Intertemporal substitution, risk aversion and ambiguity aversion

Summary. This paper axiomatizes a form of recursive utility on consumption processes that permits a role for ambiguity as well as risk. The model has two prominent special cases: (i) the recursive model of risk preference due to Kreps and Porteus [18]; and (ii) an intertemporal version of multiple-priors utility due to Epstein and Schneider [8]. The generalization presented here permits a three-way separation of intertemporal substitution, risk aversion and ambiguity aversion.Received: 5 August 2003, Revised: 12 March 2004, JEL Classification Numbers: D80, D81, D90.I am grateful to Larry Epstein for his guidance and invaluable advice, and to a referee for helpful comments and suggestions.     

Intertemporal Choice,Saving and Investment,and Interest Rate: Contributions from a Neglected Hayekian Model

Hayek’s ‘Utility analysis and interest’ expounds a graphical model of intertemporal choice that has not received the attention it deserves. This model is important in that it can be used as a basic macroeconomic model and can therefore perform for the Austrian School the role that the Solow model plays for the standard neo-classical paradigm. This article provides an in-depth presentation of the Hayekian model, and then applies the model to key theoretical issues in macroeconomics; namely, the effects upon intertemporal equilibrium and upon the interest rate of a change in time preference, of the implementation of a technical development and of an increase in the supply of labor.     

Intertemporal production and intertemporal substitution in output supply and input demand

This article presents an intertemporal model of production with multiple inputs to investigate substitution opportunities facing firms over time. The firm’s intertemporal profit maximization problem is characterized with the familiar cost function, and various intertemporal substitution elasticities are delineated for output supply and input demand. The absence of intertemporal substitution in production can imply production smoothing, and allowance for intertemporal substitution in labour demand reinforces the prediction of the real business cycle model. For aggregate US manufacturing, we find substantial substitution in output supply and labour demand over time due to intertemporal changes in output price and wage rates.     

Intertemporal substitution and the liquidity effect in a sticky price model

The liquidity effect, defined as a decrease in nominal interest rates in response to a monetary expansion, is a major stylized fact of the business cycle. This paper first confirms that, with separable preferences, a low degree of intertemporal substitution in consumption is a necessary condition for the existence of the liquidity effect. In contrast to this result, in a model with non-separable preferences and capital accumulation it takes an implausibly high elasticity of intertemporal substitution to produce a liquidity effect. The robustness of these results to alternative degrees of nominal rigidities, capital adjustment costs and stochastic monetary processes is also analysed. We conclude that price stickiness, by itself, does not guarantee the existence of a liquidity effect.     

Impact of oil booms and busts on human capital investment in the USA

This paper uses Census IPUMS data from 1970 to 2000 and ACS data from 2010 to estimate the impact of oil booms and busts on wages and human capital formation in the USA. The paper finds that the oil boom between 1970 and 1980 was associated with a slower growth in the relative demand for skills in the oil and gas sector and regions where the sector had a large presence. The oil boom led to a sharp rise in real wages and a modest decline in college wage premium in oil-rich regions in the USA. Using a synthetic cohort approach, the paper finds that relative to cohorts who went to high school in the pre-oil boom period, the cohort reaching high school age during the oil boom was about 1–2% points less likely to have a college degree by 2000 and 2010.     

Intertemporal substitution and random changes in preferences: Time series evidence for four countries

This study attempts to estimate a model of intertemporal substitution taking into account serially correlated changes in preferences with quarterly aggregate time series data for the USA, Great Britain, West Germany and Switzerland. Thereby, necessary optimality conditions representing the trade-offs between present and future consumption, present and future leisure, as well as present consumption and leisure are estimated using the forward-filtered estimator of Hayashi and Sims. The estimation results obtained for the dynamic optimality conditions reject the model formulated. The analysis of the static optimality conditions gave more satisfactory results with respect to intertemporal substitution elasticity in consumption.     

Hayekian expectations: Theory and empirical applications

We show that the orderliness of market processes and outcomes, and hence the realization and coordination of individuals' plans, are dependent on the social environment in which individuals function. In specific, when atomicity and stable (social) rules are compromised in the case of Big Players, markets are less orderly despite the fact that individuals are behaving rationally.—The paper provides an account of individual rationality by generating a theory of expectations based on Hayek's cognitive theory. Hayekian expectations are coherent, competitive, and endogenous. This suggests that expectational analysis must take account of the context of constraint—the “environment” or what we call “filtering conditions”—within which individuals function and to which they must adapt. The paper provides a theoretical analysis of expectations at the individual level and shows that the particular behaviors stemming from those expectations require a specification of the rules governing social and market activities. We thank Karen Palasek, Don Boudreaux, Joe Cobb, Peter Boettke, and the participants of the Hayek 1993 Memorial Symposium in Freiburg, Germany for helpful suggestions and comments on earlier drafts. All remaining errors are ours.     

