Optimal savings distortions with recursive preferences

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Publication Details

Output type: Journal article

Author list: Farhi E, Werning I

Publisher: Elsevier

Publication year: 2008

Journal: Journal of Monetary Economics (0304-3932)

Volume number: 55

Issue number: 1

Start page: 21

End page: 42

Number of pages: 22

ISSN: 0304-3932

eISSN: 1873-1295

Languages: English-Great Britain (EN-GB)

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Open access status: green

Full text URL: https://dspace.mit.edu/bitstream/1721.1/63989/1/optimalsavingsdi00farh.pdf

Abstract

This paper derives an intertemporal optimality condition for economies with private information, focusing on a class of recursive preferences. By comparing it to the situation where agents can freely save in a risk-free asset market, we derive the optimal savings distortions necessary for constrained optimality. Our recursive preferences are homogeneous and satisfy a balanced-growth condition, while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution. We perform some quantitative exercises that disentangle the respective roles played by these two parameters in optimal distortions and the implied welfare gains. (C) 2008 Elsevier B.V. All rights reserved.

Keywords

optimal savings

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