedness (search for similar items in EconPapers)
JEL-codes: C61 O41 (search for similar items in EconPapers)
Date: 2009-02-07
New Economics Papers: this item is included in nep-dge and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Bounding the CRRA Utility Functions (2009)
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