Euler equation errors

The standard, representative agent, consumption-based asset pricing theory based on CRRA utility fails to explain the average returns of risky assets. When evaluated on cross-sections of stock returns, the model generates economically large unconditional Euler equation errors. Unlike the equity premium puzzle, these large Euler equation errors cannot be resolved with high values of risk aversion. To explain why the standard model fails, we need to develop alternative models that can rationalize its large pricing errors. We evaluate whether four newer theories at the vanguard of consumption-based asset pricing can explain the large Euler equation errors of the standard consumption-based model. In each case, we find that the alternative theory counterfactually implies that the standard model has negligible Euler equation errors. We show that the models miss on this dimension because they mischaracterize the joint behavior of consumption and asset returns in recessions, when aggregate consumption is falling. By contrast, a simple model in which aggregate consumption growth and stockholder consumption growth are highly correlated most of the time, but have low or negative correlation in severe recessions, produces violations of the standard model's Euler equations and departures from joint lognormality that are remarkably similar to those found in the data.     

A Post-Keynesian Model of Accumulation with a Minskyan Financial Structure

Abstract

Minsky's theory of financial instability is a strong alternative to neoclassical theory. Many Post-Keynesian authors use this analysis in order to elaborate models that give rise to crises or business cycles. Nevertheless, none of them has directly linked growth and financial structure. This article proposes a simple macroeconomic model linking the accumulation of capital and the state of the financial structure as defined by Minsky. The analysis shows how a capitalist economy may become financially fragile, and it suggests that instability is apt to be the rule.     

宏观经济政策是否有效——基于理性预期模型的分析

自《通论》发表以来,关于宏观经济政策是否有效的争论一直贯穿于整个宏观经济学界。因此,从理性预期模型出发,对于宏观经济政策是否有效进行了再分析,通过博弈论思想的引入探究了宏观经济政策能否达到理想效果。在对扩张性宏观经济政策实际效果进行分析时指出了为何会出现“滞涨”,为何近年中国经济能够实现高增长低通胀的问题。     

地方政府竞争、投资冲动和我国宏观经济波动研究

利用国民收入核算公式,采用HP滤波分析方法,得到国民收入恒等式中各变量增长率的波动项,并依此构建了一个计量模型。然后利用各变量在1990-2004年间的分省数据,分析了各省GDP增长率波动的原因。结论表明,在我国的大多数省,投资增长率的波动是引起GDP增长率波动的主要因素。为剔除地域差异的影响,做了分区域的实证分析,其结果依然显示投资波动是各省GDP增长率波动的主要决定因素。进一步的分析表明,地方政府竞争是导致各省投资冲动、进而造成我国宏观经济波动的深层原因。     

A macroeconomic perspective on Knowledge Management

This paper provides a theory of the interactions between knowledge codification, firm-level organization structures, information diffusion and the dynamics of technological competition. At the firm level, we focus on incentives to design Knowledge Management policies based on the codification of soft into hard information. At the aggregate level, we discuss the endogenous nature of knowledge spillover and the implications for macroeconomic growth. The model predicts the existence of a bell shaped relationship between knowledge codification and technological competition.     

The instability principle revisited: an essay in Harrodian dynamics

Abstract

Harrod's contribution to economic dynamics is very often reduced to the dynamic equation whose character is unstable. Growth theory and cycle theory based on Harrod's contributions aimed at reducing this instability. Following Harrod, who was strongly opposed to the ‘knife-edge’ interpretation, we define the warranted rate of growth as a ‘moving equilibrium’ and focus on its interaction with the effective rate of growth. Our simple Harrodian model generates various dynamics from stable path, to growth cycle and corridor of stability.     

Foreign Exchange Accumulation and the Entrapment of Chinese Monetary Power: Towards a Balanced Growth Regime?

This article criticises the notion that China's foreign exchange reserves have strengthened its monetary power. While some scholars have argued that China's international monetary influence has been ‘entrapped’ by the domestic interests of its export sector, a one-sided focus on the export sector fails to identify the significant constraints on its macroeconomic autonomy. This article proposes an extension of the concept of entrapment that draws attention to the key role of state-owned enterprises (SOEs) and their domestic fixed-asset investment in its growth regime: China's external monetary dependency – which is understood as both export dependency and the need to maintain foreign exchange accumulation – has been caused by a disparity between fixed-asset investment and private consumption that reflects a redistribution of income from the household sector to the SOE sector. In particular, I expose the SOE sector's rising interests in foreign exchange accumulation by uncovering a mutually reinforcing dynamic between China's external monetary dependence and the financial repression of its banking system. By entrenching an investment-led growth regime that provides key benefits the SOE sector, this dynamic is found to have seriously constrained the macroeconomic policy autonomy of Chinese authorities to rebalance growth away from investments and exports towards private consumption.     

