learning your earning are labor income shocks really very persistent in this paper we examine the risk situation facing individuals in the labor market the current consensus in the literature is that the labor income process has a large random walk component we argue two points first the estimates of persistence from income data appear to be upward biased due to the omission of heterogeneity in income pro les across the population that would be implied for example by a human capital model with heterogeneity when we allow for dierences in pro les the estimated persistence falls from 0 99 to about 0 8 moreover the main evidence against pro le heterogeneity in the existing literature that the autocorrelations of income changes are small and typically negative is also replicated by the pro le heterogeneity model we estimate casting doubt on the previous interpretation of this evidence second we embed this process in a life cycle model to examine how it alters individuals consumption saving decision we assume that as seems plausible individuals do not know their pro les exactly at the beginning of life but learn in a bayesian way with successive income observations we nd that learning is very slow and aects consumption decision throughout the life cycle the model generates substantial rise in consumption inequality over the life cycle which matches empirical observations deaton and paxson 1994 moreover the shape of the age inequality pro le is non concave as in the data but unlike in a model with very persistent shocks finally the consumption pro les of college graduates are steeper than those of high school graduates in the model consistent with the data because they face a wider dispersion of and hence uncertainty about income growth rates overall this evidence indicates that income shocks may be signi cantly less persistent than what is currently assumed

gross substitution in financial markets abstract we develop restrictions on the joint distribution of an individual s risk attitudes and their endowments which guarantee the gross substitution property for market and individual excess demand functions respectively in particular it is shown that under some mild restrictions on the agent s risk aversion gross substitution holds for sufficiently large endowments

an impossibility theorem for wealth in heterogeneous agent models with limited heterogeneity abstract it has been conjectured that canonical bewley huggett aiyagari heterogeneous agent models cannot explain the joint distribution of income and wealth the results stated below verify this conjecture and clarify its implications under very general conditions we show in particular that if i agents are infinitely lived ii saving is risk free and iii agents have constant discount factors then the wealth distribution inherits the tail behavior of income shocks e g light tailedness or the pareto exponent our restrictions on utility require only that relative risk aversion is bounded and a large variety of income processes are admitted our results show conclusively that it is necessary to go beyond standard models to explain the empirical fact that wealth is heavier tailed than income we demonstrate through examples that relaxing any of the above three conditions can generate pareto tails

the economic psychology of stock market bubbles in china the chinese stock markets were extremely volatile during the period 2005 08 the shanghai stock exchange sse composite index increased more than sixfold from 1 012 in 2005 to 6 124 by the end of 2007 it then declined continuously to reach a low of 1 929 on 17 september 2008 or a drop of 70 per cent from its peak in less than 10 months although the market downturn may have been affected by the financial crisis in the united states and the rest of the world the extreme fluctuations of stock prices signify a big market bubble and the burst of that bubble must be explained by intrinsic characteristics or the economic psychology of chinese investors based on a detailed market data analysis this paper attributes the development of the stock market bubble to three key psychological factors greed envy and speculation and the burst of the bubble to three contrasting factors fear lack of confidence and disappointment it concludes that only after chinese companies become really commercialised and profitable and investors become rational can the stock markets become stable without extreme volatility as seen in the past government policies can play a role in soothing market volatility detrimental to shareholders and the wider economy but investors should not depend on government for making their own investment decisions journal compilation 2009 blackwell publishing ltd

uniqueness of steady states in models with overlapping generations in this paper we examine the likelihood of multiple real steady states in deterministic exchange economies with overlapping generations there is a single good and a single agent per generation with constant relative risk aversion expected utility in order to test for multiple equilibria we employ methods from computational algebraic geometry in our examples we find that multiplicity becomes less likely as the life span of agents increases but becomes more likely as the coefficient of risk aversion increases for moderate values of risk aversion multiplicity is very unlikely when agents live for five or more periods jel c61 c63 d50 d58

an equilibrium model of wealth distribution i present an explicitly solved equilibrium model for the distribution of wealth and income in an incomplete markets economy i flrst propose a self insurance model with an inter temporally dependent preference uzawa 1968 lucas and stokey 1984 and obstfeld 1990 i then derive an analytical consumption rule which captures stochastic precautionary saving motive and generates stationary wealth accumulation finally i provide a complete characterization for the equilibrium cross sectional distribution of wealth and income in closed form by developing a recursive formulation for the moments of the distribution of wealth and income using this recursive formulation i show that income persistence and the degree of wealth mean reversion are the main determinants of wealth income correlation and relative dispersions of wealth to income such as skewness and kurtosis ratios between wealth and income

