Growth risks, asset prices, and welfare

I connect interest rates, risk premia and welfare costs of long-run consumption uncertainty in a setting with Epstein and Zin (1989) preferences. I find that long-run uncertainty can create significant welfare costs even when risk aversion is moderate and the short-run consumption volatility low. I document that the risk-free rate puzzle is a key determinant of the welfare costs. (c) 2021 Elsevier B.V. All rights reserved.