Estimating Euler equations

In this paper we consider conditions under which the estimation of a log-linearized Euler equation for consumption yields consistent estimates of the preference parameters. When utility is isoelastic and a sample covering a long time period is available, consistent estimates are obtained from the log-linearized Euler equation when the innovations to the conditional variance of consumption growth are uncorrelated with the instruments typically used in estimation. We perform a Monte Carlo experiment, consisting in solving and simulating a simple life cycle model under uncertainty, and show that in most situations, the estimates obtained from the log-linearized equation are not systematically biased. This is true even when we introduce heteroskedasticity in the process generating income. The only exception is when discount rates are very high (e.g. 47% per year). This problem arises because consumers are nearly always close to the maximum borrowing limit: the estimation bias is unrelated to the linearization and estimates using non-linear GMM are as bad. Across all our situations, estimation using a log-linearized Euler equation does better than nonlinear GMM. Finally, we plot life cycle profiles for the variance of consumption growth, which, except when the discount factor is very high, is remarkably flat. This implies that claims that demographic variables in log-linearized Euler equations capture changes in the variance of consumption growth are unwarranted.     

Money growth,uncertainty and macroeconomic activity: a multivariate GARCH analysis

The impact uncertainty has on money growth has received much attention in recent years and is an issue of critical importance to central banks, particularly for those, such as the European Central Bank (ECB), which place a strong emphasis on monetary analysis in monetary policy formulation. Some recent papers examining this issue use ad hoc estimates and measure variability rather than uncertainty. We employ a multivariate GARCH model, which measures uncertainty by the conditional variance of the data series, to investigate whether macroeconomic uncertainty and monetary uncertainty Granger-cause changes in real money. The estimated model also allows us to investigate how monetary uncertainty impacts economic activity. We find that macroeconomic uncertainty impacts positively on US real M2 growth over a two-year horizon but that monetary uncertainty does not cause changes in real M2. Instead, our results indicate that real money growth causes monetary uncertainty. Monetary uncertainty is found to have a negative effect on real economic activity and on macroeconomic uncertainty. We conclude by discussing the implications of these results and the methodological approach used for institutions such as the ECB that give monetary analysis a prominent role in their monetary policy strategy.     

Macroeconomic performance and convergence in OECD countries

This paper investigates the robustness of the correlation between growth and a set of variables which comprises accumulation rates in human and physical capital and medium term macroeconomic indicators in OECD countries. We include these variables as additional regressors in the standard growth equation that comes from the human capital-augmented Solow model. Our results show that variables related to medium term macroeconomic performance affect both growth and convergence. In some periods these variables even outperform the explanatory power of the conventional growth variables such as the accumulation rates. Our results also suggest that it is difficult to analyse the contribution to growth of any particular macroeconomic indicator in an isolated way. Rather, these effects should be studied in a framework that accounts for the macroeconomic performance of a country.     

An Accounting Method for Economic Growth

As Chari et al. (2007) indicate, many growth theories explaining frictions in real economies are equivalent to a competitive economy, with some exogenous taxes. Using this idea, I developed an accounting method for identifying fundamental causes of economic growth. A two-sector neoclassical growth model with taxes is used as a prototype economy, and its equilibrium conditions define wedges. These wedges endogenously determine the long run growth rate, which is exogenous and not correlated with any other variables in a one-sector growth model. Furthermore, the importance of wedges in explaining the long-run growth rate can be evaluated through the use of a prototype economy. Applying this method to fifty countries reveals that, among seven wedges, two wedges that are respectively associated with the production function and the Euler equation for human capital are important in explaining economic growth.     

DOES NEOCLASSICAL THEORY ACCOUNT FOR THE EFFECTS OF BIG FISCAL SHOCKS? EVIDENCE FROM WORLD WAR II*

Much debate surrounds the usefulness of the neoclassical growth model for assessing the macroeconomic impact of fiscal shocks. We test the theory using data from World War II, which is by far the largest fiscal shock in the history of the United States. We take observed changes in fiscal policy during the war as inputs into a parameterized, dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data. Our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock.     

Stylised facts and other empirical evidence on firm dynamics,business cycle and growth

In this paper, we bring together, in a systematised fashion, the scattered empirical evidence relating firm dynamics with both short-run and long-run macroeconomic dynamics. There are numerous studies that focus on firm-level data while controlling for macroeconomic conditions. From these studies a fairly robust set of empirical regularities pertaining to entry, exit, growth and the size distribution of firms has emerged. However, the literature that focuses explicitly on the interplay between firm dynamics and the business cycle is roughly confined to the US experience and to the cyclical properties of firm entry and exit, while the studies about the relationship between firm dynamics and economic growth are limited and unsystematic. We also give a brief account of the most recent theoretical literature on firm dynamics and macroeconomic dynamics, and try to relate it to the empirical findings.     

Using Patents In Growth Models

This paper argues that macroeconomic models of endogenous growth driven by technological change could be much improved by drawing lessons from the microeconomic literature of intellectual property design. Growth models use overly simplistic and sometimes incorrect assumptions regarding the intellectual property regime. Microeconomic theory and empirical work are reviewed to demonstrate that determining optimal intellectual property design is complex and has important implications for firm behavior and performance. Considering the question of intellectual property design in a dynamic general equilibrium model should yield important insights about how intellectual property impacts growth and welfare.     

