an aggregate consumption function for canada a cointegration approach this study utilizes cointegration theory and error correction models ecms to specify a candidate dynamiac formulation of the aggregate consumption function using quarterly canadian date the variables entering the long run equlibrium relationship are tested for unit roots using a variety of techniques such as the dickey fuller the augemented dickey fuller and the phillips perron test profedures the engle and granger cointegration test and the fully modified consistent and efficient estimator of phillips and hansen are used to estimate the cointegration relationship johansen s maximum likelihood approach is also used to determine the rank of the cointegrating matrix the error correction model which appears to be a tentatively adequate conditional characterization of the date generating process revelas that disposable income wealth government expenditures relative prices and liquidity constraints proxied by the unemployment rate are important variables non nested tests are carried out against

consumption and the credit market abstract this paper uses a kalman filter model to allow the fraction of current income consumers to vary over time and shows that these consumers are liquidity constrained by relating this percentage to measures of credit market tightness

euler equation tests of ricardian equivalence abstract tests of ricardian equivalence based on the euler condition can be written in several mathematically equivalent ways this paper shows that these alternative solutions may give rise to different empirical results when liquidity constraints are ignored this may be due to misspecification since a crucial assumption of the model is violated or due to the different parameter restrictions imposed by the different solutions the evidence suggests that misspecification is the most likely explanation previous evidence based on restricted specifications should be interpreted with caution

are poor people credit constrained or myopic evidence from a south african panel credit constraints are an almost ubiquitous assumption in development economics yet direct evidence for credit constraints is limited and many observations consistent with credit constraints are equally compatible with myopic non forward looking consumption or precautionary saving using household panel data and a source of widely anticipated income in south africa this paper tests and rejects the standard consumption model with perfect capital markets then myopic consumption and precautionary saving are tested as alternative explanations for the observed jumps in expenditure the standard model with credit constraints cannot be rejected in favour of myopic consumption or precautionary saving

nonlinear mean reversion in the short term interest rate using a new bayesian method for the analysis of diffusion processes this article finds that the nonlinear drift in interest rates found in a number of previous studies can be confirmed only under prior distributions that are best described as informative the assumption of stationarity which is common in the literature represents a nontrivial prior belief about the shape of the drift function this belief and the use of flat priors contribute strongly to the finding of nonlinear mean reversion implementation of an approximate jeffreys prior results in virtually no evidence for mean reversion in interest rates unless stationarity is assumed finally the article documents that nonlinear drift is primarily a feature of daily rather than monthly data and that these data contain a transitory element that is not reflected in the volatility of longermaturity yields the drift of the short term interest rate is an important determinant of a wide variety of asset prices both inside and outside the boundaries of what is often called fixed income while volatilities may be estimated relatively accurately using high frequency observations of the short rate the short rate s extreme persistence makes identifying the true shape of the drift function a particularly elusive goal if our goal is merely to fit prices then the difficulty in estimating a drift function can be avoided by backing out implied drifts using a no arbitrage approach such as hull and white 1990 or heath jarrow and morton 1992 these methods bypass the true distribution entirely focusing on solving for the risk neutral drift function that is consistent with the cross section of bond prices if our goal however is to learn from prices and to be able to assess theories such as the expectations hypothesis that link short and long rates then estimating the drift function under the true measure is unavoidable in several recent articles a variety of sophisticated econometric techniques have been brought to bear on the problem in particular

consumption in developing countries tests for liquidity constraints and finite horizons adjustment programs in developing countries emphasize the importance of reducing fiscal deficits in order to improve aggregate saving and investment performance recent theoretical analyses associated with the ricardian equivalence proposition however suggest that changes in the level of public sector saving may be offset by a change in private saving the empirical relevance of this proposition depends among other things on the length of consumers horizons and on the extent to which households are liquidity constrained empirical tests of a consumption model for a sample of developing economies do not support the equivalence propositions owing to the prevalence of liquidity constraints copyright 1989 by mit press

durability and tests of the permanent income hypothesis using partially disaggregated consumption data since goods classified as non durable may in fact have a durable component random walk tests of the permanent income hypothesis using non durable data series may yield incorrect results this paper investigates this problem by first simulating a model of consumption to show the effects of durability on statistical tests of non durable consumption models and then by applying these tests to various disaggregated consumption series to determine the effect in practice the paper finds that there are significant differences in the behaviour of the series within the non durables and services catagories and that these differences may be related to durability the effect of this on standard tests of consumption is discussed

will the new keynesian macroeconomics resurrect the is lm model the is lm model has no greater prospect of being a viable analytical vehicle for macroeconomics in the 1990s than the ford pinto has of being a sporty reliable car for the 1990s because of its treatment of expectations the is lm model as traditionally constructed and currently used is a hazardous base on which to build positive theories of business fluctuations and to undertake policy analysis to simplify economic reality sufficiently to use the is lm model as an analytical tool economists must essentially ignore expectations we now know that this simplification eliminates key determinants of aggregate demand the last two decades of research have taught economists that the assumption of rational expectations is a powerful part of economic explanations of individual and market behavior ranging from consumption and investment dynamics to pricing of stocks and bonds the emphasis on expectations in the macro model is the end result of a process of building microeconomic underpinnings that was initiated in the 1950s and 1960s when the goal was to develop dynamic theoretical foundations for the is and lm schedules inevitably consideration of dynamic choice pushed the question of expectations to the forefront as a result most of the equations of the is lm model are now viewed as summarizing purposeful economic behavior in which choices over time play a central role however as we will see this finding means there is no way to maintain traditional uses of the is lm model

