Risk aversion as a technology factor in the production function

We incorporate risk aversion into the technology component of the production function. In a traditional theoretic framework, we show that an increase in risk aversion increases unemployment and reduces potential output. Our out-of-sample forecasting experiments suggest that while interest rates impact the economy through the demand-side. However, an interest rate spread (TED) is used as a measure of risk aversion and is shown to impact output through the economy's supply-side.