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Risk aversion as a technology factor in the production function

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  • David Black
  • Michael Dowd

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.

Suggested Citation

  • David Black & Michael Dowd, 2011. "Risk aversion as a technology factor in the production function," Applied Financial Economics, Taylor & Francis Journals, vol. 21(18), pages 1345-1354.
  • Handle: RePEc:taf:apfiec:v:21:y:2011:i:18:p:1345-1354
    DOI: 10.1080/09603107.2011.572846
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    References listed on IDEAS

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    1. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters,in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
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    Cited by:

    1. Benchimol, Jonathan, 2014. "Risk aversion in the Eurozone," Research in Economics, Elsevier, vol. 68(1), pages 39-56.

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