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We examine a decision theoretic model of portfolio
choice in which investors face income risk that is not directly
insurable. We consider the sensitivity of savings and portfolio
allocation rules to different assumptions about utility, the
stochastic process for income and asset returns, and market frictions
(transactions costs and short-sale constraints). Under CRRA time
additive utility, habit persistence utility, and for a broad range of
parameterizations, the model predicts that investors wish to borrow
and invest all of their savings in stocks. This qualitative
implication is robust to the introduction of significant transaction
costs in the stock market, and contrasts sharply with portfolio
allocation models in which there is no labor income.
This paper diagnoses the symptoms of the Dutch disease in a two-sector
stochastic endogenous growth model. A productive, low-skill-intensive
primary sector causes the currency to appreciate in real terms, thus
hampering the development of a high-skill-intensive secondary sector and
thereby reducing growth. Moreover, the volatility of the primary sector
generates real-exchange-rate uncertainty and may thus reduce investment and
learning in the secondary sector and hence also growth. Cross-sectional and
panel regressions based on data for 125 countries in the period 1960–1992
confirm a statistically significant inverse relationship between the size of
the primary sector and economic growth, but not between the volatility of
the real exchange rate and growth.
Empirical evidence shows that entrepreneurs hold a large fraction of wealth, have higher saving rates than workers, and face substantial uninsurable entrepreneurial and investment risks. This paper constructs a heterogeneous-agent general equilibrium model with uninsurable entrepreneurial risk and capital-market imperfections to explore the implications of uninsurable entrepreneurial risk for wealth distribution and aggregate activity in an incomplete market economy. It is shown that entrepreneurial risk can substantially affect both the wealth distribution and the macroeconomy.
I develop an algorithm for solving dynamic models in which individual
decision rules and the cross-sectional distribution of agents'
characteristics influence each other. To illustrate the algorithm, I
solve an endowment economy with incomplete markets, a continuum of
heterogeneous agents, and aggregate shocks. The key innovation of the
algorithm is to parameterize the (cross-sectional) density with a
flexible functional form, which makes it possible to avoid simulation
techniques. The paper shows how to check for accuracy and establishes
links between the properties of the incomplete-markets economy and
the aspects involved in obtaining a numerical solution.
Previous studies investigating threshold behavior in real-exchange-rate and price difference data have used rather ad hoc statistical methods and have focused on univariate threshold models for relative prices. We utilize a general multivariate threshold cointegration model and develop a systematic testing and estimation strategy for this model, building on the work of others. Using Monte Carlo experiments, we systematically compare the use of univariate and multivariate techniques for testing threshold cointegration, estimating various threshold models, and testing specifications. We apply our methodology to a large set of U.S. disaggregated CPI data. We find evidence of threshold cointegration mainly for tradable goods. However, the type of threshold nonlinearity that we find generally does not support the transaction-cost view of commodity arbitrage.
This book is an ambitious effort by three well-known and
well-respected scholars to fill an acknowledged void in the
literature—a text covering the burgeoning
field of empirical finance.
As the authors note in the preface, there are several excellent books
covering financial theory at a level suitable for a Ph.D. class or as
a reference for academics and practitioners, but there is little or
nothing similar that covers econometric methods and applications.
Perhaps the closest existing text is the recent addition to the Wiley
Series in Financial and Quantitative Analysis.
written by Cuthbertson
(1996). The major difference between the books is that Cuthbertson
focuses exclusively on asset pricing in the stock, bond, and foreign
exchange markets, whereas Campbell, Lo, and MacKinlay (henceforth CLM)
consider empirical applications throughout the field of finance,
including corporate finance, derivatives markets, and market
microstructure. The level of anticipation preceding publication
can be partly measured by the fact that at least three reviews
(including this one) have appeared since the book arrived. Moreover,
in their reviews, both Harvey (1998) and Tiso (1998) comment on the
need for such a text, a sentiment that has been echoed by numerous
This paper analyzes the role of money and monetary policy as well as the forecasting performance of New Keynesian dynamic stochastic general equilibrium models with and without separability between consumption and money. The study is conducted over three crisis periods in the Eurozone, namely, the ERM crisis, the dot-com crisis, and the global financial crisis (GFC). The results of successive Bayesian estimations demonstrate that during these crises, the nonseparable model generally provides better out-of-sample output forecasts than the baseline model. We also demonstrate that money shocks have some impact on output variations during crises, especially in the case of the GFC. Furthermore, the response of output to a money shock is more persistent during the GFC than during the other crises. The impact of monetary policy also changes during crises. Insofar as the GFC is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter.
In this paper we investigate whether a standard life-cycle model in which households purchase nondurable consumption and consumer durables and face idiosyncratic income and mortality risk as well as endogenous borrowing constraints can account for two key patterns of consumption and asset holdings over the life cycle. First, consumption expenditures on both durable and nondurable goods are hump-shaped. Second, young households keep very few liquid assets and hold most of their wealth in consumer durables. In our model durables play a dual role: they both provide consumption services and act as collateral for loans. A plausibly parameterized version of the model predicts that the interaction of consumer durables and endogenous borrowing constraints induces durables accumulation early in life and higher consumption of nondurables and accumulation of financial assets later in the life cycle, of an order of magnitude consistent with observed data.
This study investigates the rates of technological progress, total output growth, and per capita output growth when population growth is negative using a semiendogenous research and development (R&D) growth model. The analysis shows that within a finite time horizon, the employment share of the final goods sector reaches unity and that of the R&D sector reaches zero; accordingly, the rate of technological progress tends toward zero. In this case, the growth rate of per capita output asymptotically approaches a positive value.