The Macroeconomic Evidence for Prudence
Résumé
We explore the macroeconomic evidence for a “prudent" risk attitude using a Real Business Cycle model. We extend the consumer side of the model with the “expo-power" utility function, which can generate increasing, decreasing, or constant relative prudence depending on its parameters. Using the particle-filter maximum-likelihood method, we estimate the model using US macroeconomic data and find weak decreasing relative prudence. The policy implications of this risk attitude are investigated by examining the implicit “social" discount rate. Although the discount effect is small in percentage-point terms, the valuation differential over a long horizon can be large.
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