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RELATIVE RISK AVERSION AND THE TRANSMISSION OF FINANCIAL CRISES

Melisso Boschi () and Aditya Goenka ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We study how investor behaviour affects the transmission of financial crises. If investors exhibit decreasing relative risk aversion, then negative wealth shocks increase the risk premium required to hold risky assets. We integrate this into a second generation model of currency crises which allows for a competitiveness effect and for contagion through changes in fundamentals. The investor behaviour can lead to the transmission of financial crises even in the absence of the competitiveness effect, and makes multiple equilibria more likely. The possible stabilization effects of capital controls and a Tobin tax on the international transmission of financial crises are also studied.

JEL-codes: D91 F31 F32 G11 G15 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2007-10
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https://cama.crawford.anu.edu.au/sites/default/fil ... schi_goenka_2007.pdf (application/pdf)

Related works:
Journal Article: Relative risk aversion and the transmission of financial crises (2012) Downloads
Working Paper: Habit formation and the transmission of financial crises (2006) Downloads
Working Paper: International capital flows and transmission of financial crises (2004) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2007-28

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