Knowledge that Transforms

Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk by Ralph S. J. Koijen, Hanno Lustig, Stijn Van Nieuwerburgh and Adrien Verdelhan. Published in volume 100, issue 2, pages 552-56 of American Economic Review, May 2010

(CEPR) Business Cycle Dating Committee date business cycle turning points using a small number of aggregate measures of real economic activity. For example, in its memorandum explaining the December 2007 peak (NBER Business Cycle Dating Committee 2008), the NBER committee mentioned that it considers five series, quarterly real GDP and the “big four ” monthly series, real personal income less transfers, real manufacturing and wholesaleretail trade sales, industrial production, and nonfarm employment. (These series do not in general receive equal weight.) In contrast, when the NBER research program on dating business cycles commenced, researchers examined turning points in hundreds of series and dated business cycles by detecting clusters of specific-cycle turning points; see Arthur Burns and Wesley Mitchell (1946, 13 and 77–80). The dating of turning points evidently has shifted from aggregating the turning points of many disaggregated series to using the turning points of a few highly aggregated series. This shift raises a methodological question: should reference cycle turning points be determined by aggregating then dating, or by dating then aggregating? This paper provides some preliminary evidence on the question of whether it is better to date then aggregate or aggregate then date using 270 monthly disaggregated real economic indicators. The questions considered in this paper parallel those in the large literature on forecasting

Emotions can have important effects on performance and socioeconomic outcomes. We study a natural experiment where two teams of professionals compete in a tournament taking turns in a sequence. As the sequential order is determined by the random outcome of a coin flip, the treatment and control groups are determined via explicit randomization. Hence, absent any psychological effects, both teams should have the same probability of winning. Yet, we find a systematic first-mover advantage. Further, professionals are self-aware of their own psychological effects and, when given the chance, they rationally react by systematically taking advantage of these effects.

Americanae nace como un proyecto conjunto que surge dentro de la Red Europea de Información y Documentación sobre América Latina (REDIAL), y que ha afrontado la Biblioteca de la Agencia Española de Cooperación Internacional para el Desarrollo (AECID). Esta nueva biblioteca virtual hace más accesibles los libros digitales de tema americanista a los investigadores y usuarios interesados de cualquier parte del mundo.

Troy Davig and Eric Leeper (2007) have proposed a condition they call the generalized Taylor principle to rule out indeterminate equilibria in a version of the new-Keynesian model where the parameters of the policy rule follow a Markov-switching process. We show that although their condition rules out a subset of indeterminate equilibria, it does not establish uniqueness of the fundamental equilibrium. We discuss the differences between indeterminate fundamental equilibria included by Davig and Leeper's condition and fundamental equilibria that their condition misses

We show, using novel data on currency and prices for US imports, that even conditional on a price change, there is a large difference in the exchange rate pass-through of the average good priced in dollars (25 percent) versus nondollars (95 percent). We document this to be the case across countries and within disaggregated sectors. This finding contradicts the assumption in an important class of models that the currency of pricing is exogenous. We present a model of endogenous currency choice in a dynamic price setting environment and show that the predictions of the model are strongly supported by the data.

Economics

Early admissions are widely used by selective colleges and universities. We identify some basic facts about early admissions policies, including the admissions advantage enjoyed by early applicants and patterns in application behavior, and propose a game-theoretic model that matches these facts. The key feature of the model is that colleges want to admit students who are enthusiastic about attending, and early admissions programs give students an opportunity to signal this enthusiasm.

Long-Run Risk (LRR) model which emphasizes the role of long-run risks, that is, low-frequency movements in consumption growth rates and volatility, in accounting for a wide-range of asset pricing puzzles. In this article we present a generalized LRR model, which allows us to study the role of cyclical fluctuations and macroeconomic-crisis on asset prices and expected returns. The Bansal and Yaron (2004) LRR model contains (i) a persistent expected consumption growth component, (ii) long-run variation in consumption volatility, and (iii) preference for early resolution of uncertainty. To evaluate the role of cyclical risks, we incorporate a cyclical component in consumption growth — this component is stationary in levels. To study financial market crisis, we also entertain jumps in consumption growth and consumptionvolatility. We find that the magnitude of risk compensation for cyclical risks in consumption critically depends on the magnitude of the inter-temporal elasticity of substitution (IES). When the IES is larger than one, cyclical risks carry a very small risk-premium and the compensation for long-run risks is large. When IES is close to zero, the risk compensation for cyclical risks is large, however, in this case the risk-free rate is implausibly high (in excess of 10 percent). Given this, it seems unlikely that the compensation for cyclical risk is of economically significant magnitude. This implication is also consistent with Robert E. Jr. Lucas (1987), who argues that economic costs of transient shocks are small and those for trend shocks are large. Moreover, Ravi Bansal, Robert F. Dittmar and Dana Kiku (2009) provide evidence from equity markets that the compensation for long-run risks is large and that for cyclical risk is quite small.

How to sustain cooperation is a key challenge for any society. Different social organizations have evolved in the course of history to cope with this challenge by relying on different combinations of external (formal and informal) enforcement institutions and intrinsic motivation. Some societies rely more on informal enforcement and moral obligations within their constituting groups. Others rely more on formal enforcement and general moral obligations towards society at large. How do culture and institutions interact in generating different evolutionary trajectories of societal organizations? Do contemporary attitudes, institutions and behavior reflect distinct pre-modern trajectories? This paper addresses these questions by examining the bifurcation in the societal organizations of pre-modern China and Europe. It focuses on their distinct epitomizing social structures, the clan and the city, that sustain cooperation through different mixes of enforcement and intrinsic motivation. The Chinese clan is a kinship-based hierarchical organization in which strong moral ties and reputation among clan’s members are particularly important in sustaining cooperation. In Medieval Europe, by contrast, the main example of a cooperative organization is the city. Here cooperation is across kinship lines and external enforcement plays a bigger role. But morality and reputation, although weaker, also matter and extend beyond one’s kin.