housing development and urbanisation in china rapid urbanisation and rising income have led to a strong demand for housing in urban china however housing development has been distorted by speculation income inequality and lack of government support for low cost houses in recent years house prices become so high making the vast majority of urban residents unable to afford whereas rich families are able to buy many and leave them vacant income inequality is a major cause for rising house prices which in turn exaggerates income inequality further this vicious relationship has caused social tension between the rich and the poor and unhappiness among the middle and low income groups this paper discusses the factors responsible for the housing bubble in china and recommends appropriate policies to resolve this problem

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

solving asset pricing models when the price dividend function is analytic we present a new method for solving asset pricing models which yields an analytic price dividend function of one state variable to illustrate our method we give a detailed analysis of abel s asset pricing model a function is analytic in an open interval if it can be represented as a convergent power series near every point of that interval in addition to allowing us to solve for the exact equilibrium price dividend function the analyticity property also lets us assess the accuracy of any numerical solution procedure used in the asset pricing literature

wealth distribution with random discount factors abstract to explain the pareto tail behavior empirically observed in wealth distributions the quantitative macro literature has occasionally assumed that agents have random discount factors this paper formally proves that the stationary wealth distribution in a simple huggett model with random discounting has power law tails and characterizes the pareto exponents analytically i find that in general there is no clear relationship between the return on wealth and inequality and that the pareto exponent is highly sensitive to the persistence of the discount factor process i also provide a practical guidance for how to characterize the pareto exponents in richer models

fiscal policy composition of intergenerational transfers and income distribution abstract in this paper we characterize the relationship between the initial distribution of human capital and physical inheritances among individuals and the long run distribution of these two variables in a model with indivisible investment in education we analyze how the initial distribution of income determines the posterior intergenerational mobility in human capital and the evolution of intragenerational income inequality this analysis enables us in turn to characterize the effects of fiscal policy on future income distribution and mobility when the composition of intergenerational transfers is endogenous to this end we consider the following government interventions a pay as you go social security system a tax on inheritance a tax on capital income a tax on labor income and a subsidy on education investment

simulating the transmission of wealth inequality the role of bequests in propagating wealth inequality has long interested economists policymakers and social commentators josiah wedgwood s 1929 study of wealthy britons indicated that most had received large inheritances and suggested that one third owed their position in the wealth distribution entirely to inheritance these findings and those of j e meade 1966 c d harbury and d m w n hitchens 1979 and paul l menchik 1979 support the public s general view that restricting inheritances by taxing estates or inheritances or by forcing annuitization would lead to a more equal wealth distribution would wealth inequality actually be reduced if inheritances and for that matter all private inter vivos transfers were eliminated the answer is not obvious private wealth holdings would in this case be traced to precautionary and retirement saving with the distribution of wealth determined by the distributions of aftertax labor earnings rates of return demographics and saving preferences household labor income is distributed very unequally because of differences in genetic endowments educational opportunities parental care health labor leisure preferences assortative mating and a host of other factors rates of return earned on saving also vary widely across households for systematic and nonsystematic reasons also as recently documented by steven f venti and david a wise 2000 there is a great deal of heterogeneity with respect to saving behavior thus a high degree of wealth inequality would exist in the absence of bequests and inter vivos gifts adding them back into the mix could actually reduce overall wealth inequality if they were made to children with relatively low earnings low rates of return or poor saving discipline or were made primarily to children whose parents died young clearly understanding the precise role that bequests and gifts play in wealth inequality requires building a fairly elaborate model that can control for different factors and their interactions the model we co developed in gokhale et al 2001 to study u s wealth inequality which we extend here represents a step in this direction the model features 88 overlapping generations it incorporates marriage fertility patterns random death heterogeneous skill endowments and rates of return assortative mating based on skills skill inheritability progressive income taxation and wealth annuitization via social security given the strong evidence against intergenerational altruism reported in kotlikoff 2002 and the dictates of tractability we modeled bequests as arising solely from imperfect annuitization the model generates a realistic ratio of aggregate wealth to aggregate labor income a realistic flow of bequests relative to the stock of wealth and a realistic distribution of wealth at retirement including the share of wealth held by those in the top tail of the distribution bequests play a limited role in influencing wealth inequality the major determinant of which is skill earnings differences interestingly bequests serve to equalize the distribution of wealth because when children inherit wealth is determined by the random date of parent s death in contrast social security plays a disequalizing role as stressed by martin s feldstein 1976 social security annuitizes a much larger share of the assets of the poor than of the rich leaving them with relatively little fungible wealth

