IntertemporalSubstitution, Risk Aversion, and Economic Performance in a StocashticallyGrowing Open Economy

Stephen Turnovsky, University of Washington and Paola Giuliano, University of California-Berkeley
Authors registered in the RePEc Author Service: Stephen J Turnovsky and Paola Giuliano

No 277, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: Most intertemporal studies of risk are based on the constant relative risk aversion utility function. This has the property that the intertemporal elasticity of substitution and the coefficient of relative risk aversion are both consstant and inverses of each other. With the diversity of empirical evidence suggesting that this constraint may or may not be met, it is important that studies of risk and growth decouple these two parameters, which impinge on the equilibrium in distinct and in some respects conflicting ways. This paper provides both an analytical characterization as well as extensive numerical simulations of the euqilibrium in a stochastically growing small open economy under more general recursive preferences. The paper shows that errors committed by using the constant elasticity uility function rather than the more general recursive preferences, even for small violations of the compatibility condition within empirically plausible range of the parameter values can be both quantitatively and even qualitatively substantial.

Keywords: stochastic growth; open economy; risk aversion; intertemporal substitution (search for similar items in EconPapers)
JEL-codes: D9 (search for similar items in EconPapers)
Date: 2001-04-01
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Related works:
Journal Article: Intertemporal substitution, risk aversion, and economic performance in a stochastically growing open economy (2003)
Working Paper: Intertemporal Substitution, Risk Aversion, and Economic Performance in a Stochastically Growing Open Economy (2002)
Working Paper: Intertemporal Substitution, Risk Aversion, and Economic Performance in a Stochastically Growing Open Economy (2000)
Working Paper: Intertemporal Substitution, Risk Aversion, and Economic Performance in a Stochastically Growing Open Economy (2000)
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