Measuring the Effects of Risk Aversion Change on Households’ Performance Using Endogenous Discount Factor Model

Abstract

Given the importance of household time preference and risk aversion as macroeconomic variables that play a role in capital accumulation, growth and economic development and are one of the main roots of interest rates, they play an important role in the equilibrium of the economy and society. On the other hand, economic development, improvement of living standards and prosperity of society have always been among the most important issues faced by the planners of a country, and one of the conditions is to achieve higher economic growth in society. The existence of time preference and discount factor, which show the degree of patience of society in terms of consumption and the value of current consumption over future consumption. This article attempts to investigate the role of risk aversion in the presence of an endogenous discount factor on macroeconomic variables and household performance in the context of a DSGE model. The study of household data of the Iranian economy for the period 1998 to 2020 shows that given the fact that people in the community are sensitive to the decision to increase their expected desirability at a certain level of risk and care about it, increasing the risk aversion coefficient in the desirability function of the household leads to fluctuations and changes in the optimal path of the economic variables of the household and finally the change in allocations is adjusted to attribute the maximum expected return to its portfolio. Indeed, increasing risk aversion leads households to allocate their resources optimally between periods (present and future) by paying more attention to their time.