inheritance and wealth inequality the case of the punjab abstract this study follows a wealth function approach to quantify the role of inheritance in wealth inequality in the region of punjab india using household data from the national sample survey 25th round the specification of the wealth function is fairly general it is used to test the hump shaped pattern of wealth age relationship and also to decompose the reported wealth holding of each sample household into inherited and accumulated components it is found that inheritance accounts for 53 38 and 24 13 percent of wealth inequality in the rural and urban sectors respectively some policy implications of our results are stated

development path of china and india and the challenges for their sustainable growth the segmentation of global manufacturing and services provided china and subsequently india with a golden opportunity to make full use of their absolute advantage low cost yet educated labour to integrate into the world economy within a comparatively shorter period of time than some earlier industrialisers though international trade functioned as a vent of surplus in view of the narrowness of their domestic markets at the beginning of their economic catch up the label of export led model may not reflect the real picture as imports underwent dramatic increases during their respective growth periods in particular for china foreign direct investment has played a pivotal role in their economic growth and has major presence in international trade and investment in leading sectors of both countries giving rise to certain special features and weak links for their economic expansion and sustainability of fast

trends in the transitory variance of earnings in the united states we decompose the rise in cross sectional variance of male annual earnings in the united states from 1969 to 1996 into permanent and transitory components we find that the variance of permanent earnings began rising in the the late 1970s and has continued to rise in the 1980s the variance of transitory earnings also rose in the 1980s but declined in the 1990s there are lags in the earnings process which require a structural model to pinpoint the exact calendar times at which the changes in trends occurred

on income convergence among china hong kong and macau hong kong and macau were reunited with china in the late 1990s as two special administrative regions sars over the last half century they were china s good examples of economic development windows of openness and investors owing to historical reasons china lagged far behind hong kong and macau in terms of per capita incomes however rapid economic growth in china over the last three decades must have brought about a significant convergence of the three economies china s economic success has benefited from the integration of its two sars and the coastal provinces especially guangdong in terms of technological spillover massive investment and trade the economic trickledown direct investment and trade must have been important drivers of economic integration and income convergence this paper aims to analyse the trend and studies the determinants of income convergence between china and its two sars both parametric and non parametric techniques are employed to quantify the pace of convergence on per capita incomes in hong kong macau and the chinese provinces over a period of more than 40 years we find no evidence of convergence in the pre reform period but strong evidence of both absolute and conditional convergence in the post reform period over the reform period the pace of convergence is less than 1 per cent per annum without controlling for trade and more than 2 per cent conditional on trade

china coming to grips with the new global player this paper analyses china s economic performance in the last 25 years and discusses its prospect for growth in the future exports and investment have been the two driving forces for the high annual gdp growth rates fdi plays an important role however structural issues such as the loss making state owned firms and the fragile banking industry have to be solved monetary policy is complicated by the accumulation of reserves which however provide an insurance for the fragile banking system property rights a crucial element in transforming a communist society are far from being clearly developed major policy issues in the future include the correction of the distorted growth process and of the institutional deficits especially with respect to the rule of law and the lack of democracy

the role of financial systems for cross country differences in the link between income and consumption inequality abstractthis article discusses why consumption inequality stays low despite high income inequality in the u s but income inequality is closely followed by consumption inequality in china we show that different financial systems can play a critical role in shaping the cross country different links between income and consumption inequality this phenomenon is consistent with the cross country different relationships between income inequality and saving rates consumer credit expansion in the u s makes inequality much less serious for consumption than for income and this result holds to an even larger extent if more domestic credit can be financed by foreign savings but this is not the case in china whose financial system focuses only on investment and trade while neglecting liquidity constraints on consumption our assertions accord well with evidence found from the u s china and other related economies

