Bounding the CRRA Utility Functions
AbstractThe constant-relative-risk-aversion (CRRA) utility function is now predominantly used in quantitative macroeconomic studies. This function, however, is not bounded and thus creates problems when applying the standard tools of dynamic programming. This paper devises a method for "bounding" the CRRA utility functions. The proposed method is based on a set of conditions that can establish boundedness among a broad class of utility functions. These results are then used to construct a bounded utility function that is identical to a CRRA utility function except when consumption is very small or very large. It is shown that the constructed utility function also satisfies the Inada condition and is consistent with balanced growth.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 13260.
Date of creation: 07 Feb 2009
Date of revision:
Utility Function; Elasticity of Marginal Utility; Boundedness;
Other versions of this item:
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-14 (All new papers)
- NEP-DGE-2009-02-14 (Dynamic General Equilibrium)
- NEP-UPT-2009-02-14 (Utility Models & Prospect Theory)
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