Risk aversion as a technology factor in the production function

David Black and Michael Dowd

Applied Financial Economics, 2011, vol. 21, issue 18, 1345-1354

Abstract: We incorporate risk aversion into the technology component of the production function. In a traditional theoretic framework, we show that an increase in risk aversion increases unemployment and reduces potential output. Our out-of-sample forecasting experiments suggest that while interest rates impact the economy through the demand-side. However, an interest rate spread (TED) is used as a measure of risk aversion and is shown to impact output through the economy's supply-side.

Keywords: forecasting; gross domestic product; interest rates; risk aversion; technology; production function; time series (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/09603107.2011.572846

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