How is Inter temporal rate of substitution related to *increased* volatility of GDP growth. I know that it is negatively related to the GDP growth, but not sure how it is related to *volatility* of the GDP growth. Would much appreciate it, if someone can explain this in plain English.
Anyone?
If there’s less certainty about having more money tomorrow, people will spend more today.
so if people are consuming more today, why do we say that with greater volatility, the highter the risk free rate?
I don’t know that we do.
What makes you think so?
in the book, it says that GDP growth is positively correlated with real interest rate as well as with the volatility of GDP growth.
Thats what throwing me off