Do Individuals Have Preferences Used in Macro-Finance Models? An Experimental Investigation

Brown, Alexander; Kim, Hwagyun

doi:10.1287/mnsc.2013.1794

Cited by 48 publications

(21 citation statements)

References 76 publications

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“…In this environment, agents have preferences for early resolution of uncertainty, consistent with recent experimental studies (Brown and Kim, 2014). If γ = 1/ψ, preferences collapse to the standard power utility case.…”

Section: An Endowment Economysupporting

confidence: 74%

Matching the BRIC equity premium: A structural approach

Curatola

Donadelli

Grüning

2015

Emerging Markets Review

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The equity risk premium (ERP) in BRIC markets is, on average, significantly higher than that in the US market. This paper employs an endowment economy with recursive preferences and long-run risk to explain the ERP generated by a portfolio of BRIC equity indices. The combination of recursive preferences and long-run risk partially explains the BRIC ERP. It turns out that there is a puzzle with respect to BRIC data as well. This holds even if we account for high levels of aversion to consumption and utility risk and for the empirically observed autoregressive structure of US consumption and BRIC dividend growth.

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Section: An Endowment Economysupporting

confidence: 74%

Matching the BRIC equity premium: A structural approach

Curatola

Donadelli

Grüning

2015

Emerging Markets Review

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“…Notice also that this class of preference has been recently supported by experimental studies (Brown and Kim (2013)). …”

Section: Householdssupporting

confidence: 57%

Austerity, Fiscal Volatility, and Economic Growth

et al. 2014

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This paper contributes to the ongoing debate on the relationship between austerity measures and economic growth. We propose a general equilibrium model where (i ) agents have recursive preferences; (ii ) economic growth is endogenously driven by investments in R&D; (iii ) the government is committed to a zero-deficit policy and finances public expenditures by means of a combination of labor taxes and R&D taxes. We find that austerity measures that rely on reducing resources available to the R&D sector depress economic growth both in the short-and long-run. High debt EU members are currently implementing austerity measures based on higher taxes and/or lower investments in the R&D sector. This casts some doubts on the real ability of these countries to grow over the next years.Keywords: Austerity Measures, Fiscal Policy, Endogenous Growth, R&D JEL Codes: G12, G15 * All authors are at the Research Center SAFE, Goethe University Frankfurt, Grüneburgplatz 1, 60323 Frankfurt, Germany.Corresponding author: Patrick Grüning, gruening@safe.uni-frankfurt.de, +49 (0) 69-798-30086. Remaining authors' e-mails and phone numbers: curatola@safe.uni-frankfurt.de, +49 (0) 69-798-30096; michael.donadelli@gmail.com, +49 (0) 69-798-33882; gioffre@safe.uni-frankfurt.de, +49 (0) 69-798-33855. We thank Francesco Bianchi, Alex Ludwig, Marco Pagano, Lorenzo Prosperi and Christian Schlag for helpful comments and suggestions. We gratefully acknowledge financial support from the Research Center SAFE, funded by the State of Hessen initiative for research LOEWE. All remaining errors are our own.

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“…Note that we have γ > 1/ψ. This implies that agents have a preference for early resolution of uncertainty, which is also in line with the recent experimental evidence by Brown and Kim (2014). Following standard practice, the consumption share in the utility bundle ν is chosen such that the steady state supply of labor is one third of the total time endowment of the household.…”

Section: Benchmark Calibrationmentioning

confidence: 68%

Investment-Specific Shocks, Business Cycles and Asset Prices

et al. 2015

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Recent studies show that investment-specific shocks (e.g. shocks to the marginal efficiency of investment, or shocks to the capital depreciation rate) are a key driver of macroeconomic fluctuations. Additionally, it has been shown that these shocks help in bringing asset prices and macroeconomic quantities closer to their empirical counterparts.However, there are still some open questions concerning the role of investment-specific shocks for the dynamics of macroeconomic and financial variables. On the one hand, economic models relying exclusively on investment shocks tend to produce a negative correlation between consumption and investment, contrary to what data suggest. On the other hand, studies examining the role of both aggregate productivity and investment-specific shocks show that the former does not match first and second moments of asset prices if a quantitatively relevant investment-specific shock is missing.In this paper, we develop a two-sector (consumption and investment) production economy where the combination of long-run productivity risk in both sectors and wage rigidities helps in resolving the aforementioned issues. In this respect, our paper contributes to the existing literature by examining the joint effect of investment-specific shocks on both asset prices and macroeconomic quantities.After providing an empirical justification for the presence of a long-run risk component in both sectors, we show that long-run investment-specific shocks act as a substitute for a stochastic marginal efficiency of investment. In particular, even in the absence of a shock to the marginal efficiency of investment, our economy gives rise to a sizeable aggregate risk premium and a low and smooth risk-free rate, and it reproduces the empirically observed spread in the stock return volatilities of the two sectors. Once a moderate amount of wage rigidities is added, the model is also capable of reproducing the empirically observed positive co-movement between consumption and investment growth. AbstractWe introduce long-run investment productivity risk in a two-sector production economy to explain the joint behavior of macroeconomic quantities and asset prices. Long-run productivity risk in both sectors, for which we provide economic and empirical justification, acts as a substitute for shocks to the marginal efficiency of investments in explaining the equity premium and the stock return volatility differential between the consumption and the investment sector. Moreover, adding moderate wage rigidities allows the model to reproduce the empirically observed positive co-movement between consumption and investment growth.

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Do Individuals Have Preferences Used in Macro-Finance Models? An Experimental Investigation

Cited by 48 publications

References 76 publications

Matching the BRIC equity premium: A structural approach

Matching the BRIC equity premium: A structural approach

Austerity, Fiscal Volatility, and Economic Growth

Investment-Specific Shocks, Business Cycles and Asset Prices

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