A Multiplier Approach to Understanding the Macro Implications of Household Finance

Chien, YiLi; Cole, Harold L.; Lustig, Hanno

doi:10.3386/w13555

Cited by 23 publications

(21 citation statements)

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“…Many economists have adopted recursive formulations that replace or supplement standard "primal" state variables with "dual" ones. Examples include Kehoe and Perri (2002), Marimon and Quadrini (2006), Acemoglu, Golosov, and Tsyvinski (2010), Chien, Cole, andLustig (2011), andAiyagari, Marcet, Sargent, andSeppälä (2002). Despite their widespread use, thorough analysis of these methods is limited and their application has often been ad hoc.…”

Section: Literaturementioning

confidence: 99%

The Dual Approach to Recursive Optimization: Theory and Examples

Pavoni¹,

Sleet²,

Messner³

2018

Econometrica

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APPENDIX A: NUMERICAL IMPLEMENTATION THIS SECTION DESCRIBES how to implement the recursive dual approach numerically. Under the conditions of Theorem 2, the dual Bellman operator is a contraction and, consequently, it is natural to calculate D * via value iteration. Numerical approximation of candidate dual value functions is facilitated by their sub-linearity and the simplicity of their domain. The dual Bellman involves an (outer) minimization over a set of multipliers; these multipliers are passed to (and "coordinate") a family of simple (inner) maximizations over current actions and states. Additive separability in the objective may be exploited to decompose the inner maximizations into a family of simpler maximizations that in parametric settings often have analytical solutions.Dual Value Function Approximation. Numerical implementation of a value function iteration algorithm requires approximations to candidate value functions. Our implementation exploits the sub-linearity of dual value functions and uses a piecewise linear approximation (on the spherical domain C). Piecewise linear approximations to value functions defined on spheres were first applied in economics by Judd, Yeltekin, and Conklin (2003). We apply their approximation procedure to our setting. 31 Recall that under the conditions of Theorem 2, the domain for the dual Bellman operator may be identified with an interval of functions D : S × Y → R, each of which is sub-linear in its second argument. As noted, these functions are fully determined on S × C (or a subset thereof). Moreover, their sub-linearity implies that, for all y ∈ C, Judd, Yeltekin, and Conklin (2003) used this approach to approximate the support function of a payoff set in a repeated game; we use it to approximate the recursive dual value function. In other aspects, our (recursive dual) formulation is different from that of Judd, Yeltekin, and Conklin (2003). Alternative approaches to approximation on spherical domains are described in Sloan and Womersley (2000). 32 For this and other properties of sub-linear functions used below, see Florenzano and Van (2001).

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Section: Literaturementioning

confidence: 99%

The Dual Approach to Recursive Optimization: Theory and Examples

Pavoni¹,

Sleet²,

Messner³

2018

Econometrica

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“…For theoretical models of fees and flows, asset price effects, manager incentive problems, and other aspects of mutual funds, see, for example,Mamaysky and Spiegel (2002),Berk and Green (2004),Kaniel and Kondor (2013),Cuoco and Kaniel (2011), Chien, Cole, and Lustig (2011), Chapman, Evans, and Xu (2010, andPástor and Stambaugh (2012). A number of recent papers in the empirical mutual fund literature also find that some managers have skill, for example,Kacperczyk, Sialm, andZheng (2005, 2008),Kacperczyk and Seru (2007),Cremers and Petajisto (2009), Huang, Sialm, andZhang (2011),Koijen (2014),Baker, Litov, Wachter, and Wurgler (2010).…”

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confidence: 99%

A Rational Theory of Mutual Funds' Attention Allocation

2016

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The question of whether and how mutual fund managers provide valuable services for their clients motivates one of the largest literatures in finance. One candidate explanation is that funds process information about future asset values and use that information to invest in high‐valued assets. But formal theories are scarce because information choice models with many assets are difficult to solve as well as difficult to test. This paper tackles both problems by developing a new attention allocation model that uses the state of the business cycle to predict information choices, which in turn, predict observable patterns of portfolio investments and returns. The predictions about fund portfolios' covariance with payoff shocks, cross‐fund portfolio and return dispersion, and their excess returns are all supported by the data. These findings offer new evidence that some investment managers have skill and that attention is allocated rationally.

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“…In order to match the data better, households in the model should be given the possibility to over‐accumulate wealth, or experience substantial wealth losses. An alternative is to consider financial market access constraints as in Chien, Cole, and Lustig ().…”

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confidence: 99%

Understanding the Distributional Impact of Long‐Run Inflation

Camera

Chien

2014

J of Money Credit Banking

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The impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices. In stationary equilibrium, inflation nonlinearly alters the endogenous distributions of income, wealth, and consumption. Small departures from zero inflation have the strongest impact. Three features determine how inflation impacts distributions and welfare: financial structure, shock persistence, and labor supply elasticity. When agents can self‐insure only with money, inflation reduces wealth inequality but may raise consumption inequality. Otherwise, inflation reduces consumption inequality but may raise wealth inequality. Given persistent shocks and an inelastic labor supply, inflation may raise average welfare. The results hold when the model is extended to account for capital formation.

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A Multiplier Approach to Understanding the Macro Implications of Household Finance

Cited by 23 publications

References 1 publication

The Dual Approach to Recursive Optimization: Theory and Examples

The Dual Approach to Recursive Optimization: Theory and Examples

A Rational Theory of Mutual Funds' Attention Allocation

Understanding the Distributional Impact of Long‐Run Inflation

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