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Volatility and Growth with Recursive Preferences

23 Pages Posted: 24 Jun 2016  

Barbara Annicchiarico

University of Rome, Tor Vergata - Department of Economics and Finance

Alessandra Pelloni

University of Rome II, Department of Economics

Fabrizio Valenti

University of Rome, Tor Vergata - Department of Economics and Finance

Date Written: May 2016

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.

Keywords: Growth and Uncertainty, Epstein-Zin Preferences, Intertemporal Elasticity of Sub- stitution, Risk Aversion

JEL Classification: D92,E22,E32,O49

Suggested Citation

Annicchiarico, Barbara and Pelloni, Alessandra and Valenti, Fabrizio, Volatility and Growth with Recursive Preferences (May 2016). CEIS Working Paper No. 387. Available at SSRN: https://ssrn.com/abstract=2800147

Barbara Annicchiarico (Contact Author)

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

Rome, I-00133
Italy

Alessandra Pelloni

University of Rome II, Department of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy
390672595908 (Phone)

Fabrizio Valenti

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

Rome
Italy

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