关于中国人民银行独立性的研究--来自独立性指数和政策反应函数的证据

本文的目的在于 :(1 )根据GMT和CWN的方法 ,将中国人民银行有关法律指数化 ,并通过独立性指数的纵向和跨国家比较来分析中国人民银行在法律层面上的独立性变化和独立性程度 ;(2 )构建中国人民银行政策反应函数 (policyreactionfunction) ,并通过政策工具变量 (instrumentvariables)和政治事件虚拟变量 (dummyvariables)的变化来反映中国人民银行的实际独立性。     

Ecological macroeconomics: An application to climate change

Ecological economics has not paid sufficient attention to the macroeconomic level both in terms of theory and modeling. Yet, key topics debated in the field of ecological economics such as sustainable consumption, reduction in working time, the degrowth debate, the energy–exergy link, and the rebound effect require a holistic and macro perspective. While this deficiency has been identified before and Keynesian economics has been generally suggested as a potent vehicle to establish economic systemic thinking, very little concrete theorizing and practical suggestions have been put forward. We give further credence to this suggestion and demonstrate the value of tackling key concerns of ecological economics within a Keynesian growth framework. Contextualized by an application to climate change we suggest that policy relevant recommendations need to be based on a consistent view of the macroeconomy. We end with laying out key building blocks for a Keynesian model framework for an ecological macroeconomics.     

The impact of macroeconomic factors on income inequality: Evidence from the BRICS

In this paper we investigate how the evolution of income growth, real interest rates, and inflation have driven income inequality across a variety of countries with particular focus on the BRICS economies (Brazil, Russia, India, China, and South Africa) during the period 2001 to 2015. Our work suggests that, when central banks of the BRICS economies use monetary policy for macroeconomic stabilization, they need to consider the impact monetary policy changes have on the distribution of income in their nations. Our estimates reveal that the unintended consequence of policies that induce economic growth and higher prices is higher income inequality. We find that the positive relationship between the three macroeconomic variables and income inequality for the BRICS economies is stronger during the post-2008 period.     

Sequential R&D and blocking patents in the dynamics of growth

The incentives to conduct basic or applied research play a central role for economic growth. How does increasing early innovation appropriability affect basic research, applied research, innovation and growth? In a common law system an explicitly dynamic macroeconomic analysis is appropriate. This paper analyzes the macroeconomic effects of patent protection by incorporating a two-stage cumulative innovation structure into a quality-ladder growth model with endogenous skill acquisition. We focus on two issues: (a) the over-protection versus the under-protection of intellectual property rights in basic research; (b) the evolution of jurisprudence shaping the bargaining power of the upstream innovators. We show that the dynamic general equilibrium interactions may seriously mislead the empirical assessment of the growth effects of IPR policy: stronger protection of upstream innovation always looks bad in the short- and possibly medium-run. We also provide a simple “rule of thumb” indicator of the basic researcher bargaining power.     

Bank Credit Risk Management and Migration Analysis; Conditioning Transition Matrices on the Stage of the Business Cycle

Credit risk has been one of the most active areas of recent financial research. It is driven by advances in portfolio risk measurement and management techniques, growth in credit derivatives trading, the Basel II implementation, and regulatory concerns stemming from the commercial credit crunch that initially took place in 2001 and 2002 in the USA. Within this broader literature, a growing body of research analyzes the meaning, role, and influence of credit ratings that quantify credit risk. This paper examines the two-way links between credit risk measurement and the macroeconomic conditions, interpreted through phases of business cycles. We propose a methodology applied on bank internal rating data, which estimates ratings migration probabilities while integrating the state of the economy. We first discuss the issue of whether credit risk is low or high in different economic scenarios. In order to evaluate this prospect, we examine each year in four quarters that represent different scenarios throughout the year. We then review how macroeconomic considerations are incorporated into credit risk models and the risk measurement approach that underlies Basel II and Basel III.     

On the Persistence of Labour Market Insecurity and Slow Growth in the US: Reckoning with the Waltonist Growth Regime

In this article I systematically incorporate empirical work on rising income inequality and wage stagnation into a regulation theoretic framework for analysing macroeconomic growth. The rise of job polarisation and income inequality coincides with a long period of macroeconomic stagnation, both continuing through to the present (with the exception of a brief period of strong growth and declining inequality in the second half of the 1990s). The corporate scramble to restore profit rates after the crisis of Fordism has transformed the institutional configuration of the political economy. In particular, institutions supporting upward mobility and middle-class incomes in the economy have been eroded by the twin forces of internationalisation (leading to the re-emergence of wage-based competition) and employment externalisation (outsourcing, downsizing, antiunionism, etc). The current growth regime, which may be characterised as Waltonist, based on the Wal-Mart model of buyer-driven global supply chains focused on cutthroat wage-based competition and deunionisation, is not transitional but rather embedded in apparently long-term institutional settlements that amount to a dysfunctional regime.