on the existence and uniqueness of stationary equilibrium in bewley economies with production abstract i prove existence of stationary recursive competitive equilibrium in bewley economies with production under specifications in which i the utility function is allowed to be unbounded and ii the underlying discrete idiosyncratic productivity process can take any form aside from mild restrictions some of the intermediate results provide theoretical basis for assumptions often made in the quantitative macroeconomics literature by providing an example i illustrate that the equilibrium is not necessarily unique even under typical specifications of the model and discuss the underlying reasons for multiplicity

correlated income shocks and excess smoothness of consumption abstract in the literature econometricians typically assume that household income is the sum of a random walk permanent component and a transitory component with uncorrelated permanent and transitory shocks using data on realized individual incomes and individual expectations of future incomes from the survey of italian households income and wealth i find that permanent and transitory shocks are negatively correlated relaxing the assumption of no correlation between the shocks i explore the effects of correlated income shocks on the estimated consumption insurance against permanent and transitory shocks and consumption smoothness using a life cycle model with self insurance calibrated to u s data negatively correlated income shocks result in smoother consumption and upward biased estimates of the insurance against transitory and permanent when borrowing constraints are not tight income shocks while the life cycle model with negatively correlated shocks fits well the sensitivity of consumption to current income shocks observed in u s data it falls short of explaining the sensitivity of consumption to income shocks cumulated over a longer horizon

solving asset pricing models with stochastic volatility abstract this paper provides a closed form solution for the price dividend ratio in a standard asset pricing model with stochastic volatility the growth rate of the endowment is a first order gaussian autoregression while the stochastic volatility innovations can be drawn from any distribution for which the moment generating function exists the solution is useful in allowing comparisons among numerical methods used to approximate the nontrivial closed form the closed form solution reveals that when using perturbation methods around the deterministic steady state the approximate solution needs to be sixth order accurate in order for the parameter capturing the conditional standard deviation of the stochastic volatility process to be present

consumption asset pricing with stable shocks exploring a solution and its implications for mean equity returns abstract we study the consumption based asset pricing model due to lucas econometrica 46 1978 1429 the exogenous endowment sequence is modeled as a linear stochastic process driven by stable shocks in an otherwise standard framework the gaussian process emerges as a special case we derive exact analytical solutions for asset prices and returns and provide conditions under which these exist we also study the ability of the model to generate realistic values of observed mean rates of return

huggett economies with multiple stationary equilibria abstract i obtain a closed form solution to a huggett economy with constant absolute risk aversion cara utility when the vector of individual state variables follows a var 1 process with an arbitrary shock distribution the stationary equilibrium is unique if the income process is ar 1 but not necessarily so otherwise with gaussian shocks i provide general sufficient conditions for the existence of at least three equilibria when the income process is either arma 1 1 ar 2 or has a persistent transitory pt representation with negatively correlated shocks the possibility of multiple equilibria calls for caution in comparative statics exercises and policy analyses using heterogeneous agent models as an illustration i provide an example in which the welfare implication of changing the income risk goes in opposite directions depending on the choice of equilibrium

solving asset pricing models with gaussian shocks this paper provides a closed form solution for the price dividend ratio in a standard asset pricing model when the growth rate of the endowment is a first order gaussian autoregression it determines the conditions under which this solution is bounded the findings are useful in allowing comparisons among numerical methods used to approximate the nontrivial closed form the solution method is extended to accommodate multivariate and higher ordered autoregressive processes

incomplete markets and volatility abstract this paper shows that the precautionary motive combined with asset incompleteness is a major source of volatility and indeterminacy in financial markets price fluctuations originate from agents efforts to insure themselves through time by borrowing and lending instead of shifting income across states of nature by trading risky assets a high interest rate at a future date reduces the potential for future consumption smoothing via borrowing which leads to a strong precautionary motive and a low interest rate in the current period the negative feedback between future and current rates generates fluctuations this logic is developed in spec a cara normal exchange economy with many periods and endogenous interest rates when there is an intermediate level of market incompleteness and sufficient investor impatience fluctuations in the real interest rate can be large even though the aggregate endowment is constant spec has a unique equilibrium under a finite horizon on the other hand with a finite number of infinitely lived agents there exists a robust continuum of equilibria that are neither bubbles nor sunspots journal of economic literature classification numbers c61 d52 d58 g11 g12

