Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/311687 
Year of Publication: 
2025
Series/Report no.: 
ISER Discussion Paper No. 1272
Publisher: 
Osaka University, Institute of Social and Economic Research (ISER), Osaka
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.
Subjects: 
endogenous business fluctuations
relative risk aversion
dynamic general equilibrium
instability
JEL: 
E1
E2
E3
Document Type: 
Working Paper

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