Real Business Cycle Theory-A Systematic Review

In the past few decades, real business cycle theory has developed rapidly after the initiation of Kydland and Prescott in 1982. It has grown substantially as an independent literature and served as a widely recognized framework for studies of the economy at business cycle frequencies. It has enjoyed great success for its ability to replicate most of the observed characteristics of U.S. aggregate economic activity after WWII. Over the years, different extensions to and modifications of the real business cycle model have been proposed by many researchers. In the mean time, various criticisms and challenges have been exposed to the theory from different perspectives. Recently, new developments have been undergoing a constructive process and emerging questions are being considered to improve the empirical performance of the theory. To celebrate the theory, several works have been devoted to a comprehensive survey of the literature, represented by King and Rebelo (1999). Efforts have been also made to discuss open questions in the literature in an attempt to suggest future studies, such as Rebelo (2005). However, a systematic review of the real business cycle theory involving different perspectives to compact the literature into a narrative representation seems currently unavailable. This paper tries to fill the gap.real business cycles; dynamic stochastic general equilibrium; aggregate shocks

Fertility and Economic Growth in the Process of Demographic Transition

In recent decades, several East Asian economies have been going through the demographic transition at rapid paces. With total fertility rates well below replacement ratio, it is no surprise that childless families have begun to emerge on a large scale. This poses new challenges not only to public policymaking but also to the theoretical literature on quality-quantity tradeoff of children. When there are no children, the vehicle for human capital investment may simply disappear. This paper tries to shed some light on the issue above by drawing on some prelimenary statistics.fertility choice, economic growth, childless families, demographic transition

人口结构转变过程中生育率与经济增长的关系

In recent decades, several East Asian economies have been going through the demographic transition at rapid paces. With total fertility rates well below replacement ratio, it is no surprise that childless families have begun to emerge on a large scale. This poses new challenges not only to public policymaking but also to the theoretical literature on quality-quantity tradeoff of children. When there are no children, the vehicle for human capital investment may simply disappear. This paper tries to shed some light on the issue above by drawing on some prelimenary statistics

人口结构转变过程中生育率与经济增长的关系

In recent decades, several East Asian economies have been going through the demographic transition at rapid paces. With total fertility rates well below replacement ratio, it is no surprise that childless families have begun to emerge on a large scale. This poses new challenges not only to public policymaking but also to the theoretical literature on quality-quantity tradeoff of children. When there are no children, the vehicle for human capital investment may simply disappear. This paper tries to shed some light on the issue above by drawing on some prelimenary statistics

Suppression of blow-up in 3-D Keller-Segel model via Couette flow in whole space

In this paper, we study the 3-D parabolic-parabolic and parabolic-elliptic Keller-Segel models with Couette flow in $\mathbb{R}^3$. We prove that the blow-up phenomenon of solution can be suppressed by enhanced dissipation of large Couette flows. Here we develop Green's function method to describe the enhanced dissipation via a more precise space-time structure and obtain the global existence together with pointwise estimates of the solutions. The result of this paper shows that the enhanced dissipation exists for all frequencies in the case of whole space and it is reason that we obtain global existence for 3-D Keller-Segel models here. It is totally different from the case with the periodic spatial variable $x$ in [2,10]. This paper provides a new methodology to capture dissipation enhancement and also a surprising result which shows a totally new mechanism.Comment: 22 pag

Real Business Cycle Theory-A Systematic Review

In the past few decades, real business cycle theory has developed rapidly after the initiation of Kydland and Prescott in 1982. It has grown substantially as an independent literature and served as a widely recognized framework for studies of the economy at business cycle frequencies. It has enjoyed great success for its ability to replicate most of the observed characteristics of U.S. aggregate economic activity after WWII. Over the years, different extensions to and modifications of the real business cycle model have been proposed by many researchers. In the mean time, various criticisms and challenges have been exposed to the theory from different perspectives. Recently, new developments have been undergoing a constructive process and emerging questions are being considered to improve the empirical performance of the theory. To celebrate the theory, several works have been devoted to a comprehensive survey of the literature, represented by King and Rebelo (1999). Efforts have been also made to discuss open questions in the literature in an attempt to suggest future studies, such as Rebelo (2005). However, a systematic review of the real business cycle theory involving different perspectives to compact the literature into a narrative representation seems currently unavailable. This paper tries to fill the gap

Regime Learning and Asset Prices in A Long-run Model: Theory

This paper tries to draw on the relative merits of both the jump risk models and the long-run risk models with a linkage established by Bayesian learning, in an attempt to improve both asset pricing approaches in producing a better mechanism for understanding asset prices regularities. Rather than treating event risk as direct jumps in the level of aggregate income, we model it as changes in the underlying state of the world, the economic regimes, which affect aggregate consumption and dividend flows through their growth and volatility’s dependence on the state. Realistically, information about the state transition is imperfect in this representative agent endowment economy and agents with recursive utility perform Bayesian learning to form and update beliefs about the conditional state arrival in order to make optimal long-run consumptioninvestment decisions. This new learning component to the consumption-based paradigm will generate novel pricing implications through inducing extra covariance to be priced. Specifically, besides the aggregate uncertainty stemming from jump risk exposure, the presence of imperfect learning behavior also generates individual ambiguity. We shall see that such dual channels can help better explain some asset pricing regularities observed, e.g. the dual puzzles, predictability issues, time-varying conditional moments, etc., and shed some new light on the long-run cash flow news approach in asset pricing

A Simple Model of Managerial Incentives and Portfolio-Investment Decision

What is the optimal portfolio allocation when a manager is investing both for his firm and for himself? I address this question by solving a manager’s decision problem under a specific executive compensation structure. I study how flat wage and stock compensation affect the manager’s investment decision. I show that the allocation is the same regardless of whether the manager is prohibited from trading the public shares of his own firm. Results from calibration show that the manager invests less in firm-specific technology and more in the aggregate stock market as the risk of the firm’s project increases. More stock compensation discourages him from investing in the firm’s risky technology, but encourages more risk-taking in terms of personal investment. In addition, I prove that flat wage, effectively as a riskless bond, hedges risk and leads to more risk-taking behavior both in firm investment and personal investment

A Simple Model of Managerial Incentives and Portfolio-Investment Decision

What is the optimal portfolio allocation when a manager is investing both for his firm and for himself? I address this question by solving a manager’s decision problem under a specific executive compensation structure. I study how flat wage and stock compensation affect the manager’s investment decision. I show that the allocation is the same regardless of whether the manager is prohibited from trading the public shares of his own firm. Results from calibration show that the manager invests less in firm-specific technology and more in the aggregate stock market as the risk of the firm’s project increases. More stock compensation discourages him from investing in the firm’s risky technology, but encourages more risk-taking in terms of personal investment. In addition, I prove that flat wage, effectively as a riskless bond, hedges risk and leads to more risk-taking behavior both in firm investment and personal investment

Schooling and Wage Revisited: Does Higher IQ Really Give You Higher Income?

Traditional studies of returns-to-schooling have been generally concerned with several issues like the omitted variable bias, error-in-measurement bias and the endogeneity of schooling. While such inquiries are of much empirical importance, this paper tries to ask a different but non-negligible question: what should be interpreted from the individual ability measure per se in the wage equation? With data from well documented national surveys in the U.S., this paper is able to make a simple but fundamental argument: IQ level per se, holding all other personal characteristics constant, has negligible net effect in determining one’s income level and thus should not be used as the proper measure of the ability we want to quantify in the wage-determining process, i.e., the very ability to earn income