government debt government spending and private sector behavior reply roger kormendi 1983 presents apparently strong evidence that in contrast to the standard view consumption is not reduced by taxes but is reduced by government expenditure he interprets his results as supporting a consolidated approach to private sector behavior in which consumers effectively internalize the government budget constraint specifically he claims that consumers regard government spending as the true measure of the government s claim on private resources and so do not respond to changes in taxes given spending this is basically the approach advocated by robert barro 1974 and known also as the ricardian equivalence proposition hereafter rep kormendi s results appears to contradict other empirical work based on the life cycle hypothesis for example martin feldstein 1982 modigliani 1984a sterling 1985 although results similar to his have been reported see david aschauer 1985 john seater and roberto mariano 1985 and the references in kormendi in our view kormendi s analysis is seriously flawed his heuristic derivation of the consumption function leads him to a specification of the aggregate consumption function which is not consistent with the life cycle hypothesis lch or with rep and to questionable methods of estimation once his conceptual and methodological errors are corrected his formulation and more generally the rep hypothesis are found to receive little empirical support in the next section we rely on the lch to derive an aggregate consumption function which shows explicitly how government expenditure and taxes should effect private consumption this derivation helps to bring out the observable implications of rep which are shown to be equivalent to a limiting form of the lch in which the planning horizon is infinite it also serves to clarify the appropriate specification of the variables appearing in the consumption function next section ii reports our empirical estimates and tests section iii compares our results with kormendi s finally section iv reports the results of endeavors to improve the specification of fiscal variables notably by distinguishing between permanent and transitory tax changes

testing for liquidity constraints in euler equations with complementary data sources previous tests for liquidity constraints using consumption euler equations have frequently split the sample on the basis of wealth arguing that low wealth consumers are more likely to be constrained we propose alternative tests using different and more direct information on borrowing constraints obtained from the 1983 survey of consumer finances in a first stage we estimate probabilities of being constrained which are then utilized in a second sample the panel study of income dynamics to estimate switching regression models of the euler equation our estimates indicate stronger excess sensitivity associated with the possibility of liquidity constraints than the sample splitting approach

ricardian equivalence rational expectations and the permanent income hypothesis the ricardian equivalence proposition and the permanent income hypothesis are tested in an intertemporal consumption model with rational expectations the representative consumer incorporates the government budget constraint an alternative hypothesis of incomplete tax discounting is nested within this model a deterministic time trend is rejected for the variables of the model variables exhibit instead a stochastic trend the permanent income model is not rejected by annual u s data i e no excess sensitivity is found the evidence with respect to ricardian equivalence is mixed the empirical study employs theorems from the cointegration literature and specifically addresses issues of nonstationary regressors copyright 1990 by ohio state university press

household saving out of different types of income revisited the purpose of this paper is to test for two hypotheses about household consumption and saving behaviour namely the substitution hypothesis according to which changes in corporate retained earningshave an offsetting effect on household savingand the hypothesis that consumption and saving out of different types of income vary cross country evidence from 13 oecd countries over the period 1963 80 lies very well in accordance with both of these hypotheses moreover results are robust to alternative specifications of consumption function to additional variables and to estimation methods

the theoretical developments initiated by haberler but named for pigou do not provide sufficient grounds for rejecting keynes s key theoretical proposition this paper examines a claim made in the introduction to milton friedman s presidential address to the american economic association and that is now taken for granted in orthodox economics according to friedman the theoretical developments initiated by haberler but named for pigou provide sufficient grounds for rejecting keynes s key theoretical proposition and the economics of keynes in its entirety the problem with this claim is that it turns out given the scrutiny that it clearly deserves to be false the theoretical developments initiated by haberler but named for pigou do not provide sufficient grounds for rejecting keynes s key theoretical proposition and thus the economics of keynes as a whole there is no legitimate rationale for believing in other words even in a world of flexible prices that the system will tend naturally toward a position of equilibrium at full employment

expectations based reference dependent life cycle consumption this study incorporates a recent preference specification of expectations based loss aversion which has been applied broadly in microeconomics into a classic macro model to offer a unified explanation for three empirical observations about life cycle consumption first loss aversion explains excess smoothness and sensitivity that is the empirical observation that consumption responds to income shocks with a lag intuitively such lagged responses allow the agent to delay painful losses in consumption until his expectations have adjusted secondly the preferences generate a hump shaped consumption profile early in life consumption is low due to a first order precautionary savings motive however as uncertainty resolves over time this motive is dominated by time inconsistent overconsumption that eventually leads to declining consumption towards the end of life thirdly consumption drops at retirement prior to retirement the agent wants to overconsume his uncertain income before his expectations catch up post retirement however income is no longer uncertain and overconsumption is associated with a sure loss in future consumption as an empirical contribution i structurally estimate the preference parameters using life cycle consumption data my estimates match those obtained in experiments and other micro studies and generate the degree of excess smoothness observed in macro consumption data

permanent income liquidity and adjustments of automobile stocks evidence from panel data a recent article by bernanke 1984 tests the rational expectations permanent income hypothesis using panel data on automobile expenditures he finds no evidence refuting the hypothesis this paper incorporates a threshold adjustment process into bernanke s model estimations based on a subset of the data used by bernanke reveal evidence that resale market imperfections and credit market constraints have important effects on automobile expenditures

the predictability of aggregate consumption growth in oecd countries a panel data analysis we examine aggregate consumption growth predictability we derive a dynamic consumption equation which encompasses relevant predictability factors habit formation intertemporal substitution current income consumption and non separabilities between private consumption and both hours worked and government consumption we estimate this equation for a panel of 15 oecd countries over the period 1972 2007 taking into account parameter heterogeneity endogeneity and error cross sectional dependence using a gmm version of the common correlated effects mean group estimator small sample properties are demonstrated using monte carlo simulations the estimation results support income growth as the only variable with significant predictive power for aggregate consumption growth

