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Real business cycle dynamics under first-order risk aversion

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  • Jim Dolmas

Abstract

This paper incorporates preferences that display first-order risk aversion (FORA) into a standard real business cycle model. Although FORA preferences represent a sharp departure from the expected utility/constant relative risk aversion (EU/CRRA) preferences common in the business cycle literature, the change has only a negligible effect on the model s second moment implications. In fact, for what I argue is an empirically reasonable \"ballpark\" calibration of the FORA preferences, the moment implications are essentially identical to those under EU/CRRA, while the welfare cost of aggregate fluctuations in the model is substantially larger.

Suggested Citation

  • Jim Dolmas, 2007. "Real business cycle dynamics under first-order risk aversion," Working Papers 0704, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:0704
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    Cited by:

    1. Ralph S.J. Koijen & Jules H. van Binsbergen & Juan F. Rubio-Ramírez & Jesus Fernandez-Villaverde, 2008. "Likelihood Estimation of DSGE Models with Epstein-Zin Preferences," 2008 Meeting Papers 1099, Society for Economic Dynamics.
    2. Dario Caldara & Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez & Wen Yao, 2009. "Computing DSGE Models with Recursive Preferences," PIER Working Paper Archive 09-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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    Keywords

    Business cycles;

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