A Note on Uncertainty and Growth with Recursive Preferences

19 Pages Posted: 31 Jan 2023

See all articles by Barbara Annicchiarico

Barbara Annicchiarico

Roma Tre University - Department of Law

Alessandra Pelloni

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

Fabrizio Valenti

KSAR Consulting Group

Date Written: January 29, 2023

Abstract

There is cross-country and time-series evidence that volatility is associated with slower growth. However, matching this evidence has proven to be a challenge for growth models without market failures, as they tend to predict the opposite for values of risk aversion greater than unity. This note studies the relationship between uncertainty and long-term growth in a complete markets economy with Epstein-Zin preferences and where the accumulation of human and physical capital drives unbounded growth. With these preferences, risk aversion and intertemporal elasticity of substitution are allowed to be independent of one another. When both are relatively high, the relationship between volatility and growth turns out to be negative.

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

JEL Classification: D92, E22, E32, O49

Suggested Citation

Annicchiarico, Barbara and Pelloni, Alessandra and Valenti, Fabrizio, A Note on Uncertainty and Growth with Recursive Preferences (January 29, 2023). Available at SSRN: https://ssrn.com/abstract=4341721 or http://dx.doi.org/10.2139/ssrn.4341721

Barbara Annicchiarico (Contact Author)

Roma Tre University - Department of Law ( email )

Via Ostiense 163
Roma, RM 00154
Italy

Alessandra Pelloni

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

Rome
Italy

Fabrizio Valenti

KSAR Consulting Group ( email )

440 ave Laurier Ave W
Suite 200
Ottawa, ON K1R7X6
Canada

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