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Volatility and Growth with Recursive Preferences

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Barbara Annicchiarico & Alessandra Pelloni & Fabrizio Valenti, 2016. "Volatility and Growth with Recursive Preferences," Working Paper series 16-05, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:16-05
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • 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
    • O49 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Other

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