Risk-Sensitive Real Business Cycles

Posted: 23 Sep 2001

See all articles by Thomas D. Tallarini

Thomas D. Tallarini

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Abstract

This paper considers the business cycle, asset pricing, and welfare effects of increased risk aversion, while holding intertemporal substitution preferences constant. I show that increasing risk aversion does not significantly affect the relative variabilities and co-movements of aggregate quantity variables. At the same time, it dramatically improves the model's asset market predictions. The welfare costs of business cycles increase when preference parameters are chosen to match financial data.

Keyword(s): Business cycles; Asset pricing; Non-expected utility

JEL Classification: E32; G12; D81

Suggested Citation

Tallarini, Thomas D., Risk-Sensitive Real Business Cycles. Journal of Monetary Economics, Vol. 45, No. 3, June 1, 2000. Available at SSRN: https://ssrn.com/abstract=252333

Thomas D. Tallarini (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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