Growth risks, asset prices, and welfare

Mariano M. Croce

Economics Letters, 2021, vol. 202, issue C

Abstract: I connect interest rates, risk premia and welfare costs of long-run consumption uncertainty in a setting with Epstein and Zin (1989) preferences. I find that long-run uncertainty can create significant welfare costs even when risk aversion is moderate and the short-run consumption volatility low. I document that the risk-free rate puzzle is a key determinant of the welfare costs.

Keywords: Welfare costs; Long-run risk; Asset pricing; Recursive utility (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:202:y:2021:i:c:s016517652100094x

DOI: 10.1016/j.econlet.2021.109817

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