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Direct preferences for wealth, the risk premium puzzle, growth, and policy effectiveness

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  • Gong, Liutang
  • Zou, Heng-fu

Abstract

In this paper, we consider social status, the spirit of capitalism, fiscal policies, and asset pricing in a stochastic model of growth. With specific assumptions on the production technology, preferences, and stochastic shocks, we derive the explicit solutions to the growth rates of consumption and savings and equilibrium returns on all assets. We further demonstrate how fiscal policies, the spirit of capitalism, and stochastic shocks affect growth, asset pricing, and welfare.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 26 (2002)
Issue (Month): 2 (February)
Pages: 247-270

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Handle: RePEc:eee:dyncon:v:26:y:2002:i:2:p:247-270

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  1. Maurice Obstfeld, 1992. "Risk-taking, global diversification, and growth," Discussion Paper / Institute for Empirical Macroeconomics 61, Federal Reserve Bank of Minneapolis.
  2. Turnovsky, Stephen J. & Grinols, Earl, 1996. "Optimal government finance policy and exchange rate management in a stochastically growing open economy," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 687-716, October.
  3. Fershtman, C. & Weiss, Y., 1991. "Social Status , Culture and Economic Performance," Papers 32-91, Tel Aviv.
  4. Corsetti, Giancarlo, 1997. "A portfolio approach to endogenous growth: equilibrium and optimal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(10), pages 1627-1644, August.
  5. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
  6. Heng-fu Zou, 1995. "The spirit of capitalism and savings behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 28(1), pages 131-143, September.
  7. Grinols, E.L. & Turnovsky, S.J., 1992. "Risk, the Financial Market and Macroeconomic Equilibrium," Discussion Papers in Economics at the University of Washington 92-01, Department of Economics at the University of Washington.
  8. Heng-fu Zou, 1995. "'The spirit of capitalism' and long-run growth," CEMA Working Papers 94, China Economics and Management Academy, Central University of Finance and Economics.
  9. Grinols, Earl L, 1996. "The Link between Domestic Investment and Domestic Savings in Open Economies: Evidence from Balanced Stochastic Growth," Review of International Economics, Wiley Blackwell, vol. 4(2), pages 119-40, June.
  10. Harold L. Cole & George J. Mailath & Andrew Postlewaite, . ""Incorporating Concern for Relative Wealth into Economic Models''," CARESS Working Papres 95-14, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  11. Grinols, Earl L. & Turnovsky, Stephen J., 1994. "Exchange rate determination and asset prices in a stochastic small open economy," Journal of International Economics, Elsevier, vol. 36(1-2), pages 75-97, February.
  12. Cole, Harold L & Mailath, George J & Postlewaite, Andrew, 1992. "Social Norms, Savings Behavior, and Growth," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1092-1125, December.
  13. Corsetti, G., 1992. "A Portfolio Approach to Endogenous Growth Eaton's Model Revisited," Papers 678, Yale - Economic Growth Center.
  14. Fershtman, C. & Murphy, K.M., 1993. "Social Status, Education and Growth," Papers 8-93, Tel Aviv.
  15. Gurdip S. Bakshi & Zhiwu Chen, 1996. "The Spirit of Capitalism and Stock-Market Prices," CEMA Working Papers 511, China Economics and Management Academy, Central University of Finance and Economics.
  16. Eaton, Jonathan, 1981. "Fiscal Policy, Inflation and the Accumulation of Risky Capital," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 435-45, July.
  17. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  18. Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-81, November.
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