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Safety Traps

Author

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  • Benhima, Kenza
  • Massenot, Baptiste

Abstract

Fear of risk provides a rationale for protracted economic downturns. We develop a real business cycle model where investors with decreasing relative risk aversion choose between a risky and a safe technology that exhibit decreasing returns. Because of a feedback effect from the interest rate to risk aversion, two equilibria can emerge: a standard equilibrium and a ``safe'' one in which investors invest in safer assets. We refer to the dynamics of this second equilibrium as a safety trap because it is self-reinforcing as investors accumulate more wealth and show it to be consistent with Japan's lost decade.

Suggested Citation

  • Benhima, Kenza & Massenot, Baptiste, 2013. "Safety Traps," CEPR Discussion Papers 9636, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9636
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    References listed on IDEAS

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    22. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, pages 149-166.
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    1. repec:sgh:gosnar:y:2016:i:6:p:5-22 is not listed on IDEAS
    2. Kenza Benhima & Baptiste Massenot, 2013. "Safety Traps," American Economic Journal: Macroeconomics, American Economic Association, pages 68-106.

    More about this item

    Keywords

    Business cycles; Japan's lost decade; Risk aversion;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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