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Loss aversion in aggregate macroeconomic time series

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  • Rosenblatt-Wisch, Rina

Abstract

Prospect theory has been the focus of increasing attention in many fields of economics. However, it has scarcely been addressed in macroeconomic growth models--neither on theoretical nor on empirical grounds. In this paper we use prospect theory in a stochastic optimal growth model. Thereafter, the focus lies on linking the Euler equation obtained from a prospect theory growth model of this kind to real macroeconomic data. We will use generalized method of moments (GMM) estimation to test the implications of such a non-linear prospect utility Euler equation. Our results indicate that loss aversion can be traced in aggregate macroeconomic time series.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 52 (2008)
Issue (Month): 7 (October)
Pages: 1140-1159

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Handle: RePEc:eee:eecrev:v:52:y:2008:i:7:p:1140-1159

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Keywords: Ramsey growth model Loss aversion Prospect theory GMM;

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Citations

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Cited by:
  1. Edoardo GAFFEO & Ivan PETRELLA & Damjan PFAJFAR & Emiliano SANTORO, 2010. "Reference-dependent preferences and the transmission of monetary policy," Center for Economic Studies - Discussion papers ces10.28, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  2. Keith Blackburn & David Chivers, 2013. "Inequality Without Imperfection: The Role of Uncertainty," Centre for Growth and Business Cycle Research Discussion Paper Series 182, Economics, The Univeristy of Manchester.
  3. Foellmi, Reto & Rosenblatt-Wisch, Rina & Schenk-Hoppé, Klaus Reiner, 2011. "Consumption paths under prospect utility in an optimal growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 273-281, March.
  4. Edoardo Gaffeo & Ivan Petrella & Damjan Pfajfar & Emiliano Santoro, 2012. "Loss Aversion and the Asymmetric Transmission of Monetary Policy," Discussion Papers 12-21, University of Copenhagen. Department of Economics.
  5. Eleonora Pierucci & Luigi Ventura, 2010. "Risk Sharing: A Long Run Issue?," Open Economies Review, Springer, vol. 21(5), pages 705-730, November.
  6. Lena Dräger & Jan-Oliver Menz & Ulrich Fritsche, . "Perceived Inflation under Loss Aversion," Macroeconomics and Finance Series 201105, Hamburg University, Department Wirtschaft und Politik.
  7. Mumtaz, Haroon & Surico, Paolo, 2011. "Estimating the Aggregate Consumption Euler Equation with State-Dependent Parameters," CEPR Discussion Papers 8233, C.E.P.R. Discussion Papers.

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