intertemporal substitution imports and the permanent income model abstract we examine the importance of intertemporal substitution in u s import consumption using a model of permanent income that allows for random preference shocks and additive separability the latter feature allows us to take two estimation approaches in the first approach we show that there is a cointegrating restriction imposed by the first order conditions of the model which allows us to estimate the intertemporal elasticity of imported and domestic goods consumption in the second approach we estimate the euler equations using generalized method of moments this approach however requires us to place some restrictive assumptions on the model that are not required for the first estimation approach thus the two different approaches allow an assessment of the severity of these restrictive assumptions which are often imposed in the literature

simulation methods for levy driven continuous time autoregressive moving average carma stochastic volatility models we develop simulation schemes for the new classes of non gaussian pure jump levy processes for stochastic volatility we write the price and volatility processes as integrals against a vector levy process which makes series approximation methods directly applicable these methods entail simulation of the levy increments and formation of weighted sums of the increments they do not require a closed form expression for a tail mass function or specification of a copula function we also present a new and apparently quite flexible bivariate mixture of gammas model for the driving levy process within this setup it is quite straightforward to generate simulations from a levy driven continuous time autoregressive moving average stochastic volatility model augmented by a pure jump price component simulations reveal the wide range of different types of financial price processes that can be generated in this manner including processes with persistent stochastic volatility dynamic leverage and jumps

excess sensitivity of consumption to current income liquidity constraints or myopia this paper asks whether the empirical rejection of the rational expectations permanent income hypothesis occurs because agents are myopic in the sense that the marginal propensity to consume out of transitory income is non zero or because some agents face liquidity constraints the finding that the estimate of the mpc out of transitory income is dramatically affected in both magnitude and statistical significance by the inclusion of a proxy for liquidity constraints suggests that liquidity constraints are an important part of the explanation of the observed excess sensitivity of consumption to current income la sensibilite excessive de la consommation au revenu courant contraintes sur la liquidite ou myopie ce memoire examine la question a savoir pourquoi l hypothese du revenu permanent avec anticipations rationnelles n est pas v6rifiee empiriquement est ce parce que les agents economiques sont myopes i e que leur propension marginale a consommer a partir de leur revenu transitoire n est pas nulle ou bien est ce que certains agents economiques font face a des contraintes sur leur liquidite le fait que l estimation de la propension marginale a consommer le revenue transitoire est affectee par l inclusion d une variable qui tente de capturer l importance des contraintes sur la liquidit6 tant dans l 6valuation de sa taille que dans sa signification statistique suggere que ces contraintes jouent un role important dans l explication de cette sensibilite excessive qu on observe de la consommation aux changements dans le niveau de revenu courant almost all the recent empirical tests of the rational expectations permanent income hypothesis re pih have rejected the hypothesis using a rich variety of data sets and estimation methods the empirical work indicates that the failure of the re pih is significant both statistically and quantitatively the null hypothesis in this empirical literature typically consists of the joint hypothesis that 1 agents expectations are formed rationally 2 desired consumption is determined by permanent income and 3 capital markets are perfect in the sense that agents can lend or borrow against 1 studies rejecting the re pih include blinder 1981 flavin 1981 hall and mishkin 1982 hayashi 1982 and sargent 1978 in his original paper hall 1978 did not reject the re pih decisively however flavin 1981 showed that with a minor alteration in the specification of the alternative hypothesis the re pih could be rejected using hall s test and data set bernanke 1981 studying panel data on automobile expenditures did not find evidence against the hypothesis for an extensive survey of the empirical literature on the rational expectations permanent income hypothesis see king 1983 canadian journal of economics revue canadienne d economique xviii no 1 february fevrier 1985 printed in canada imprime au canada 0008 4085 85 117 36 1 50 canadian economics association this content downloaded from 157 55 39 17 on wed 31 aug 2016 05 08 58 utc all use subject to http about jstor org terms

the existence of ramsey equilibrium the authors demonstrate existence of a perfect foresight equilibrium under borrowing constraints in a one sector model with infinitely lived heterogeneous agents the class of admissible preferences includes but is not limited to recursive preferences existence is proven using a t 2ctonnement argument under appropriate conditions on preferences and technology a new measure of discounting the norm of marginal impatience is used to determine which technologies are admissible depending on the norm of marginal impatience the admissible technology may either allow for permanent growth or have a maximum sustainable stock copyright 1991 by the econometric society

short term interest rates as subordinated diffusions in this article we cbaracterize and estimate the process for short term interest rates using federal funds interest rate data we presume that we are observing a discrete time sample of a stationary scalar diffusion we concentrate on a class of models in whicb the local volatility elasticity is constant and the drift has aflexible specufication to accommodate missing observations and to break the link between economic time and calendar time we model the sampling scheme as an increasing process that is not directly observed we propose and implement two new methods for estimation we find evidence for a volatility elasticity between one and onehalf and two when interest rates are high local mean reversion is smaul and the mechanism for inducing stationarity is the increased volatility of the diffusion process

a new method for identifying the effects of foreign exchange interventions central banks react even to intraday changes in the exchange rate however in most cases intervention data is available only at a daily frequency this temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate we apply the bayesian mcmc approach to this endogeneity problem we use data augmentation to obtain intraday intervention amounts and estimate the efficacy of interventions using the augmented data applying this new method to japanese data we find that an intervention of one trillion yen moves the yen dollar rate by 1 7 percent which is more than twice as much as the magnitude reported in previous studies applying ols to daily observations this shows the quantitative importance of the endogeneity problem due to temporal aggregation

the permanent income hypothesis estimation and testing by instrumental variables the permanent income hypothesis with rational expectation is restated estimated and tested by an instrumental variables technique on the postwar u s aggregate time series data the hypothesis is accepted on a consumption series which includes service flows from consumer durables if the consumption series is the one in the national income and product accounts the hypothesis is decisively rejected an explanation is suggested to reconcile the conflicting test results

