Unexploited Connections Between Intra- and Inter-temporal Allocation

This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identified by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility.elasticity of intertemporal substitution, Euler equation estimation, demand systems

Unexploited Connections Between Intra- and Inter-temporal Allocation

This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identified by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility.elasticity of intertemporal substitution, Euler equation estimation, demand systems

Dating the Timeline of Financial Bubbles during the Subprime Crisis

A new recursive regression methodology is introduced to analyze the bubble characteristics of various financial time series during the subprime crisis. The methods modify a technique proposed in Phillips, Wu and Yu (2010) and provide a technology for identifying bubble behavior and consistent dating of their origination and collapse. The tests also serve as an early warning diagnostic of bubble activity. Seven relevant financial series are investigated, including three financial assets (the Nasdaq index, home price index and asset-backed commercial paper), two commodities (the crude oil price and platinum price), one bond rate (Baa), and one exchange rate (Pound/USD). Statistically significant bubble characteristics are found in all of these series. The empirical estimates of the origination and collapse dates suggest an interesting migration mechanism among the financial variables: a bubble first emerged in the equity market during mid-1995 lasting to the end of 2000, followed by a bubble in the real estate market between January 2001 and July 2007 and in the mortgage market between November 2005 and August 2007. After the subprime crisis erupted, the phenomenon migrated selectively into the commodity market and the foreign exchange market, creating bubbles which subsequently burst at the end of 2008, just as the effects on the real economy and economic growth became manifest. Our empirical estimates of the origination and collapse dates match well with the general datetimes of this crisis put forward in a recent study by Caballero, Farhi and Gourinchas (2008).Financial bubbles, Crashes, Date stamping, Explosive behavior, Mildly explosive process, Subprime crisis, Timeline

The Life Cycle Model of Consumption and Saving

The life-cycle model is the standard framework which economists use to think about the intertemporal allocation of time, money and effort. The model suggests that households should `smooth' expenditures. One of the strengths of the model is that it provides a single framework which integrates allocation at many different frequencies. Accordingly, we provide an assesment of the life- cycle model by re-examining the empirical evidence for smoothing (1) within the year, (2)at year-to-year or business cycle frequencies, (3) over the working life, and (4) across the stages of life, such as working into retirement. We conclude that although unresolved challenges remain, the model has had many more successes than failures. We provide some calculations that show that where deviations from the model's predictions have been detected, they imply very small welfare costs for households. Moreover, economists are really just beginning systematic application of general theory models to microdata. Thus it is much too early to abandon the life-cycle model.life cycle model; consumption; saving

Entry Costs and Stock Market Participation Over the Life Cycle

Several explanations for the observed limited stock market participation have been offered in the literature. One of the most promising one is the presence of market frictions mostly in the form of fixed entry and/or transaction costs. Empirical studies strongly point to a significant structural (state) dependence in the stock market entry decision, which is consistent with costs of these types. However, the magnitude of these costs are not yet known. This paper focuses on fixed stock market entry costs. I set up a structural estimation procedure which involves solving and simulating a life cycle intertemporal portfolio choice model augmented with a fixed stock market entry cost. Important features of household portfolio data (from the PSID) are matched to their simulated counterparts. Utilizing a Simulated Minimum Distance estimator, I estimate the coefficient of relative risk aversion, the discount factor and the stock market entry cost. Given the equity premium and the calibrated income process, I estimate a one-time entry cost of approximately 2 percent of (annual) permanent income. My estimated model matches the zero median holding as well as the hump-shaped age-participation profile observed in the data.entry costs; stock market; structural estimation

TRADE LIBERALIZATION, THE EXCHANGE RATE AND JOB AND WORKER FLOWS IN BRAZIL

Over the 1990's Brazil experienced a massive trade liberalization and wide variation in the real exchange rate. At the same time, employment growth was small and in manufacturing there was a significant reduction in total manufacturing. The main goal of this article is to idntify the effects of the exchange rate and trade liberalization on job and worker flows in Brazil. Using a novel sector exchange rate measure, our results suggest that a depreciation of the exchange rate affects net employment growth by increasing job creation and hires, with no effect on job reallocation. Tariffs have no effect on job or worker flows, while import penetration decrease job growth by increasing job destruction. The results suggest that the echange rate have a very important role on job and worker flows, even after controlling for openess and sector specificities.

