Constant Absolute Risk Aversion Preferences and Constant Equilibrium Interest Rates



    1. Graduate School of Business, Columbia University, New York City, New York
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    • * I with to thank Michael Adler, Sudipto Bhattacharya, Jean-Pierre Danthine, David Modest, Krishna Ramaswamy, and Larry Selden for their comments. Special thanks go to George Constantinides for his valuable suggestions. I am especially grateful to Jon Ingersoll, the referee who made many constructive comments and criticisms. The editorial comments of Michael Brennan were valuable in improving the paper. Faculty Research Support from Graduate School of Business, Columbia University is acknowledged with thanks. Errors remaining in the paper are my own.


This paper constructs a general equilibrium model with endogenous stochastic production and establishes that the equilibrium interest rate can be constant in a closed production economy when the preferences are represented by constant absolute risk aversion utility functions. The results in this paper and their limitations are compared and contrasted with related contributions in the financial economics literature.