mcmc analysis of diffusion models with application to finance this article proposes a new method for estimation of parameters in diffusion processes from discrete observations the method is based on markov chain monte carlo methodology and applies to a wide class of models including systems with unobservable state variables and nonlinearities the method is applied to the estimation of parameters in one factor cev interest rate models and a two factor model with a latent stochastic volatility component sv the cev model is found to do a poor job in capturing the time varying volatility interest rate data the sv model provides vastly superior fit to that of the cev model the article also presents a simulation study that demonstrates that the method provides accurate parameter estimates of the sv model at moderate sample sizes

the observational implications of labor contracts in a dynamic general equilibrium model economies are studied where labor contracts even without changing real allocations can make equilibria appear different one basic example is that wage observations generated by long term employment contracts are biased measures of theoretical market wages this idea is analyzed in a dynamic stochastic economic model including both overlapping generations of finite lived workers and infinite horizon employers so that the implications for business cycle life cycle and cross sectional phenomena can be explicitly addressed understanding contracts in this way potentially allows us to reconcile several ostensibly anomalous aspects of the data with equilibrium theory

housing booms and local spending abstract this paper examines how local governments adjust their spending in response to a temporary revenue windfall generated by a housing boom we focus on spanish local governments because of the intensity of the last housing boom bust experienced there and the large share of construction related revenues they obtain we find that windfall revenues were mostly used to increase expenditures above all current we seek to determine whether this behaviour was due to political myopia incumbents in contested elections increasing expenditures to convince uninformed voters about their competence or to extrapolation bias leading to the overstatement of the persistence of revenue shocks we find evidence for both mechanisms the propensity to spend is higher where local incumbents were elected by a narrow vote margin and lower in places with past volatility experience finally we also examine what happens during the bust and find that governments enjoying large windfalls during the boom had to cut their spending abruptly above all capital and raise taxes the adjustment during the bust was actually greater in those places that overspent more during the crisis

using daily range data to calibrate volatility diffusions and extract the forward integrated variance a common model for security price dynamics is the continuous time stochastic volatility model for this model hull and white 1987 show that the price of a derivative claim is the conditional expectation of the black scholes price with the forward integrated variance replacing the black scholes variance implementing the hull and white characteriza tion requires both estimates of the price dynamics and the conditional distribution of the forward integrated variance given observed variables using daily data on close to close price movement and the daily range we find that standard models do not fit the data very well and that a more general three factor model does better as it mimics the long memory feature of financial volatility we develop techniques for estimating the conditional distribution of the forward integrated variance given observed variables i introduction

testing short run neutrality abstract this paper derives and implements a robust test of the short run neutrality of anticipated policy that is valid when the information set used to form expectations is incorrectly specified and the effect of unanticipated policy on deviations of output from the natural rate varies over time the test is based on the observation that if unanticipated policy affects output with a maximum lag of n quarters then any information prior to n should be uninformative about output movements the test is applied to quarterly data for the united states and the paper concludes that policy is not neutral

who is credit constrained in the u s economy an important assumption of the life cycle model of consumption is the postulate of perfect capital markets this hypothesis has recently been challenged by substantial empirical evidence hall and mishkin 1982 using the panel study of income dynamics estimate that 20 percent of united states families are liquidity constrained mariger 1986 derives a life cycle model with endogenous liquidity constraints and using a cross section estimates this fraction to be 19 4 percent hubbard and judd 1986 simulate a model with a constraint on net worth which shows that with reasonable assumptions about preferences 19 0 percent of united states consumers are liquidity constrained the emerging consensus points therefore to a fraction of approximately 20 percent of the population behaving in a manner that is inconsistent with the pure life cycle model in addition hayashi 1985 and zeldes 1989 investigate the correlation among consumption wealth and income for various population groups and infer that liquidity constraints are more important for younger families with low levels of wealth and saving the main limitation of these studies is that in their data sets constrained consumers are not observable and have to be identified via indirect evidence thus there is as yet little firm evidence about the characteristics of the consumers who are likely to be credit constrained this paper adopts an approach that differs from previous tests for liquidity constraints because it makes use of data where constrained consumers are observable and explicitly links their existence to credit market imperfections and personal characteristics the data drawn from the 1983 survey of consumer finances scf and described in section ii provide information on individuals whose request for credit has been rejected by financial intermediaries in section iii a model is developed in which consumers and lenders behavior jointly determines the probability that a consumer is rationed in the credit market this probability is then

optimal filtering of jump diffusions extracting latent states from asset prices this paper provides an optimal filtering methodology in discretely observed continuoustime jump diffusion models although the filtering problem has received little attention it is useful for estimating latent states forecasting volatility and returns computing model diagnostics such as likelihood ratios and parameter estimation our approach combines time discretization schemes with monte carlo methods it is quite general applying in nonlinear and multivariate jump diffusion models and models with nonanalytic observation equations we provide a detailed analysis of the filter s performance and analyze four applications disentangling jumps from stochastic volatility forecasting volatility comparing models via likelihood ratios and filtering using option prices and returns jel c11 c13 c15 c51 c52 g11 g12 g17 this paper develops a filtering approach for learning about unobserved shocks and states from discretely observed prices generated by continuous time jumpdiffusion models the optimal filtering problem which has received little attention is the natural companion to the parameter estimation problem as filters allow researchers to analyze and use their models for practical applications 1 despite its usefulness there is currently no general method for solving the filtering problem in continuous time models

