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Safety Traps

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  • Kenza Benhima
  • Baptiste Massenot

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

  • Kenza Benhima & Baptiste Massenot, 2012. "Safety Traps," Cahiers de Recherches Economiques du Département d'économie 12.04, Université de Lausanne, Faculté des HEC, Département d’économie.
  • Handle: RePEc:lau:crdeep:12.04
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Is a lost decade ahead?
      by Economic Logician in Economic Logic on 2012-07-13 18:56:00
    2. [経済]安全の罠
      by himaginary in himaginaryの日記 on 2012-07-13 12:00:00

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    Cited by:

    1. Andrzej Wojtyna, 2016. "Kontrowersje teoretyczne wokół koncepcji pułapki średniego poziomu rozwoju," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 6, pages 5-22.
    2. Kenza Benhima & Baptiste Massenot, 2013. "Safety Traps," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 68-106, October.

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    More about this item

    Keywords

    decreasing relative risk aversion; reference consumption; business cycles; Japan's lost decade;
    All these keywords.

    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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