Safety Traps

Kenza Benhima and Baptiste Massenot ()

American Economic Journal: Macroeconomics, 2013, vol. 5, issue 4, 68-106

Abstract: Fear of risk provides a rationale for protracted economic downturns. We develop a real business cycle model where investors with decreasing relative risk aversion choose between a risky and a safe technology that exhibit decreasing returns. Because of a feedback effect from the interest rate to risk aversion, two equilibria can emerge: a standard equilibrium and a "safe" one in which investors invest in safer assets. We refer to the dynamics of this second equilibrium as a safety trap because it is self-reinforcing as investors accumulate more wealth and show it to be consistent with Japan's lost decade.

JEL-codes: D14 E13 E21 E22 E23 E32 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/mac.5.4.68
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Citations: View citations in EconPapers (1)

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Working Paper: Safety Traps (2013)
Working Paper: Safety Traps (2012)
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