liquidity constraints and the substitutability between private and government consumption the role of military and non military spending i introduction using data for a number of economies we investigate i the relationship between private consumption and two types of government spending military and non military and ii the severity of liquidity constraints because of their importance for macroeconomic modeling in theory and practice 1 both issues have been the subjects of considerable theoretical and empirical investigation on the issue of liquidity constraints the most influential research has relied on hall s 1978 euler equation approach to the permanent income hypothesis in an attempt to reconcile hall s and flavin s 1981 methodologies hayashi 1982 modified hall s martingale result to allow for the possibility that a subset of consumers are liquidity constrained and showed that liquidity constraints can result in consumption s excess sensitivity to current income campbell and mankiw 1989 1990 1991 and jappelli and pagano 1989 have applied hayashi s methodology using data from the u s and several other oecd countries on the substitutability issue aschauer 1985 has modified hall s euler equation to allow for substitutability between government spending and private consumption and found that the two are substitutes for the u s karras 1994 however using a similar approach and data for 30 countries concludes that private and government consumption are better described as complementary or unrelated liquidity constraints and substitutability have been combined in studies by graham and himarios 1991 cushing 1992 and graham 1993 using u s data and by evans and karras 1996 for a number of countries a crucial limitation of most of these studies is the use of aggregate government consumption data which counterintuitively imposes a common substitutability parameter on all components of government spending 2 using recently available time series data for a large number of countries the present paper relaxes this restriction by decomposing government consumption into military and non military components enabling us to separately identify their relationship to private consumption the allocation of government consumption between military and non military functions has varied greatly across countries the appendix reports the average size of military and non military government shares in gdp as well as the military non military ratio by country over the 1970 1989 period average military expenditure as a fraction of gdp for example has ranged in our sample from 0 11 in mexico to 12 30 in jordan similarly the fraction of government consumption absorbed by military expenditure has ranged from 1 09 in mauritius to 66 82 in poland this sizable variability is promising in terms of cross sectional identification power but it also suggests that the estimated parameters must not be assumed to be common across countries the estimated model is derived in section ii which combines liquidity constraints and substitutability by nesting the approaches of hayashi 1982 and aschauer 1985 in the same section we discuss data sources and the estimation strategy which permits the estimated parameters to vary by country in a way that helps determine how they are influenced by country specific factors section iii estimates the model for a panel of the 66 countries for which annual data on all series are available for the 1970 1989 period the paper s main conclusions are given in section iv ii methodology and data we assume that consumers in economy i at time t derive utility from effective consumption c sup which we define as 1 mathematical expression omitted where c is private consumption g sup m and g sup nm are the military and non military components of government consumption the parameters theta sup m and theta sup nm measure the degree of substitutability between c and g sup m and c and g sup nm respectively

debt neutrality theory and evidence from developing countries this paper reviews the ricardian barro hypothesis and tests the basic postulate of the model for a sample of developing countries including mexico and venezuela two specifications are utilized the first is based on the simple consumption model associated with the work of kormendi 1983 the alternative is based on a model developed by haque and montiel 1987 the outcome of the two stage least square estimation technique rejected the hypothesis in mexico trinidad and tobago and venezuela all countries which underwent adjustment programmes however these results were reversed when the alternative model was utilized due to liquidity constraint and possibly the yaari blanchard effect the contradictory outcome alludes to the sensitivity of the results to the model specified

consumption adjustment under time varying income uncertainty we study the effect of income uncertainty on consumption in a model that includes precautionary saving in contrast to previous studies we focus on time series variation in income uncertainty our time series measure of income uncertainty is constructed from a panel of forecasts we find evidence of precautionary saving in that increases in income uncertainty are related to increases in aggregate rates of saving we also find evidence that anticipated income growth rates have less explanatory power for consumption growth rates after conditioning on income uncertainty the evidence indicates the presence of forward looking consumers who gradually adjust precautionary savings in response to changing income uncertainty

can interest rate volatility be extracted from the cross section of bond yields most affine models of the term structure with stochastic volatility predict that the variance of the short rate should play a dual role in that it should also equal a linear combination of yields however we find that estimation of a standard affine three factor model results in a variance state variable that while instrumental in explaining the shape of the yield curve is essentially unrelated to garch estimates of the quadratic variation of the spot rate process or to implied variances from options we then investigate four factor affine models of the models tested only the model that exhibits unspanned stochastic volatility usv generates both realistic short rate volatility estimates and a good cross sectional fit our findings suggest that short rate volatility cannot be extracted from the cross section of bond prices in particular short rate volatility and convexity are only weakly correlated c 2009 elsevier b v all rights reserved

testing the life cycle hypothesis with a norwegian household panel this article reports the results of progressive refinements in the models used to test the permanent income hypothesis these tests are undertaken with a household panel constructed from diaries by the norwegian central bureau of statistics the data combine detailed expenditure and price information with income and wealth data from the government s tax files for 1975 1977 using a model that takes account of relative price change and demographic variables recognizes the effects of durables and incorporates explicit recognition of the effects of differences in the timing of observations or income innovations and spending the results indicate that the data are consistent with the permanent income life cycle hypothesis

returns to schooling implicit discount rates and black white wage differentials a simple econometric model of investment in schooling is developed and estimated the measure of individual discount rates implicit in their educational investment decisions suggests no difference between individuals from different socioeconomic backgrounds differences in individual speeds of educational attainment which do vary with background explain most of the variation in levels of attainment that is attributable to family background

