Nonexpected Utility in Macroeconomics

Abstract

This paper introduces, within the context of an infinite horizon optimal consumption problem, a parametric class of Kreps-Porteus nonexpected utility preferences—generalized isoelastic utility—which distinguishes attitudes toward risk from behavior toward intertemporal substitution. Some of the theoretical and empirical implications for macroeconomics of these state- and time-nonseparable preferences are examined.