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  3. American Economic Journal: Macroeconomics
  4. October 2013
  5. Safety Traps

Safety Traps

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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.

Citation

Benhima, Kenza, and Baptiste Massenot. 2013. "Safety Traps." American Economic Journal: Macroeconomics, 5 (4): 68-106. DOI: 10.1257/mac.5.4.68

Additional Materials

JEL Classification

  • 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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