an analytic solution to a stochastic consumption saving problem with liquidity constraints a substantial amount of recent work focusses on the importance of liquidity constraints and their effect on consumption behavior 5 liquidity constraints play an important role in determining the path of consumption over time when income is uncertain and individuals are unable to borrow they will take precautions against being caught short of income in the future this precautionary saving has been used as an explanation for several consumption puzzles 7 and as a channel for fiscal policy to influence the economy 1 liquidity constraints are also important in the analysis of government policy for example the effectiveness of fiscal policy depends on the consumers ability to smooth their path of consumption when faced with a change in the path of income as evidenced in the controversy over ricardian equivalence 2 finally liquidity constraints have been offered as a reason permanent income models are rejected by excess sensitivity tests 4 6 if individuals cannot adjust current consumption to new information about future consumption then consumption changes more than expected when the adjustment in income arrives past income helps predict future consumption since it affects the likelihood of being liquidity constrained in the future for these reasons it is important to understand the mechanisms through which liquidity constraints influence individual s consumption saving decisions despite the existence of a large body of empirical work analytic solutions have not yet been obtained for consumption models that include liquidity constraints instead solutions are characterized using indirect methods such as numerical techniques or other approximations this paper derives an analytic solution to a 3 period consumption savings model with uncertain income and liquidity constraints and examines the economic implications of the solution for consumer behavior the results show that liquidity constraints induce precautionary saving and excess sensitivity on the part of an optimizing individual further these two phenomena occur jointly since both arise from the consumer s desire to avoid being liquidity constrained in the future the analytic solution also allows us to examine how consumption saving behavior changes with variations in model parameters and to characterize the threshold level of wealth where the liquidity constraint becomes irrelevant

permanent income in general equilibrium abstract this paper reviews recent tests of the permanent income hypothesis this literature suggests that consumption is too sensitive to current income relative to the predictions of the usual partial equilibrium model it is then argued that in general equilibrium attempts to move along a consumption possibilities frontier exhibiting diminishing returns would naturally give rise to endogenous changes in interest rates creating a link between consumption and current income a fully specified general equilibrium example is introduced which does indeed exhibit the same excess sensitivity reported in the literature for precisely this reason

the economic effects of social security toward a reconciliation of theory and measurement abstract in this paper we argue that actuarial valuation of social security benefit streams is theoretically inconsistent with the assumption of pure life cycle motives instead we show that the simple discounted value of future benefits ignoring the possibility of death is often a good approximation to the relevant concept of value this observation motivates a re examination of existing empirical evidence concerning the economic effects of social security we focus our attention on studies of distributional equity and personal saving behavior in both cases we argue that the use of simple rather than actuarial discounting of survival contingent income streams produces results that differ dramatically from previous findings specifically estimates based on actuarial valuation may overstate the importance of redistribution between and within generations and may understate the depressive effect of social security on personal wealth accumulation by a factor of three or more

business cycle fluctuations and excess sensitivity of private consumption we investigate whether business cycle fluctuations affect the degree of excess sensitivity of private consumption growth to disposable income growth using multivariate state space methods and quarterly us data for the period 1965 2000 we find that excess sensitivity is significantly higher during recessions

estimating the parameters of stochastic volatility models using option price data this article describes a maximum likelihood method for estimating the parameters of the standard square root stochastic volatility model and a variant of the model that includes jumps in equity prices the model is fitted to data on the s p 500 index and the prices of vanilla options written on the index for the period 1990 to 2011 the method is able to estimate both the parameters of the physical measure associated with the index and the parameters of the risk neutral measure associated with the options including the volatility and jump risk premia the estimation is implemented using a particle filter whose efficacy is demonstrated under simulation the computational load of this estimation method which previously has been prohibitive is managed by the effective use of parallel computing using graphics processing units gpus the empirical results indicate that the parameters of the models are reliably estimated and consistent with values reported in previous work in particular both the vola

survey expectations in the time series consumption function this paper introduces survey based measures of expectations and uncertainties about income and real interest rates into an otherwise conventional consumption function the survey dat a contribute more than conventional variables to the explanation of changes in consumption the hypothesis that consumption follows a random walk is rejected in favor of a model in which consumption responds with a lag to changes in expected income growth the significance of inflation in earlier estimates of the u s consumpti on function is shown to be spurious and due to a strong negative correlation between expected inflation and expected income growth copyright 1992 by mit press

how well does the is lm model fit postwar u s data postwar u s time series for money interest rates prices and gnp are characterized by a multivariate process driven by four exogenous disturbances those disturbances are identified so that they can be interpreted as the four main sources of fluctuations found in the is lm phillips curve model money supply money demand is and aggregate supply shocks the dynamic properties of the estimated model are analyzed and shown to match most of the stylized predictions of the model the estimated decomposition is also used to measure the relative importance of each shock to interpret some macroeconomic episodes and to study sources of permanent shocks to nominal variables

are consumers ricardian when some are liquidity constrained evidence for the united states this paper formulates and estimates a revised specification of evans 1988 test for ricardian equivalence which incorporates the possible presence of liquidity constrained consumers if liquidity constrained consumers are significant in number tests using aggregate consumption data may tend to reject the ricardian equivalence hypothesis when the model allows for liquidity constraints a test which incorporated liquidity constrained consumers could not reject ricardian equivalence over the sample period 1946 91 while the proportion of aggregate consumption which is liquidity constrained is found to be significant it does not appear large enough to affect the test for ricardian equivalence

sensitivity of consumption to income and to government purchases some specification and estimation issues the paper derives a nonlinear error correction model ecm for consumption and shows that existing models that are based on quadratic utility combine permanent income and current income consumption and nest or could nest the hypothesis of substitutability between private consumption and government purchases are special cases of the ecm the importance of some econometric issues that have not received proper attention in the literature is demonstrated by estimating the models using us aggregate quarterly data 1953 1 1992 4 the evidence suggests that the ecm produces more reliable estimates than do the existing restrictive models

