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Relative Risk Aversion and Business Fluctuations

Author

Listed:
  • Ken-ichi Hashimoto

    (Kobe University)

  • Ryonghun Im

    (Kwansei Gakuin University)

  • Takuma Kunieda

    (Kwansei Gakuin University)

  • Akihisa Shibata

    (Kyoto University)

Abstract

By applying a simple dynamic general equilibrium model without exogenous shocks inhabited by infinitely lived capitalists and workers, we show that a higher degree of relative risk aversion can destabilize an economy. In traditional real business cycle (RBC) theory, a higher degree of relative risk aversion dampens the amplitude of the consumption fluctuations caused by exogenous shocks through consumption smoothing. However, a higher degree of relative risk aversion combined with a high degree of elasticity of the marginal product of capital can also lead to the emergence of a nonlinear mechanism that causes endogenous business fluctuations. The nontrivial steady state loses stability due to the higher degree of relative risk aversion; thus, endogenous business fluctuations can occur. This result suggests that for a deeper understanding of boom-bust cycles, researchers should merge exogenous and endogenous business fluctuations when investigating economies.

Suggested Citation

  • Ken-ichi Hashimoto & Ryonghun Im & Takuma Kunieda & Akihisa Shibata, 2025. "Relative Risk Aversion and Business Fluctuations," KIER Working Papers 1110, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1110
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    Keywords

    Automation; endogenous business fluctuations; relative risk aversion; dynamic general equilibrium; instability.;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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