Standard Neoclassical Model Research Articles

Capital Mobility and Macroeconomic Volatility: Evidence from Greece

This paper focuses on the impact of full capital account liberalization on macroeconomic volatility in Greece. According to the standard neoclassical model, such liberalization is to be desired because, among other advantages, it may reduce macroeconomic volatility. The link between macroeconomic volatility and capital account openness in the Greek economy is investigated by applying a simple three-month rolling standard deviation of real GDP growth and real final (total) consumption growth combined with more formal econometric methods such as Granger causality test and multivariate regressions. There is no strong evidence for a stable relation between macroeconomic volatility and variables of financial openness. Thus other factors, such as exchange rate volatility and exogenous shocks rather than a full liberalization of capital movements, seem to be related to macroeconomic growth volatility in the Greek economy.

Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico

In this paper we introduce weak property rights in the standard real business cycle (RBC) model in order to examine the role of institutions as a source of economic fluctuations in emerging markets. In particular, in Mexico, the movements in productivity in the data are associated with changes in institutions, so that we can explain productivity shocks to a large extent as shocks to the quality of institutions. We find that the model with shocks to the degree of protection of property rights can match the second moments in the data for Mexico very well. Moreover, the fit is better than that of the standard neoclassical model with full protection of property rights regarding the auto-correlations and cross-correlations in the data. Viewing productivity shocks as shocks to institutions is also consistent with the stylized fact of falling productivity and non-decreasing labor hours in Mexico over 1980–1994, which is a feature that the neoclassical model cannot match.

Investment Based Valuation and Managerial Expectations

A generalized version of the standard neoclassical investment model can explain the relatively high equity prices in the late 1990s and early 2000s in the US corporate nonfinancial and NASDAQ sectors along with the relatively low prices before and after this period. Stock returns predicted by the model are as volatile as the observed stock returns in both sectors. Three key model assumptions are multiple capital goods, investment-specific technological change and non-quadratic adjustment costs. During the “bubble” period, investment in equipment is relatively high — consistent with high expected cash flows and high prices. Investment rates subsequently fall — consistent with lower expected cash flows and lower prices. On average, managers’ forecasts are correct. Levels and changes in managerial expectations are correlated with proxies for investor sentiment. Increases in the growth rate of equipment investment coincide with decreases in measured productivity growth. This is consistent with the unobserved diversion of labor from producing output towards accumulating human capital or other intangible assets.

Rozhodování o individuální nabídce práce s ohledem na produkci domácnosti a v průběhu životního cyklu

The article presents two other applications of the standard neoclassical model of consumption-leisure choice, which forms the individual labour supply. The first one is decision making concerning time allocation with regard to household production; the second one is focused on labour supply over the life cycle. The final part supports the theoretical conclusions of models with selected recent statistical data from the Czech background.

A Neoclassical Analysis of the Asian Crisis: Business Cycle Accounting for a Small Open Economy

This paper applies the business cycle accounting method à la Chari, Kehoe and McGrattan (2007) to a standard neoclassical small open economy model and assesses the economic crises in Hong Kong, Korea and Thailand. Quantitative results show that distortions in production efficiency are important in all countries in accounting for the sudden output collapses while distortions in the investment and international financial markets are not. If domestic or international financial frictions are the main source of the Asian crisis, they must have operated through total factor productivity (TFP).

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Blaming the messenger: Notes on the current state of experimental economics

Binmore and Shaked (this issue) criticize Fehr and Schmidt's (1999) model of inequality aversion. We present a considerable body of experimental research supporting the inequality aversion motive. Binmore and Shaked also urge experimentalists to adopt “a more skeptical attitude when far-reaching claims about human behavior are extrapolated from very slender data.” It is true that experimental findings indicate that the standard neoclassical model fails to predict a considerable range of strategic behaviors widely observed in the laboratory, particularly under conditions where normative behavior is prevalent in every-day social life. This is indeed a “far-reaching claim,” but one amply justified by an impressive and constantly growing body of evidence from experiments.

Sur l’estimation d’un système complet de demande sous rationnements quantitatifs

The paper is divided into two parts. In the first one, three complete systems of demand equations are derived, namely, the standard neo-classical model, a model under quantity rationing and the general reduced form of walrasian models. The standard neo-classical model has no spillover eflects while the other models allow for them. But the spillover effects of the general reduced form are walrasian while the spillover effects of the model with quantity rationing can be specified as keynesian. In the second part of the paper, the authors try to discriminate among these forms on empirical grounds. As a matter of fact, each model is found consistent with the Canadian data and the authors conclude that to discriminate between the models, one must insert them into more general models.

