Relative Risk Aversion and Business Fluctuations

Ken-ichi Hashimoto (), Ryonghun Im (), Takuma Kunieda () and Akihisa Shibata
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Ken-ichi Hashimoto: Graduate School of Economics, Kobe University
Ryonghun Im: School of Economics, Kwansei Gakuin University
Takuma Kunieda: School of Economics, Kwansei Gakuin University

No 285, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: By applying a simple dynamic general equilibrium model without exogenous shocks inhabited by infinitely lived capitalists and workers, we show that a higher degree of relative risk aversion can destabilize an economy. In traditional real business cycle (RBC) theory, a higher degree of relative risk aversion dampens the amplitude of the consumption fluctuations caused by exogenous shocks through consumption smoothing. However, a higher degree of relative risk aversion combined with a high degree of elasticity of the marginal product of capital can also lead to the emergence of a nonlinear mechanism that causes endogenous business fluctuations. The nontrivial steady state loses stability due to the higher degree of relative risk aversion; thus, endogenous business fluctuations can occur. This result suggests that for a deeper understanding of boom-bust cycles, researchers should merge exogenous and endogenous business fluctuations when investigating economies.

Keywords: endogenous business fluctuations; relative risk aversion; dynamic general equilibrium; instability (search for similar items in EconPapers)
JEL-codes: E1 E2 E3 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2025-01
New Economics Papers: this item is included in nep-rmg and nep-upt
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http://192.218.163.163/RePEc/pdf/kgdp285.pdf First version, 2025 (application/pdf)

Related works:
Working Paper: Relative Risk Aversion and Business Fluctuations (2025)
Working Paper: Relative Risk Aversion and Business Fluctuations (2025)
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