A Long-Run Risks Model of Asset Pricing with Fat Tails

WWe explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. We estimate the structural parameters of the proposed model by maximum likelihood. We find that the homoskedastic model with fat tails leads to significant increase in implied risk premia and volatility of price-dividend ratio over the benchmark Gaussian model, but similar volatility of market return, expected risk free rate and its volatility.asset pricing, long run risks, equity risk premium, fat tails, Dampened Power Law, Levy process

Variety Matters

Countercyclical markups are a key transmission mechanism in many endogenous business cycle models. Yet, recent findings suggest that aggregate markups in the US are procyclical. The current model adresses this issue. It extends Gali's (1994) composition of aggregate demand model by endogenous entry and exit of firms and by product variety effects. Endogenous business cycles emerge with procyclical markups that are within empirically plausible ranges.sunspot equilibria, indeterminacy, markups, variety effects, business cycles

Variety Matters

Countercyclical markups are a key transmission mechanism in many endogenous business cycle models. Yet, recent findings suggest that aggregate markups in the US are procyclical. The current model addresses this issue. It extends Gall's (1994) composition of aggregate demand model by endogenous entry and exit of firms and by product variety effects. Endogenous business cycles emerge with procyclical markups that are within empirically plausible ranges.Sunspot equilibria, Indeterminacy, Markups, Variety effects, Business cycles.

Fiscal policy and indeterminacy in models of endogenous growth

This paper investigates the dynamic behavior of two-sector models of endogenous growth with sector-specific external effects, and government expenditure financed by distortionary taxation. When this type of external effect is combined with a sufficient degree of capital taxation in a Lucas–Uzawa endogenous growth model, continua of equilibria will emerge in the region of the balanced growth paths. By contrast, indeterminacy is not possible when either sector-specific external effects or factor taxation are added to the model in isolation. In the second part of the paper, we demonstrate that if labor supply is endogenous, indeterminacy can be consistent with much lower degrees of increasing returns to scale. Furthermore, certain types of fiscal policy will be associated with multiple balanced growth paths and the existence of a poverty trap. Finally, in the last part of the paper, we demonstrate that if physical capital is employed in both sectors of the economy, indeterminacy will emerge for varying combinations of factor taxation and external effects, even when returns to scale are constant at the social level

Optimization in non-standard problems. An application to the provision of public inputs

This paper describes a new method for solving non-standard constrained optimization problems for which standard methodologies do not work properly. Our method (the Rational Iterative Multisection -RIM- algorithm) consists of different stages that can be interpreted as different requirements of precision by obtaining the optimal solution. We have performed an application of RIM method to the case of public inputs provision. We prove that the RIM approach and comparable standard methodologies achieve the same results with regular optimization problems while the RIM algorithm takes advantage over them when facing non-standard optimization problems.direct search, constrained optimization, multisection, optimal taxation, public input.

Population and Endogenous Growth

Using a general three sector growth model, this paper derives general conditions for positive growth in the economy along a balanced growth path under the alternative assumptions of a static population and a growing population. The framework is general enough to replicate endogenous and semi-endogenous R&D based growth models. This paper challenges the conventional wisdom that (non-) linearity is synonymous with (semi-) endogenous growth. CES technology is introduced to human capital accumulation to obtain positive balanced growth with or without population growth.

Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets

This paper discusses the consequences of introducing imperfectly competitive product markets into an otherwise standard neoclassical growth model. We pay particular attention to the consequences of imperfect competition for the explanation of fluctuations in aggregate economic activity. Market structures considered include monopolistic competition, the 'customer market' model of Phelps and Winter, and the implicit collusion model of Rotemberg and Saloner. Empirical evidence relevant to the numerical calibration of imperfectly competitive models is reviewed. The paper then analyzes the effects of imperfect competition upon the economy's response to several kinds of real shocks, including technology shocks, shocks to the level of government purchases, and shocks that change individual producers' degree of market power. It also discusses the role of imperfect competition in allowing for fluctuations due solely to self-fulfilling expectations.

Exploring ways to estimate endogenous productivity

This paper explores methods to assess the impact on firm productivity of the investment in innovation activities (endogenous productivity). It uses 23 years of firm-level data generated by the Spanish ESEE survey (1990-2012). We first apply traditional approaches to the measurement of productivity such as Solow Residual and Multilateral Index. We then replicate the estimation of the model in Doraszelski and Jaumandreu (2013) using more data now available. We briefly compare both approaches and discuss about the importance of treating inputs and productivity as endogenous. We then discuss ways to apply the model for endogenous productivity when there are no firm-level output price indices available, a limitation of many data bases. Including the demand of the firm in the estimation allows us to obtain a "composite" of productivity, demand elasticity, and demand heterogeneity. This unobservable, often called "revenue productivity", is the estimate of productivity used by most scholarly studies. We find that this composite does not behave as productivity and, in particular, neither is greater for firms that perform R&D nor its distribution shows stochastic dominance. Its persistence and returns also give misleading results. Our findings highlight the importance of producing more complete databases, especially if policy implications are to be drawn. They also suggest caution in interpreting the results based on revenue productivity