Market Uncertainty and Socially Embedded Reputation

AbstractBoth economists and sociologists generally recognize the importance of reputation in coordinating economic transactions. In a perfectly competitive and anonymous market characterized by faceless buyers and sellers, the issue of reputation would be irrelevant and unnecessary. In reality, however, markets are often filled with varying degrees of information asymmetry, which can threaten the very existence of the market system itself. In critical reaction to the standard neoclassical model, some economists, on the one hand, argue that when there is an information problem, reputation serves as a valuable source of market signal of quality. Sociologists of economic life similarly contend that reputation, along with trust, is critical in lowering transaction costs and thereby facilitating various economic activities among individual actors. The purpose of this article is to apply this broad theoretical observation to a specific empirical phenomenon. It does so by highlighting the role of social networks that connect actors on both demand and supply sides of the market. Specifically, this study examines how interpersonal networks in the market for legal services affect the duration of ties between buyers and sellers. Quantitative analysis based on a random sample of Chicago lawyers, a project funded by the American Bar Foundation, reveals that ceteris paribus the lawyer‐client relations are significantly driven by social network factors.

What accounts for Chinese Business Cycle?

Abstract This paper investigates the sources of economic fluctuations in China since its reform that started in 1978. Using the framework of a standard neoclassical open economy model with time-varying frictions (wedge), we study the relative contribution of the efficiency, labor, investment and foreign debt wedges to the business cycles of China. The business accounting procedure suggests that productivity best explains the behavior of aggregate economic variables in China throughout the period of 1978–2006. The labor wedge plays a major role in explaining the movement of labor force. The foreign debt wedge and investment wedge primarily affect the composition of output, but their role in explaining the movement of output is modest. Our results suggest that the focus of government policies should be to combat the problems of inefficient factor utilization and labor market rigidity.

Can overconfidence explain the consumption hump?

The standard neoclassical life-cycle model predicts that individual consumption should either increase, remain constant or fall monotonically depending on whether the market rate of return on savings is greater than, equal to or less than the discount rate. However, empirical evidence suggests that even after controlling for economic growth and family size, household consumption exhibits a robust hump at around age 45–55, with the ratio of peak consumption to consumption when entering the workforce greater than 1.1. This paper extends the “overconfidence” explanation (Caliendo and Huang, J. Macroecon 30(4):1347–1369, 2008) of this macroeconomic puzzle to a calibrated general equilibrium environment. The main finding is that although it is possible to identify parameter values under which overconfidence alone generates life-cycle consumption profiles and macro-indicators consistent with U.S. experience, quite extreme assumptions about both the magnitude and distribution of overconfidence in the population are generally required to obtain them.

Can Overconfidence Explain the Consumption Hump?: A General Equilibrium Inquiry

The standard neoclassical life-cycle model predicts that individual consumption should either increase, remain constant or fall monotonically depending on whether the market rate of return on savings is greater than, equal to or less than the discount rate. However, empirical evidence suggests that even after controlling for economic growth and family size, household consumption exhibits a robust hump at around age 45-55, with the ratio of peak consumption to consumption when entering the workforce greater than 1.1. This paper extends the explanation (Caliendo and Huang, 2008) of this macroeconomic puzzle to a calibrated general equilibrium environment. The main finding is that although it is possible to identify parameter values under which overconfidence alone generates life-cycle consumption profiles and macro-indicators consistent with U.S. experience, quite extreme assumptions about both the magnitude and distribution of overconfidence in the population are generally required to obtain them.

Logical Problems and the Teaching of Economics - A Plea for an Explanation

The basic academic education in economic thinking is dominated by very simplified models of firms and individuals in the market. The theory of firm, which is the fundamental model of neoclassical microeconomics, therefore has great influence on the way people think about economic processes. The following paper elaborates logical inconsistencies of the standard model of neoclassical microeconomics first raised by George Stigler and extensively discussed by Steve Keen, which arise if all actors are considered to be mere price-takers. Taking this inconsistencies seriously leads to the conclusion, that - interpreting the marginal market power of the individual firms correctly - a competitive environment yields quantities, prices and profits, that differ fundamentally from those predicted by standard neoclassical microeconomic models. Therefore we want to encourage the teachers of economics to enter the debate around these inconsistencies.

