I connect interest rates, risk premia and welfare costs of long-run consumption uncertainty in a setting with Epstein and Zin [12] preferences. I find that long-run uncertainty can create significant welfare costs even when risk aversion is moderate and the short-run consumption volatility low. I document that the risk-free rate puzzle is a key determinant of the welfare costs.
Growth risks, asset prices, and welfare
Croce, Mariano Massimiliano
2021
Abstract
I connect interest rates, risk premia and welfare costs of long-run consumption uncertainty in a setting with Epstein and Zin [12] preferences. I find that long-run uncertainty can create significant welfare costs even when risk aversion is moderate and the short-run consumption volatility low. I document that the risk-free rate puzzle is a key determinant of the welfare costs.
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