Evaluating Risky Consumption Paths: The Role of Intertemporal Substitutability / Maurice Obstfeld.

Format:

Book

Author/Creator:

Obstfeld, Maurice.

Contributor:

National Bureau of Economic Research.

Series:

Technical Working Paper Series (National Bureau of Economic Research) no. t0120.

NBER technical working paper series no. t0120

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Evaluating Risky Consumption Paths

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1995.

Summary:

In dynamic stochastic welfare comparisons, a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption-risk changes. The problem arises in any setting in which uncertainty is propagated over time, notably, but not exclusively, in economies with stochastic consumption trends. Regardless of the preference setup adopted, an increase in risk aversion amplifies the per-period costs of risks. The weights consumers use to cumulate the per-period costs of risks with persistent effects should, however, depend on intertemporal substitutability as well as on risk aversion. Under time-separable expected-utility preferences, an increase in the period utility function's curvature therefore alters the welfare effect of risk for reasons that in part are unrelated to risk aversion.

Notes:

Print version record

January 1995.