likelihood based specification analysis of continuous time models of the short term interest rate an extensive collection of continuous time models of the short term interest rate is evaluated over data sets that have appeared previously in the literature the analysis which uses the simulated maximum likelihood procedure proposed by durham and gallant 2002 provides new insights regarding several previously unresolved questions for single factor models i find that the volatility not the drift is the critical component in model specification allowing for additional flexibility beyond a constant term in the drift provides negligible benefit while constant drift would appear to imply that the short rate is nonstationary in fact stationarity is volatility induced the simple constant elasticity of volatility model fits weekly observations of the three month treasury bill rate remarkably well but is easily rejected when compared with more flexible volatility specifications over daily data the methodology of durham and gallant can also be used to estimate stochastic volatility models while adding the latent volatility component provides a large improvement in the likelihood for the physical process it does little to improve bond pricing performance

is the ricardian equivalence proposition an aerie fairy theory for europe using a theoretical model based on dynamic optimizing agents we test empirically the ricardian equivalence proposition rep for the eu 15 countries the theoretical setting allows us to obtain estimates of the structural parameters of the model and to test directly the hypothesis implied by the rep using recently developed end of sample cointegration breakdown tests we find evidence of a change in the fiscal behaviour of individuals during the last decade after the introduction of a fiscal rule namely the maastricht criteria for most countries in the sample the results concerning the direction of change are mixed

further evidence of excess sensitivity of consumption nonseparability among goods and heterogeneity across households the standard theoretical framework for analysing households intertemporal decisions is the life cycle permanent income model among its implications testing the model allows to analyse the response of consumption to fiscal policy however the empirical literature with microdata has yielded mixed results this article examines the sensitivity of the results to the assumption of separability among goods and of homogeneity across households for that purpose we test a rational expectations permanent income model with household data drawn from the spanish family expenditure survey this survey contains detailed information on total expenditure and the income presents large exogenous quarterly changes due to an institutional feature the article shows that assuming separability among commodities biases the test against the model when separability is not imposed we show that the rejection of the model depends on heterogeneity across households in terms of their members being unemployed or not for those

consumption permanent income and financial wealth in canada empirical evidence on the intertemporal approach to the current account the intertemporal approach to the current account is rejected as a complete explanation of the canadian current account federal government fiscal policy plays an important role in the determination of the current account a private sector agent that treats its holdings of net liabilities of the federal government as net wealth accumulates the sum of these liabilities and the net liabilities of non residents as part of an intertemporally optimal plan this result indicates both fiscal policy and intertemporal considerations are important determinants of current account behaviour consommation revenu permanent et richesse financiere au canada resultats empiriques d une approche au compte courant mettant l accent sur la dimension intertemporelle cet article montre que l approche mettant l accent sur la dimension intertemporelle ne produit pas une explication complte du comportement du compte courant canadien i1 semble que la politique fiscale du gouvernement federal joue un r6le important dans la conformation du compte courant un agent economique prive composite qui traite son portefeuille de dettes nettes du gouvernement federal comme richesse nette va accumuler la somme de ces dettes et des dettes nettes des non residents dans le cadre de son plan intertemporel optimal les resultats montrent que la politique fiscale et des considerations intertemporelles sont des elements determinants du comportement du compte courant

ricardian equivalence empirical evidence from developing economies abstract the strong underlying assumptions of the barro ricardo equivalence proposition rep raise doubts on its validity especially for developing countries this paper attempts to analyze the validity of the rep and the sources of deviation from rep for a large sample of developing countries although the results are of a mixed nature they suggest that the presence of liquidity constrained individuals may be the source of deviation from the rep the analysis also indicates that public spending is a poor substitute for private consumption and hence implies that temporary increases in public spending may have some expansionary effect on aggregate demand

a dynamic analysis of asymmetric shocks in eu manufacturing available empirical evidence regarding the degree of symmetry between european economies in the context of monetary unification is not conclusive this study offers new empirical evidence concerning this issue related to the manufacturing sector instead of using a static approach as most empirical studies do the dynamic evolution of shock symmetry is analysed using a state space model the results show a clear reduction of asymmetries in terms of demand shocks between 1978 and 1996 with an increase in terms of supply shocks at the end of the period

world public debt and real interest rates real interest rates appear to have risen in virtually all industrialized countries in the 1980s and 1990s relative to levels that prevailed in earlier decades there is concern that this may reflect higher public debt which is crowding out private sector activity there has also been increasing international capital market integration implying that interest rates in any country may be sensitive to global fiscal developments this paper estimates the effects of such fiscal developments on real interest rates in nine industrial countries the results imply that the increase in oecd wide government debt since the late 1970s was a major factor in the rise in real interest rates copyright 1999 by oxford university press

fiscal policy in good times and bad in the 1980s several countries with large government debt or deficit implemented substantial and in some cases drastic deficit cuts contrary to widespread expectations in many cases private consumption boomed rather than contracted this paper shows that in times of fiscal stress shocks to government revenues and especially expenditure have very different effects on private consumption than in normal times

consumption and portfolio choice under internal multiplicative habit formation this paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit we obtain closed form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint this enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock bond investments we also show that in a setting that combines habit formation with epstein zin utility consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease

testing the permanent income hypothesis the evidence from canadian data this paper investigates whether there are variants of the permanent income model that are consistent with seasonally unadjusted quarterly postwar canadian data the analysis is based on a misspecification test equation which nests the standard permanent income model the results obtained are somewhat unfavourable to the permanent income hypothesis the same results also apply to more general models in which the real interest rate is time varying and the utility function is non separable in consumption and the stock of durable goods un test de l hypothese du revenu permanent resultats derives a partir des donnees cana diennes ce memoire presente les resultats d une enquete pour etablir s il existe un ou des variantes du modele du revenu permanent qui soient compatibles avec les donnees trimestrielles canadiennes non desaisonnalisees pour la periode de l apres seconde guerre mondiale l analyse est fondee sur une equation qui encastre le modele de revenu perma nent standard mais qui est enrichie pour tester la specification de l 6equation les resultats obtenus sont quelque peu defavorables a l hypothese du revenu permanent les memes resultats s appliquent aussi a des modeles plus generaux dans lesquels le taux d interet reel