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

simulating the transmission of wealth inequality via bequests abstract this paper develops calibrates and simulates a dynamic 88 period olg model to study the intergenerational transmission of u s wealth inequality via bequests the model features marriage realistic fertility patterns random death assortative mating based on skills heterogeneous skill endowments heterogeneous rates of return skill inheritability progressive income taxation and resource annuitization via social security all bequests arise from imperfect annuitization nonetheless the model generates a realistic ratio of aggregate wealth to aggregate labor income a realistic bequest flow relative to the stock of wealth and a realistic wealth distribution at retirement skill differences assortative mating social security and the time preference are the primary determinants of wealth inequality bequests do propagate wealth inequality but only in the presence of social security which disproportionately disinherits the lifetime poor intergenerational wealth immobility also considered here is primarily determined by the inheritance of skills from one s parents and the magnification of the impact of this inheritance by marital sorting

the effect of interest rates on consumption in an income fluctuation problem abstract we examine the effect of a change in interest rates on an agent s consumption and savings decisions when her income is fluctuating in each period a long lived agent decides how much to save i e invest in a risky bond and how much to consume while her income and the rate of return on her savings are uncertain and depend on the state of the economy we show that under the concavity of the consumption function a condition that ensures that the substitution effect dominates the income effect lower interest rates encourage the agent s consumption across all states

fifth order perturbation solution to dsge models abstract this paper derives a fifth order perturbation solution to dsge models the paper develops a new notation that reduces the notational complexity of high order solutions and yields a faster code the new notation consists of new matrix forms of high order multivariate chain rules and a new representation of the model as a function of one vector variable the algorithm that implements the new notation is between 3 and 55 times faster than dynare depending on model size and solution order

risk and return abstract this paper examines the seasonality in the basic relationship between expected return and risk during 1935 82 the results reveal that the positive relationship between return and risk is unique to january the risk premiums during the remaining eleven months are not significantly different from zero

exact solution of asset pricing models with arbitrary shock distributions abstract the paper provides an exact solution to standard asset pricing models for any distribution of shocks to endowment s growth rate it determines the conditions that guarantee the existence of a stationary bounded equilibrium and examines these conditions for an edgeworth expansion distribution of the shocks the results are extended to the case of multivariate asset pricing models

market volatility and investor behavior it appears that speculative asset prices tend to show excess volatility relative to simple present value efficient markets models and that prices are partly forecastable as tending to returning to mean appropriately defined but what does this tell us about how speculative prices are determined are there fads in prices and if so how do they behave the question has arisen recently whether there is really room for fads in speculative prices whether or not speculative prices are too volatile if stock prices are highly correlated with dividends we might conclude that the movements in stock prices are driven by fundamentals not fads a question of longer standing is whether fads models that entail feedback from price change to price change are consistent with the observed approximate random walk price behavior that is rather low serial correlation of short run price changes we can also ask whether the feedback models are consistent with the observed relation of stock prices to dividends and earnings

trade elasticity of substitution and equilibrium dynamics abstract the empirical literature provides a wide range of estimates for trade elasticities at the aggregate level recent contributions in international macroeconomics suggest that low implied values of the trade elasticity may play an important role in understanding the disconnect between international prices and real variables however a standard model of the international business cycle displays multiple locally isolated equilibria if the trade is sufficiently low the main contribution of this paper is to compute and characterize some dynamic properties of these equilibria in simulations the presence of multiple equilibria is shown to imply a volatile and persistent real exchange rate

consumption puzzles and precautionary savings abstract when marginal utility is convex agents accumulate savings as a precautionary measure against labor income eventualities this paper shows that precautionary savings can go a long way in making the excess growth excess smoothness and excess sensitivity features of consumption consistent with the stochastic processes of labor income observed in the u s at the microeconomic level

on economic theory and recovery of the financial crisis this paper presents a new economic theory to explain the evolution of a financial crisis and why a major crisis may take a long time to recover it suggests that asymmetric psychological reactions of market players to gains and losses are the principal cause of a crisis and responsible for prolonging recovery three different shapes of recovery v u and l are defined and explained during the current financial crisis some countries such as china and india may have a v shaped recovery others such as the uk and the us may have a u shaped recovery an important policy implication is that effective macroeconomic policies should be designed to smooth market movements and implementation of such policies has to be countercyclical rather than pro cyclical

an exact discount factor restriction for period three cycles in dynamic optimization models consider a standard aggregative dynamic optimization framework u where is the transition possibility technology set u is a reduced form utility function defined on this set and 0 1 a discount factor can an optimal program in this framework exhibit a period three cycle

perturbations in dsge models an odd derivatives theorem abstract this paper extends a classical result in portfolio theory about the effect of risk on value functions to its effect more generally on policy functions if odd moments of shocks are zero up to some order then the odd order marginal effects on value and policy functions of introducing these shocks are zero as well mathematically all coefficients of corresponding odd order in the perturbation parameter are zero if shocks are symmetric e g normally distributed then this holds for all odd orders the main theorem 1 generalizes past results on perturbations and unifies their economic intuition 2 improves the computation of stochastic coefficients and 3 illustrates how to derive properties of high order perturbations through simple induction

