Volatility and Growth with Recursive Preferences

Barbara Annicchiarico, Alessandra Pelloni and Fabrizio Valenti ()
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Fabrizio Valenti: DEF, Università di Roma "Tor Vergata", http://www.ceistorvergata.it

No 387, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: This paper studies the relationship between volatility and long-run growth in a complete market economy with human capital accumulation and Epstein-Zin preferences. There is both crosscountry and time-series evidence that volatility is associated with lower growth. Matching this evidence has proved a challenge for growth models with no market failures as they tend to predict the opposite for values of risk aversion higher than unity. However in our model, risk aversion and intertemporal elasticity of substitution are allowed to move independently of each other, and when both are relatively high or relatively low, the relationship between volatility and growth is negative. Indeed this is the case for parametrizations of preferences in line with the literature.

Keywords: Growth and Uncertainty; Epstein-Zin Preferences; Intertemporal Elasticity of Substitution; Risk Aversion (search for similar items in EconPapers)
JEL-codes: D92 E22 E32 O49 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2016-06-24, Revised 2016-06-24
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-gro, nep-mac and nep-upt
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Working Paper: Volatility and Growth with Recursive Preferences (2016)
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