How Do Rulers Choose? Dual Domains of Discretion in Political Decision Making

:This paper investigates the factors that drive ruler decision making under democracy. By dividing politicians’ actions into two distinct domains and exploring their compositions, we construct a fuller and more realistic picture of politician decision making. In the non-discretionary domain, the politician’s actions are clearly limited by voter desires; in the discretionary domain the politician is free to make choices as he chooses without voter repercussions. Standard neoclassical models of political behavior suggest that when votes don’t matter, monetary income drives ruler behavior. While monetary pursuit may explain some ruler decisions, it leaves many other observed choices unexplained. Our non-discretionary/discretionary dichotomy highlights the up-to-now neglected role that psychic income plays in explaining otherwise unexplained ruler decisions. The case studies considered support this view.

Why doesn’t Luxembourg send all its capital to India?

In the standard neoclassical model, when two countries with disparate capital levels open to trade, the capital-rich country exports capital to the capital-poor country. This hastens growth in the poor country and generates income for the rich country, to the benefit of both. Real countries do not engage in this capital trade to the extent that theory predicts. It is widely understood that the weak property rights that afflict poor countries play a major role in this failure. Weak property rights make rich countries reticent about investment out of fear of expropriation. In this paper we also ascribe the insufficiency of international capital flows to weak property rights. But we model property rights as arising naturally during the process of economic growth. The impairment of trade is again the consequence of the reticence of rich countries: they want to avoid the erosion of their own property rights when trade occurs.

PROMETHEUS BOUND: POLARIZATION IS POSSIBLE IN THE NEOCLASSICAL GROWTH MODEL

The paper demonstrates that the standard neoclassical model of stochastic growth in the absence of any other modifications is consistent with club convergence contrary to the analysis in Cetorelli (2002, Journal of Economic Dynamics and Control, 27, pp. 29–50). In that sense, it is not necessary to augment the model with a probability of adverse shocks that is inversely related to aggregate capital stock or provide other modifications.

Trade liberalisation and household welfare in Nepal

We examine some of the most recent works on general equilibrium models that measured the impact of trade liberalisation on household welfare. We modify the standard neo-classical model and apply it to a typical South Asian village economy which is still lagging in studies of policy modelling. We conclude that the combination of import and export liberalisations generates higher growth but the distribution pattern does not become pro-poor. Liberalisation under a flexible exchange rate regime when compared to the fixed regime can work negatively since the currency may appreciate much and eliminate the comparative advantages. We also find that a piece by piece external reform gives better economic results than implementing all external reforms together.

The role of factor substitution in the theory of economic growth and income distribution: Two examples

While much empirical evidence suggests that the Cobb–Douglas production function may be a reasonable benchmark for aggregate analysis, we argue that the practice, particularly prevalent in contemporary growth theory, of adopting the Cobb–Douglas technology, may lead to misleading implications. Using two examples, we show that key implications of the models are highly sensitive to small deviations of the elasticity of substitution from unity. The first employs the standard neoclassical model and emphasizes the sensitivity of the speed of convergence to small changes in the elasticity of substitution. This in turn has profound consequences for wealth and income distribution. The second deals with foreign aid and highlights how the relative merits of “tied” versus “untied” aid are also very sensitive to the elasticity of substitution.

House Prices, Real Estate Returns, and the Business Cycle

The main objective of this work is to construct a model that could be used to study investment dynamics, house prices, real estate returns and the equity premium within the same uni…ed framework. The second objective is to show that the introduction of habit formation and residential real estate in the utility function provides an explanation of the puzzling volatility of house prices. To address these issues, we construct a two-sector model composed of a real estate sector and of a non-residential sector. The main contribution of this work is to show that an extended version of the standard neoclassical model is able to generate theoretical moments and risk premiums that are in line with the stylized facts.

When can changes in expectations cause business cycle fluctuations in neo-classical settings?

It is often argued that changes in expectation are an important driving force of the business cycle. However, it is well known that changes in expectations cannot generate positive co-movement between consumption, investment and employment in the most standard neo-classical business cycle models. This gives rise to the question of whether changes in expectation can cause business cycle fluctuations in any neo-classical setting or whether such a phenomenon is inherently related to market imperfections. This paper offers a systematic exploration of this issue. Our finding is that expectation driven business cycle fluctuations can arise in neo-classical models when one allows for a sufficiently rich description of the production technology; however, such a structure is rarely allowed or explored in macro-models. In particular, we identify a multi-sector setting and a setting with a costly distribution system in which expectation driven business cycles can arise.