Part Three
General Equilibrium

Suppose each participant in an economy maximizes the expected isoelastic utility of end-of-period wealth. When the technology risk is independent of the production risk, the equilibrium value of the short rate is given by

equation

where A(t) is the production process, Y(t) is the state price density process, and

equation

is the average coefficient of risk tolerance as of the end of the period. If c03-math-001, then

equation

(page 108)

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