Zombies or still alive. Who took advantage of COVID-19 state aid?

Theoretical background: The SARS-CoV-2 pandemic has caused violent reactions from the governments of almost all countries in the world. The attempt to contain a pandemic by restricting the mobility of society has had a huge impact on people and some businesses. As a result of COVID-19 restrictions, it became necessary to introduce special state aid programs for those businesses that were most affected by these restrictions. This was also the case in Poland. We based our analysis on welfare economics (Harberger, 1971), in which government support for enterprises is legitimized when their situation would have been worse without these interventions.Purpose of the article: The aim of this article is to assess the impact of public aid granted to large companies in Poland on their financial condition. The research problem is to answer the question whether the companies that received the aid needed it. In assessing the appropriateness of aid, liquidity, debt level and profitability indices were used, which directly resulted from the objectives of COVID-19 aid granted in Poland. The added value of the study is combining the analysis of data from financial statements with information on state aid published by the Office of Competition and Consumer Protection (UOKiK).Research methods: The research sample consisted of 1,201 large Polish enterprises from the non-financial sector. The study used non-parametric statistical tests and quartile analysis.Main findings: The results show that the aid went to entities that were already in a worse financial situation before the pandemic. At the same time, it was demonstrated that the aid did not distort the market mechanism, i.e. it neither excessively improved the situation of supported entities nor significantly worsened the situation of entities that did not benefit from the aid.Theoretical background: The Sars-COV-2 pandemic has caused violent reactions from the governments of almost all countries in the world. The attempt to contain a pandemic by restricting the mobility of society has had a huge impact on people and some businesses. As a result of COVID-19 restrictions, it became necessary to introduce special state aid programs for those businesses that were most affected by these restrictions. This was also the case in Poland. We based our analysis on welfare economics (Harberger, 1971), in which government support for enterprises is legitimized when their situation would have been worse without these interventions.Purpose of the article: The aim of this article is to assess the impact of public aid granted to large companies in Poland on their financial condition. The research problem is to answer the question whether the companies that received the aid needed it. In assessing the appropriateness of aid, liquidity, debt level and profitability indices were used, which directly resulted from the objectives of COVID-19 aid granted in Poland. The added value of the study is combining the analysis of data from financial statements with information on state aid published by the Office of Competition and Consumer Protection (UOKiK).Research methods: The research sample consisted of 1201 large Polish enterprises from the non-financial sector. The study used non-parametric statistical tests and quartile analysis.Main findings: The results show that the aid went to entities that were already in a worse financial situation before the pandemic. At the same time, it we demonstrate that the aid did not distort the market mechanism i.e., it neither excessively improved the situation of supported entities nor significantly worsened the situation of entities that did not benefit from the aid

Estimating Euler equations

In this paper we consider conditions under which the estimation of a log-linearized Euler equation for consumption yields consistent estimates of preference parameters. When utility is isoelastic and a sample covering a long time period is available, consistent estimates are obtained from the loglinearized Euler equation when the innovations to the conditional variance of consumption growth are uncorrelated with the instruments typically used in estimation. We perform a Montecarlo experiment, consisting in solving and simulating a simple life cycle model under uncertainty, and show that in most situations, the estimates obtained from the log-linearized equation are not systematically biased. This is true even when we introduce heteroscedasticity in the process generating income. The only exception is when discount rates are very high (e.g. 47% per year). This problem arises because consumers are nearly always close to the maximum borrowing limit: the estimation bias is unrelated to the linearization and estimates using nonlinear GMM are as bad. Across all our situations, estimation using a log-linearized Euler equation does better than nonlinear GMM despite the absence of measurement error. Finally, we plot life cycle profiles for the variance of consumption growth, which, except when the discount factor is very high, is remarkably flat. This implies that claims that demographic variables in log-linearized Euler equations capture changes in the variance of consumption growth are unwarranted

Static Decisions May Be Optimal in a Life Cycle Setting

In a multicommodity life cycle setting with uncertainty and time additive expected utility, this note finds necessary and sufficient conditions on preferences for all but one optimal decision each period to be independent of the future and of uncertainty.Multivariate life cycle, Euler equations.