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American Economic Journal: Macroeconomics: Vol. 5 No. 4 (October 2013)

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Safety Traps

Article Citation

Benhima, Kenza, and Baptiste Massenot. 2013. "Safety Traps." American Economic Journal: Macroeconomics, 5(4): 68-106.

DOI: 10.1257/mac.5.4.68

Abstract

Fear of risk provides a rationale for protracted economic downturns. We develop a real business cycle model where investors with decreasing relative risk aversion choose between a risky and a safe technology that exhibit decreasing returns. Because of a feedback effect from the interest rate to risk aversion, two equilibria can emerge: a standard equilibrium and a "safe" one in which investors invest in safer assets. We refer to the dynamics of this second equilibrium as a safety trap because it is self-reinforcing as investors accumulate more wealth and show it to be consistent with Japan's lost decade.

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Authors

Benhima, Kenza (U Lausanne)
Massenot, Baptiste (U Lausanne)

JEL Classifications

D14: Personal Finance
E13: General Aggregative Models: Neoclassical
E21: Macroeconomics: Consumption; Saving; Wealth
E22: Capital; Investment; Capacity
E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles

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