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Risk aversion as a technology factor in the production function

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  • David Black
  • Michael Dowd
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    Abstract

    We incorporate risk aversion into the technology component of the production function. In a traditional theoretic framework, we show that an increase in risk aversion increases unemployment and reduces potential output. Our out-of-sample forecasting experiments suggest that while interest rates impact the economy through the demand-side. However, an interest rate spread (TED) is used as a measure of risk aversion and is shown to impact output through the economy's supply-side.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603107.2011.572846
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    Bibliographic Info

    Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 21 (2011)
    Issue (Month): 18 ()
    Pages: 1345-1354

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    Handle: RePEc:taf:apfiec:v:21:y:2011:i:18:p:1345-1354

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    Related research

    Keywords: forecasting; gross domestic product; interest rates; risk aversion; technology; production function; time series;

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    Cited by:
    1. Jonathan Benchimol, 2012. "Risk Aversion in the Euro area," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00713669, HAL.

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