measuring regional effects of monetary policy in canada this article measures monetary policy shocks and examines whether the effects of such shocks have differential regional effects in canada we identify three possible sources of regional effects differences in the importance of interest sensitive industries differences in the contribution of exports to output and differences in the proportion of small relative to large firms using the overnight interest rate as the instrument of monetary policy we present impulse responses of industry output from a recursive vector autoregression which incorporates a cointegrating relation the results show that manufacturing and primary industries are the most interest sensitive we conduct impulse responses of provincial employment from a monetary contraction the results show that newfoundland and prince edward island pei primary industry based provinces are strongly and adversely affected by a monetary contraction manitoba saskatchewan and alberta also primary based are also affected ontario which is man

unemployment and liquidity constraints summary we present a dynamic framework for the interaction between borrowing liquidity constraints and deviations of actual hours from desired hours both measured by discrete valued indicators and estimate it as a system of dynamic binary and ordered probit models with panel data from the panel study of income dynamics we analyze a household s propensity to be liquidity constrained by means of a dynamic binary probit model we analyze qualitative aspects of the conditions of employment namely whether the household head is involuntarily overemployed voluntarily employed or involuntarily underemployed or unemployed by means of a dynamic ordered probit model we focus on the possible interaction between the two types of constraints we estimate these models jointly using maximum simulated likelihood where we allow for individual random effects along with an autoregressive process for the general error term in each equation a novel feature of our method is that it allows for the random effects to be correlated with regressors in a time invariant fashion our results provide strong support for the basic theory of constrained behavior and the interaction between liquidity constraints and exogenous constraints on labor supply copyright 2007 john wiley sons ltd

non linear adjustments on the excess sensitivity of consumption with liquidity constraints abstractthis article investigates the role of domestic credit markets in explaining the excess sensitivity of private consumption to disposable income using heterogeneous panel data of 19 oecd countries over the last two decades we find that the degree of the excess sensitivity has decreased as the liquidity constraints of households have been alleviated the estimated time varying coefficients for the marginal propensity to consume vary between 0 16 for the countries with low liquidity constraints and 0 38 for those with high liquidity constraints we also provide evidence that the excess sensitivity has been more prominent after the global financial crisis in some advanced countries such as japan spain and the united states where sharp deleveraging of households has been ongoing

consumption and unemployment this paper examines consumption changes of workers following experiences of unemployment in different stochastic environments the model developed in the paper predicts that consumption changes following unemployment spells should be small for workers the higher are their layoff and recall probabilities these predictions are confirmed in estimates with panel data

do liquidity constraints vary over time evidence from survey and panel data note much empirical work has been devoted to estimating the proportion of liquidity constrained consumers p and the fraction of income held by these liquidity constrained consumers l a common feature of these studies is that p and l are taken to be constant over time this paper attempts to determine whether this assertion is empirically justified by providing new evidence on the extent of liquidity constraints using survey and panel data the authors find that p and l do vary over time with trend and cyclical components but that over the period 1968 82 these fluctuations have not been dramatic copyright 1990 by ohio state university press

sterling s relationship with the dollar and the deutschemark 1976 89 this paper evaluates the linkages between bilateral exchange rates using a time varying parameter model which can be estimated using the kalman filter the technique solves many of the statistical problems which arise when ordinary least squares is used to estimate currency correlation applying the technique to the dollar sterling dm sterling and dm dollar bilateral exchange rates the results suggest a market weakening strengthening of sterling s relationship with the dollar dm since the mid 1970s additionally these currency linkages are shown to have undergone a number of regime shifts suggesting that the timing of the weakening of the dollar sterling relationship is different to that proposed by previous studies copyright 1991 by royal economic society

the effect of borrowing constraints on consumer liabilities this paper explores the effects of liquidity constraints on consumer liabilities while much empirical evidence attests to the importance of liquidity constraints in the u s economy evidence about the effects of borrowing constraints on consumer balance sheets is scarce using the 1983 survey of consumer finances data we estimate desired borrowing for unconstrained households we then evaluate the gap between predicted and observed debt for the sample of liquidity constrained consumers predicted debt is 75 percent higher than actual debt in the liquidity constrained sample thus the effect of removing borrowing constraints has quantitatively important implications for the allocation of debt in the household portfolio the removal of borrowing constraints would raise aggregate household liabilities by 9 percent copyright 1993 by ohio state university press

simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets abstract we present an econometric method for estimating the parameters of a diffusion model from discretely sampled data the estimator is transparent adaptive and inherits the asymptotic properties of the generally unattainable maximum likelihood estimator we use this method to estimate a new continuous time model of the joint dynamics of interest rates in two countries and the exchange rate between the two currencies the model allows financial markets to be incomplete and specifies the degree of incompleteness as a stochastic process our empirical results offer several new insights into the dynamics of exchange rates

financial liberalization and aggregate consumption the evidence from taiwan this paper considers the effect of financial liberalization on aggregate consumption with a special focus on taiwan which has sustained a high savings rate and a rapid rate of economic growth under financial dualism but has undertaken financial liberalization since the 1980s leading to an expansion of the formal financial sector the paper finds that because of an active informal financial sector consumers in taiwan are less credit constrained than in other developing countries however the expansion of the formal financial sector has contributed to some relaxation of consumer credit constraints and thereby changes in the income and interest elasticities of consumption it also has brought about a higher consumption growth rate offsetting at least partially the positive growth effect of financial liberalization which helps improve the efficiency in finanacial intermediation