29 research outputs found

    Unifying Classical and Bayesian Revealed Preference

    Full text link
    This paper establishes the equivalence between Bayesian revealed preference (Caplin and Dean, 2015) and classical revealed preference with non-linear budget constraints (Forges and Minelli, 2009). Classical revealed preference tests for utility maximization given known budget constraints. Bayesian revealed preference tests for costly information acquisition given a utility function. Our main result shows that the key theorem in Caplin and Dean (2015) on Bayesian revealed preference is equivalent to Afriat-type feasibility inequalities (Afriat, 1967) for general (non-linear) budget sets. Our second result exploits this connection between classical and Bayesian revealed preference to construct a monotone convex information acquisition cost from decision maker's utilities and decisions in Bayesian revealed preference. Keywords: Afriat's Theorem, Revealed preference, Bayesian revealed preference, Costly Information acquisition, Rational Inattention, Blackwell ordering, Utility Theory

    Revealed Preference Test and Shortest Path Problem; Graph Theoretic Structure of the Rationalizability Test

    Full text link
    * Revised: [15-17, 2015]* Revised: [15-17-Rev, 2015

    Essays on Broad Divisia Monetary Aggregates: Admissibility and Practice

    Get PDF
    The assumption of weak separability of goods and services in the utility function is ubiquitous in macroeconomic modeling. If the goods and services are weakly separable, they can be combined into an "admissible" aggregate. This project tests the assumption of weak separability (or "admissibility") for broad Divisia monetary aggregates for the United States provided by the Center for Financial Stability; Divisia M4, Divisia M4-, and Divisia M3. These broad monetary aggregates measure the service flow of money in the macroeconomy through a share weighted index method developed by Barnett (1980), and already established as superior to simple sum aggregates in the literature collected in Barnett and Serletis (2000). The problem to be addressed is the determination of how broad a monetary aggregate should be: is the Divisia M2 level sufficient for aggregation or should other like commercial paper, overnight repurchase agreements, short term securities and large denomination time deposits be included? These components contained in broad aggregates are subject to risk that is not accounted for in the traditional user cost estimate of Barnett (1980), but can be adjusted through methods proposed in Barnett and Wu (2005). The performance of these risk adjusted aggregates is tested alongside with the risk neutral case to determine admissibility. Using microeconomic foundations in the non-parametric weak separability test literature of Varian (1982) the aggregates are examined for evidence of admissibility. Since Varian (1982) tends to over-reject weak separabiltiy, we implement methods from Barnett and de Peretti (2009) to avoid over rejection from noise in the data. Furthermore a necessary and sufficient weak separability condition is used based on the marginal rate of substitution between two goods, instead of an only sufficient condition. The results provide evidence for the use of Divisia M4 as an admissible aggregate. In the risk adjusted case several violations found in the risk neutral case dissolve, and the Divisia M4- gains support as admissible. There is less evidence to support the use of Divisia M3 as an admissible aggregate as it passes the necessary but not sufficient conditions for admissibility

    ESSAYS IN DIVISIA MONETARY AGGREGATION: APPLICATIONS TO THE GULF MONETARY UNION

    Get PDF
    In the aftermath of the 2007-08 financial crisis when short-term nominal interest rate reached zero, many central banks worldwide have adopted unconventional monetary policy tools such as quantitative easing where central banks inject money via purchases of long-term government bonds to stimulate their economies. Using the officially published simple-sum monetary aggregates to measure monetary service flows of the economy can be misleading since the simple-sum index ignores the liquidity characteristics of assets in monetary aggregates. Divisia indexes remove the investment motive and measure all other monetary services associated with economic liquidity, by allowing the weights of monetary assets to vary depending on their monetary services at the margin. This dissertation introduces key economic indicators for the Gulf states and discusses the main issues related to monetary policy and theory, aggregation theory and index number theory. It outlines the methods for constructing proper inflation and monetary indexes that are consistent with monetary theory and aggregation theory. Moreover, it provides guidelines for creating optimal monetary aggregation, as suggested by the originator of Divisia monetary aggregation, William A. Barnett. This dissertation reports on the first Divisia monetary aggregates for the complete GCC area and focuses on economic measurement. The second chapter builds monthly time-series of Divisia monetary aggregates for the Gulf area for the period of June 2004 to December 2011, using area-wide data. It also offers an "economic stability" indicator for the GCC area by analyzing the dynamics pertaining to certain variables such as the dual price aggregates, aggregate interest rates, and the Divisia aggregate user-cost growth rates. Our findings unfold the superiority of the Divisia indexes over the officially published simple-sum monetary aggregates in monitoring the business cycles. There is also direct evidence on higher economic harmonization between GCC countries--especially in terms of their financial markets and the monetary policy. Monetary policy often uses interest rate rules, when the economy is subject only to technology shocks. In that case, money is nevertheless relevant as an endogenous indicator [Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press]. Properly weighted monetary aggregates provide critical information to policy makers regarding inside liquidity created by financial intermediaries. In addition, policy rules should include money as well as interest rates, when the economy is subject to monetary shocks as well as technology shocks. The data show narrow aggregates growing while broad aggregates collapsed following the financial crises. This information clearly signals problems with the financial system's ability to create liquidity during the crises. The third chapter investigates the feasibility of forming a common currency area over the Gulf states by testing the weak separability of the monetary aggregates within and then over the GCC countries. Our findings indicate the weak separability of the broad monetary aggregates for the individual GCC countries from private consumption and hence the existence of broad monetary aggregates. The narrow monetary aggregates do exist for the GCC countries except for Qatar where the demand deposits (which offer positive interest rates) cannot be grouped with currency. Our weak separability tests on the Gulf area confirm the existence of the broad monetary aggregate. However, a narrow monetary aggregate for the entire GCC area does not exist and hence the GCC countries cannot form a common currency area. We find that if Oman is excluded from the monetary union, being a non-oil producing country and hence heterogeneous with respect to the remaining GCC countries, a common currency area is feasible. Using our admissible groups of GCC monetary assets, we construct Divisia monetary aggregates. Our findings suggest the superiority of Divisia indexes over their counterpart simple-sum monetary aggregates in resembling the business cycle patterns where Divisia monetary indexes are low prior to the recent financial crisis and higher afterwards indicating their ability to signal financial turmoil. Finally, the fourth chapter provides core inflation indicators for the complete GCC area along with alternative inflation measurements. It constructs core inflation indicators for the GCC countries and then recursively builds a single core inflation indicator for the Gulf area for the period of June 2004 to December 2011. This chapter proposes core inflation indicators for the GCC area based upon two alternative monetary aggregates: Divisia monetary aggregates and simple-sum monetary aggregates. Using the Generalized Dynamic Factor Model (GDFM), the core inflation indicators for the Gulf area were obtained by extracting the long-term common components of inflation while disregarding the short-term components--thereby eliminating idiosyncratic shocks and transitory noise from our inflation measures. Lastly, this chapter shows that the predictive performance of the Divisia monetary aggregates dominates their simple-sum counterparts for inflation forecasts in the Gulf area

