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Author: Michael Mussa
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 62
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Book Description
This paper examines five examples of rational expectations models with a continuum of convergent solutions and demonstrates serious difficulties in the economic interpretation of these solutions. The five examples are (1) a model of optimal capital accumulation with a negative rate of time preference, (2) Taylor's (1977) linear rational expectations model of macroeconomic equilibrium; (3) Calvo's (1984) model of contract setting and price dynamics; (4) Obstfeld's (1984) equilibrium model of monetary dynamics with individual optimizing agents; and (5) Calvo's (1978) life-cycle model of savings and asset valuation. In every case, when these models yield a continuum of convergent infinite horizon solutions, these solutions fail to exhibit economically appropriate, forward looking dependence of the endogenous variables on the paths of the exogenous forcing variab1es--a difficulty that does not arise under the circumstances where these models yield unique convergent infinite horizon solutions. Further, the three models that have natural finite horizon versions, either lack finite horizon solutions or have solutions that do not converge to any of the infinite horizon solutions. Again, this difficulty arises only under the circumstances where these models have a continuum of infinite horizon solutions.
Author: Michael Mussa
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 62
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Book Description
This paper examines five examples of rational expectations models with a continuum of convergent solutions and demonstrates serious difficulties in the economic interpretation of these solutions. The five examples are (1) a model of optimal capital accumulation with a negative rate of time preference, (2) Taylor's (1977) linear rational expectations model of macroeconomic equilibrium; (3) Calvo's (1984) model of contract setting and price dynamics; (4) Obstfeld's (1984) equilibrium model of monetary dynamics with individual optimizing agents; and (5) Calvo's (1978) life-cycle model of savings and asset valuation. In every case, when these models yield a continuum of convergent infinite horizon solutions, these solutions fail to exhibit economically appropriate, forward looking dependence of the endogenous variables on the paths of the exogenous forcing variab1es--a difficulty that does not arise under the circumstances where these models yield unique convergent infinite horizon solutions. Further, the three models that have natural finite horizon versions, either lack finite horizon solutions or have solutions that do not converge to any of the infinite horizon solutions. Again, this difficulty arises only under the circumstances where these models have a continuum of infinite horizon solutions.
Author: United States. Congress. Senate. Committee on Banking, Housing, and Urban Affairs
Publisher:
ISBN:
Category :
Languages : en
Pages : 138
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Book Description
Author: Peter Howitt
Publisher: University of Michigan Press
ISBN: 9780472102105
Category : Business & Economics
Languages : en
Pages : 272
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Book Description
This volume brings together Howitt's key contributions to the development of macroeconomic theory
Author: Maurice Obstfeld
Publisher:
ISBN:
Category : Foreign exchange
Languages : en
Pages : 24
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Book Description
It has recently been observed that when equations of motion for state variables are nonautonomous, optimal control problems involving Uzawa's endogenous rate of time preference cannot be solved using the change-of-variables method common in the literature. Instead, the problem must be solved by explicitly adding an additional state variable that measures the motion of time preference over time. This note reassesses earlier work of my own on exchange rate dynamics, which was based on a change-of- variables solution procedure. When the correct two-state-variable solution procedure is used, the model's qualitative predictions are unchanged. In addition, the analysis yields an intuitive interpretation of the extra co-state variable that arises in solving the individual's maximization problem.
Author: National Bureau of Economic Research
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 128
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Book Description
Author: Douglas Holtz-Eakin
Publisher:
ISBN:
Category : Finance, Public
Languages : en
Pages : 58
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Book Description
Author: John Y. Campbell
Publisher:
ISBN:
Category : Monte Carlo method
Languages : en
Pages : 28
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Book Description
Small sample properties of parameter estimates and test statistics in the vector autoregressive dividend ratio model (Campbell and Shiller [1988 a,b]) are derived by stochastic simulation. The data generating processes are co integrated vector autoregressive models, estimated subject to restrictions implied by the dividend ratio model, or altered to show a unit root.
Author: Robert J. Shiller
Publisher:
ISBN:
Category : Random walks (Mathematics)
Languages : en
Pages : 28
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Book Description
Power functions of tests of the random walk hypothesis versus stationary first order autoregressive alternatives are tabulated for samples of fixed span but various frequencies of observation.
Author: National Bureau of Economic Research
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 206
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Book Description
Author: Michael Rothschild
Publisher:
ISBN:
Category : Arbitrage
Languages : en
Pages : 38
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Book Description
This article compares two leading models of asset pricing: the capital asset pricing model (CAPM) and the arbitrage pricing theory (APT): I argue that while the APT is compatible with the data available for testing theories of asset pricing, the CAPM is not. In reaching this conclusion emphasis is placed on the distinction between the unconditional (relatively incomplete) information which econometricians must use to estimate asset pricing models and the conditional (complete) information which investors use in making the portfolio decisions which determine asset prices. Empirical work to date suggests that it is unlikely that the APT will produce a simple equation which explains differences in risk premium well with a few parameters. If the CAPM were correct, it would provide such an equation.
