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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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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. Peters Hans, 2010. "A preference foundation for constant loss aversion," Research Memorandum 062, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. Lena Dräger & Jan-Oliver Menz & Ulrich Fritsche, 2014. "Perceived inflation under loss aversion," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 282-293, January.
  4. 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.
  5. Eleonora Pierucci & Luigi Ventura, 2010. "Risk Sharing: A Long Run Issue?," Open Economies Review, Springer, vol. 21(5), pages 705-730, November.
  6. Amit Kothiyal & Vitalie Spinu & Peter Wakker, 2014. "An experimental test of prospect theory for predicting choice under ambiguity," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 1-17, February.
  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.
  8. 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.

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