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

idiosyncratic production risk growth and the business cycle we introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets each agent is an entrepreneur operating her own technology with her own capital stock the general equilibrium is characterized by a closed form recursion in the cara normal case incomplete markets introduce a risk premium on private equity which reduces the demand for investment as compared to complete markets the steady state can thus have both a lower capital stock due to investment risk and a lower interest rate due to precautionary savings furthermore the anticipation of high real interest rates in the future feeds back into high risk premia and low investment in the present thus slowing down convergence to the steady state our results highlight the importance of private risk premia for capital accumulation and business cycles

multiplicity of equilibria and comparative statics conditions that guarantee the uniqueness of equilibrium in models of economic competition are crucial to applications of these models in exercises of comparative statics until now most of the attention given to the uniqueness question has been focused on pure exchange economies in this paper we use a topological index theorem to derive necessary and sufficient conditions for the uniqueness of equilibrium in economies with production unfortunately conditions that imply uniqueness appear to be too restrictive to have much applicability we argue for example that the only economically interpretable restrictions that imply uniqueness are either that the demand side of an economy behaves like a single consumer or that the supply side is an input output system our results suggest a need for reformulation of the comparative statics method

monetary policy vagabonding liquidity and bursting bubbles in new and emerging markets an overinvestment view credit booms have globally fuelled hikes in stock raw material and real estate markets which have culminated in the recent us subprime market crisis we explain the global asset market booms since the mid 1980s based on the overinvestment theories of hayek wicksell and schumpeter we argue that ample liquidity supply originating in the large industrialized countries has contributed to overinvestment cycles in japan east asia new markets in the industrial countries and many emerging market economies expansionary monetary policies in response to the burst of bubbles are argued to have contributed to vagabonding bubbles around the globe

on the new economic policies promoted by the 17th ccp congress in china the 17th chinese communist party congress in october 2007 attracted attention within and outside china for the bold development agenda that was placed before delegates after 30 years of economic reform that has produced a remarkable improvement in living standards and china s reintegration into the world economy the party unveiled a programme that would push china to become a world superpower over the next 30 years china s ambition is to become a technologically innovative state to make china a moderately prosperous and harmonious society with a scientific outlook on development and to achieve full industrialisation and sustainable prosperity whether china is able to attain its objectives will critically depend on the party s ability to implement the new economic policies and address the social and political challenges that economic growth has created the aim of the paper is to examine the policies motivations and constraints that china faces in achieving the objectives laid out at the party congress

income variance dynamics and heterogeneity recent theoretical work has shown the importance of measuring microeconomic uncertainty for models of both general and partial equilibrium under imperfect insurance in this paper the assumption of i i d income innovations used in previous empirical studies is removed and the focus of the analysis is placed on models for the conditional variance of income shocks which is related to the measure of risk emphasized by the theory we first discriminate amongst various models of earnings determination that separate income shocks into idiosyncratic transitory and permanent components we allow for education and time specific differences in the stochastic process for earnings and for measurement error the conditional variance of the income shocks is modelled as a parsimonious arch process with both observable and unobserved heterogeneity the empirical analysis is conducted on data drawn from the 1967 1992 panel study of income dynamics we find strong evidence of sizeable arch effects as well as evidence of unobserved heterogeneity in the variances

financial globalisation and emerging markets volatility the volatility of capital flows to emerging market em countries and frequency of financial crises have imposed high welfare costs on the countries involved the empirical literature provides at best a mixed picture on the relationship between long run em country growth and financial integration meanwhile the prevailing policy discourse regarding reform of the international financial system remains incomplete the focus has largely been on either institutional and policy measures required of em countries or international crisis resolution procedures the role played by private financial markets and institutions in the developed world has not received adequate attention this paper describes some of the structural features inherent in today s financial markets that directly contribute to the instability in em capital flows