    Stochastic Dominance Efficiency Analysis of Diversified Portfolios: Classification, Comparison and Refinements

    Get PDF
    For more than three decades, empirical analysis of stochastic dominance was restricted to settings with mutually exclusive choice alternatives. In recent years, a number of methods for testing efficiency of diversified portfolios have emerged, which can be classified into three main categories: 1) majorization, 2) revealed preference and 3) distribution-based approaches. Unfortunately, some of these schools of thought are developing independently, with little interaction or crossreferencing among them. Moreover, the methods differ in terms of their objectives, the information content of the results and their computational complexity. As a result, the relative merits of alternative approaches are difficult to compare. This paper presents the first systematic review of all three approaches in a unified methodological framework. We examine the main developments in this emerging literature, critically evaluating the advantages and disadvantages of the alternative approaches. We also point out some misleading arguments and propose corrections and improvements to some of the methods considered

    Admissible monetary aggregates for the Euro area

    Get PDF
    We use the Fleissig and Whitney (2003) weak separability test to determine admissible levels of monetary aggregation for the Euro area. We find that the Euro area monetary assets in M2 and M3 are weakly separable and construct admissible Divisia monetary aggregates for these assets. We evaluate the Divisia aggregates as indicator variables, building on Nelson (2002), Reimers (2002), and Stracca (2004). Specifically, we show that real growth of the admissible Divisia aggregates enter the Euro area IS curve positively and significantly for the period from 1980 to 2005. Out of sample, we show that Divisia M2 and M3 appear to contain useful information for forecasting Euro area inflation

    Goodness-of-Fit in Demand Analysis

    Full text link
    Revealed preference analysis provides a definitive method to test for optimizing behavior. However, it has been criticized because it fails to allow for approximate satisfaction of optimizing behavior. In this paper, I outline some possible solutions to this problem. These solutions suggest some novel measurements of goodness-of-fit in parametric demand estimation.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/101026/1/ECON464.pd

    Monte Carlo experiments of market demand theory

    Get PDF
    This study investigated the present theory for market demand and discussed the limitations and restrictions of theory from an empirical perspective. The objective of the study was to set up a Monte Carlo model to analyze the relationship between consumer demand and market demand and investigate the market approximation characteristics in light of aggregation conditions. Assuming that income and prices follow lognormal distributions individual optimal allocations were computed and aggregated to market data. Then various market demand systems were applied and approximation characteristics were studied in terms of bias and variance of elasticities. The analyses were carried in several experiments based on different individual demand systems under various assumptions of distributions of income and prices;The results indicated that bias in elasticities may be considerable. The numerical exercises also indicated that rejection rate of Slutsky restrictions increased as the assumption of constant variance of distribution of income and prices was relaxed;Quadratic response surfaces for bias as percent of true elasticities and variance of Slutsky restrictions were also fitted based on experiments following a Central Composite design;The design factors included some of the individual demand coefficients and variance of income and price distributions. The fitted quadratic response surfaces for bias in elasticities indicated that the design factors were not important. On the other hand, the response surfaces fitted for variance of Slutsky restrictions indicated that the design factors were important
    corecore