4 Unfortunately, the price that markets attach to that quantity – agents’ risk aversion – is not directly observable or easily approximated by observable variables. I shall come back to this point later. Why concentrate on consumption volatility as a proxy of real macroeconomic uncertainty?
Because this is the privileged statistic of macroeconomic conditions in consumption-based asset pricing models, the standard tool of financial economics. In these models, it is the marginal utility of consumption and its variance that should help price real payoffs in different states of nature. 5 Why focus on inflation as an indicator of nominal uncertainty?