Interpreting shocks to the relative price of investment with a two-sector model

Consumption and investment comove over the business cycle in response to shocks that permanently move the price of investment. The interpretation of these shocks has relied on standard one-sector models or on models with two or more sectors that can be aggregated. We show that the same interpretation can also be motivated with a model that captures key features of the US Input–Output Tables and cannot be aggregated into a standard one-sector model. Our alternative model yields a closer match to the empirical evidence of positive comovement for consumption and investment subject shocks that permanently move the price of investment.     

Should economists count?—The Dickensian view

This paper considers Charles Dickens’ charge that by relying too exclusively on statistics, political economists simply cannot understand the human dimension of the questions they examine and the policies they propose to reform economic conditions. Particular attention, is paid to three of Dickens’ writings: his 1836 “Full Report of the First Meeting of the Mudfog Association for the Advancement, of Everything;” his 1853 Christmas story, “The Chimes;” and finally, his 1854 novelHard Times, where these questions were a central theme.     

Partial liquidation under reference-dependent preferences

We propose a multiple optimal stopping model where an investor can sell a divisible asset position at times of her choosing. Investors have $S$-shaped reference-dependent preferences, whereby utility is defined over gains and losses relative to a reference level and is concave over gains and convex over losses. For a price process following a time-homogeneous diffusion, we employ the constructive potential-theoretic solution method developed by Dayanik and Karatzas (Stoch. Process. Appl. 107:173–212, 2003). As an example, we revisit the single optimal stopping model of Kyle et al. (J. Econ. Theory 129:273–288, 2006) to allow partial liquidation. In contrast to the extant literature, we find that the investor may partially liquidate the asset at distinct price thresholds above the reference level. Under other parameter combinations, the investor sells the asset in a block, either at or above the reference level.