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“Risk appetite and economic growth”
Abstract: We investigate the impact of risk appetite on economic growth, using a panel that spans up to two centuries and 74 countries. We propose a new measure of risk appetite, duration of low risk, where risk appetite increases the longer a country experiences a low volatility environment. Risk appetite positively affects economic growth up to the next year, followed by a reversal, where the impact of global risk appetite on growth is stronger than local risk appetite. Such effects are particularly stronger when the economy is in a high credit state, for emerging economies, and for the post-1970s when globalization increases significantly. Finally, we identify the impact of risk appetite on capital flows as one possible mechanism of why it affects growth.
Facultad de Ciencias Económicas y Administrativas UC
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