Structural booms

The paper proposes a new interpretation of long swings in economic activity. Instead of deviations from a trend growth path explained by misperceptions, long swings are seen as detours in the path itself provoked by rare and deep changes in expectations of future productivity. And such changes are approximately captured by swings in stock markets. In a large sample of OECD countries, the paper finds long-term historical relationships between share prices and employment or the rate of unemployment. The results suggest that the recent strength of a nation's stock markets and the responsiveness of employment are related to its institutions. In particular, corporatist institutions are likely to impede or obstruct entrepreneurs from taking advantage of expected productivity improvements. In contrast, a well-developed stock market – in addition to a young, well-educated labour force – may help both in the creation of profit opportunities as well as in enabling and emboldening firms to increase hiring.
— Edmund Phelps and Gylfi Zoega     

The Freiburg school and the Hayekian challenge

At first sight and in terms of explicit references, the relationship between Hayek and the early Freiburg School seems to have been one of mutually benign neglect. It took several decades before the “Hayekian challenge” was fully understood in Freiburg; in a way one could even argue that the challenge arrived in Freiburg only with Hayek himself in 1962. This delay can mostly be explained by different foci of attention. Hayek’s evolutionary economics and his classical-liberal social philosophy centers around the problem of private, dispersed knowledge. The (early) Freiburg School’s economics and its ordo-liberal social philosophy centers around the problem of private, concentrated power. This difference of perspective has consequences and can partly be explained by the different intellectual sources the proponents were drawing upon, and the different political struggles they were engaged in.     

Political booms and currency crises

This paper shows evidence that political booms, defined as the rise in governments’ popularity, are associated with a higher likelihood of currency crises. The reasoning behind this finding is that prudent economic policies to address underlying weaknesses in the economy may be political costly for incumbent governments in the short-term. Hence, popularity-concerned governments may not have enough incentives to take such corrective actions in a timely manner. This approach, in turn, can deteriorate economic fundamentals and increase related risks in the economy which can eventually lead to crises. This paper sheds light on this phenomenon in the case of currency crises, suggesting that currency crises can be viewed as “political booms gone bust” events. Moreover, it finds that higher international reserves, higher exports, and a higher degree of financial openness alleviate the effect of political booms on currency crises.     

Housing booms and media coverage

This article analyses news media coverage of the housing market. Building on theories of media influence where word of mouth is the final mechanism of opinion change but media initiate discourse, I examine the relationship between news media and the recent UK house price boom. Over 30 000 articles on the UK housing market from the period 1993 to 2008 are analysed, and it is found that media Granger-caused real house price changes, suggesting the media may have influenced opinions on the housing market. However, media sentiment on the housing market did not change with the secular increase in house prices in the 2000s, suggesting that the media did not contribute to the UK’s housing boom and may have helped constrain it.     

Soviet postwar industrial growth and capital labour substitution: An empirical note

This note tests an aggregate transcendental production function for Soviet industry. The estimated equation shows the elasticity of substitution in aggregate Soviet industry in less than unity and it is decreasing quite rapidly.     

Elasticity of substitution and productivity, capital and skill intensity differences across firms

This paper, instrumented with six theorems, shows that differences between firms in labor productivity, capital intensity and relative demand for skilled labor can be explained by differences in the substitution parameters between capital, skilled and unskilled labor in the presence of skill biased technical change.     

Oil booms and inequality in Iran

We study the response of income inequality to positive per capita oil and gas revenue shocks in Iran. Using historical data from 1973 to 2016 and vector autoregression (VAR) as well as vector error correction (VECM) model‐based impulse‐response functions, we find a positive and statistically significant response of income inequality to oil booms. We also explore possible channels through which oil booms may increase inequality, including private sector credit growth, construction investment, international trade (imports) and real economic output. We find that following an oil boom, higher imports, private sector credit growth, and real economic output can explain the increased income gap to a certain degree in Iran's oil‐based economy. Our analysis can help policymakers evaluate and accommodate the possible positive or negative effects of inequality in Iran resulting from the 2016 lifting of the embargo against the country.     

Human capital and the intertemporal substitution for leisure: empirical evidence for Spain

Portuguese Economic Journal - In this paper we provide the first estimate of the intertemporal substitution for leisure in Spain, accounting for the impact of human capital accumulation. This would...     

Psychology,social evolution and liberalism: a Hayekian trinity

Abstract

The work of Friedrich Hayek describes an extensive political economy, with explicit consideration of the psychological limits to human understanding, the market as a mechanism of information gathering and social coordination, and the relationship between market processes and the free society, where moral and political issues are relevant within a framework of continuous adaptation. Although the survival characteristics of social institutions largely defy rational enquiry, political liberalism secures the diversity that is necessary for evolutionary social adaptation.     

Hayekian evolution reconsidered: a reply to Hodgson

This is a reply to Geoffrey Hodgson's Comment on an earlierpaper by Caldwell (Hodgson on Hayek: a critique). Though certainareas of agreement are noted, differences in interpretationconcerning Hayek's views on the Malthus–Darwin relationship,on cultural evolution, on the extent to which Hayek may be characterisedas an ontogenist, and on methodological individualism remain.     

Intertemporal benefit functions

A widely used measure of benefit is the integral of ordinary uncompensated demand functions. We extend these benefit functions to include intertemporal price or demand elasticities and show the restrictions which this imposes on the demand functions. Examples are given for particular functional forms.