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Volatility and Growth with Recursive Preferences

Listed author(s):
  • Barbara Annicchiarico

    ()

    (Department of Economics and Finance, University of Rome Tor Vergata, Italy)

  • Alessandra Pelloni

    ()

    (Department of Economics and Finance, University of Rome Tor Vergata, Italy; The Rimini Centre for Economic Analysis, Italy)

  • Fabrizio Valenti

    ()

    (Department of Economics and Finance, University of Rome Tor Vergata, Italy)

This paper studies the relationship between volatility and long-run growth in a complete market economy with human capital accumulation and Epstein-Zin preferences. There is both cross-country and time-series evidence that volatility is associated with lower growth. Matching this evidence has proved a challenge for growth models with no market failures as they tend to predict the opposite for values of risk aversion higher than unity. However in our model, risk aversion and intertemporal elasticity of substitution are allowed to move independently of each other, and when both are relatively high or relatively low, the relationship between volatility and growth is negative. Indeed this is the case for parametrizations of preferences in line with the literature.

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File URL: http://www.rcfea.org/RePEc/pdf/wp16-05.pdf
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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 16-05.

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Date of creation: Apr 2016
Handle: RePEc:rim:rimwps:16-05
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