Relationship between risk attitude and economic recovery in optimal growth theory
Policy makers often resort to Keynesian fiscal stimulus to try to stabilize the economy after a major economic downturn. This is nearly always financed with deficit spending and thus debt (under the rubric of quantitative easing11Some note that “quantitative easing” is a modern euphemism formerly called “monetizing the debt.”) which invariably leads to huge budget deficit problems that tend to weaken investor and consumer confidence. Many economists agree it is better to let the economy grow out of the downturn than to finance further deficit spending through increased taxation or by printing money. Economic growth increases employment and generates government revenues to help balance the budget. But policies promoting economic growth often neglect the attitudes of consumers and investors towards risks. Risk-attitude is especially relevant if the shock originates from the financial sector, causing uncertainty and distrust. This paper examines the effect of risk aversion on growth recovery after an economic shock. We find that within the framework of optimal growth theory, risk-attitude determines the strength of the recovery path. We also find that risk-attitude can undermine the effectiveness of low interest rate policies. This highlights the importance of having policies geared towards restoring a stable risk-attitude in the economy. We feel results can best be achieved by resorting more to market mechanisms and less to government intervention. Market transparency and market discipline should be promoted to add certainty and trust so that people can properly form their risk-attitude.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Verbrugge, Randal, 2000. "Risk aversion, learning spillovers, and path-dependent economic growth," Economics Letters, Elsevier, vol. 68(2), pages 197-202, August.
- Shahrokhi, Manuchehr, 2011. "The Global Financial Crises of 2007–2010 and the future of capitalism," Global Finance Journal, Elsevier, vol. 22(3), pages 193-210.
- Kydland, Finn E & Prescott, Edward C, 1982.
"Time to Build and Aggregate Fluctuations,"
Econometric Society, vol. 50(6), pages 1345-70, November.
- Finn E. Kydland & Edward C. Prescott, 1982. "Executable program for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4, Quantitative Macroeconomics & Real Business Cycles.
- Finn E. Kydland & Edward C. Prescott, 1982. "Web interface for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4a, Quantitative Macroeconomics & Real Business Cycles.
- Enrico Saltari & Davide Ticchi, 2002.
"Risk aversion, intertemporal substitution, and the aggregate investment-uncertainty relationship,"
69, University of Rome La Sapienza, Department of Public Economics.
- Saltari, Enrico & Ticchi, Davide, 2007. "Risk aversion, intertemporal substitution, and the aggregate investment-uncertainty relationship," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 622-648, April.
- Mitra, Tapan & Roy, Santanu, 2012.
"Sustained positive consumption in a model of stochastic growth: The role of risk aversion,"
Journal of Economic Theory,
Elsevier, vol. 147(2), pages 850-880.
- Mitra, Tapan & Roy, Santanu, 2010. "Sustained Positive Consumption in a Model of Stochastic Growth: The Role of Risk Aversion," Working Papers 10-03, Cornell University, Center for Analytic Economics.
- Feicht, Robert & Stummer, Wolfgang, 2010. "Complete closed-form solution to a stochastic growth model and corresponding speed of economic recovery," FAU Discussion Papers in Economics 05/2010, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
- Robert Feicht & Wolfgang Stummer, 2010. "Complete Closed-form Solution to a Stochastic Growth Model and Corresponding Speed of Economic Recovery preliminary," DEGIT Conference Papers c015_041, DEGIT, Dynamics, Economic Growth, and International Trade.
- Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
When requesting a correction, please mention this item's handle: RePEc:eee:glofin:v:23:y:2012:i:3:p:141-150. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.