Risk aversion in the Eurozone |
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| Institution: | 1. Department of Economics, Vienna University of Economics and Business (WU), Welthandelsplatz 1, Vienna 1020, Austria;2. Austrian Institute of Economic Research (WIFO), Austria;3. International Institute of Applied System Analysis (IIASA), Austria;4. Wittgenstein Centre for Demography and Global Human Capital (WIC), Austria;5. Department of Applied Statistics, Johannes Kepler University Linz (JKU), Austria;6. Research Institute for Economics of Inequality (INEQ), Austria;7. Department of Socioeconomics, Vienna University of Economics and Business (WU), Austria;1. University of Bayreuth and CESifo, Faculty of Law, Business and Economics, Universitätsstr. 30, Bayreuth D-95440, Germany;2. University of Kaiserslautern, Faculty of Business and Economics, Gottlieb-Daimler-Straße, Kaiserslautern D-67663, Germany;1. University of Illinois at Urbana-Champaign and IZA, Urbana, IL, USA;2. Korea Institute of Public Finance, Sicheong-daero, Sejong, South Korea;3. University of Illinois at Chicago and NBER, Chicago, Illinois, USA |
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| Abstract: | We propose a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where a risk aversion shock enters a separable utility function. We analyze five periods from 1971 through 2011, each lasting for 20 years, to follow over time the dynamics of several parameters such as the risk aversion parameter; the Taylor rule coefficients; and the role of the risk aversion shock in output, inflation, interest rate, and real money balances in the Eurozone. Our analysis suggests that risk aversion was a more important component of output and real money balance dynamics between 2006 and 2011 than it was between 1971 and 2006, at least in the short run. |
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| Keywords: | Risk aversion Output Money Eurozone New Keynesian DSGE models Bayesian estimation |
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