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Safety Traps

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  • Kenza Benhima
  • Baptiste Massenot

Abstract

Fear of risk provides a rationale for protracted economic downturns. We develop a real business cycle model where investors with decreasing relative risk aversion choose between a risky and a safe technology that exhibit decreasing returns. Because of a feedback effect from the interest rate to risk aversion, two equilibria can emerge: a standard equilibrium and a "safe" one in which investors invest in safer assets. We refer to the dynamics of this second equilibrium as a safety trap because it is self-reinforcing as investors accumulate more wealth and show it to be consistent with Japan's lost decade.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 5 (2013)
Issue (Month): 4 (October)
Pages: 68-106

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Handle: RePEc:aea:aejmac:v:5:y:2013:i:4:p:68-106

Note: DOI: 10.1257/mac.5.4.68
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References

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  1. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
  2. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
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  5. Graham, Bryan S. & Jonathan Temple, 2002. "Rich Nations, Poor Nations: How much can multiple equilibria explain?," Royal Economic Society Annual Conference 2002 91, Royal Economic Society.
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  7. Campbell, John & Calvert, Lauren E. & Sodini, Paolo, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," Scholarly Articles 2617031, Harvard University Department of Economics.
  8. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
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  12. Angeletos, George-Marios & Panousi, Vasia, 2009. "Revisiting the supply side effects of government spending," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 137-153, March.
  13. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-77, December.
  14. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
  15. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
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  17. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Is a lost decade ahead?
    by Economic Logician in Economic Logic on 2012-07-13 13:56:00
  2. [??]????
    by himaginary in himaginaryの日記 on 2012-07-13 07:00:00

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