On the business cycle implications of alternative risk aversion formulations

Orhan Torul

Central Bank Review, 2018, vol. 18, issue 2, 41-50

Abstract: In this paper, I investigate the effects of alternative risk aversion formulations on business cycle properties of an otherwise standard real business cycle economy. I first report on the implications of different risk aversion formulations on impulse response functions of real variables, and show that when risk aversion coefficient co-moves counter-cyclically, responses of real variables vary sizeably due to additional wedges both in the intratemporal and the intertemporal margin. Next, I show that formulating the risk aversion coefficient as random walk instead of a deep structural parameter generates better fit with observed volatilities of real variables. Finally, I report that modelling risk aversion coefficient in an endogenously-driven counter-cyclical way improves match with data on real variable correlations.

Keywords: Business cycle statistics; Real business cycles; Time-varying risk; Risk preferences (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:cebare:v:18:y:2018:i:2:p:41-50

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