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On Consumption, Investment and Risk

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  • Francisco Venegas-Martínez

    ()
    (División de Economía, Centro de Investigación y Docencia Económicas, A. C. (CIDE). México, D.F. Mexico)

Abstract

The Mexican episode of 1992-1994 was characterized by a steep rise in consumption accompanied by a sharp fall in investment. This paper provides an explanation of the negative response of investment to political risk, as occurred in Mexico between 1992 and 1994. It is assumed that, inside an adjustable band, the expected rate of depreciation is driven by a mixed diffusion-jump process and the expected real rate of return on an international bond is governed by a diffusion process, both processes being correlated. This paper analyzes a small open stochastic economy. Two cases are considered: i) a cash-in-advance, Ramsey-type economy, and ii) a Sidrauski-type economy.

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File URL: http://www.economiamexicana.cide.edu/num_anteriores/IX-2/05_FRANCISCO_VENEGAS_227-244.pdf
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Bibliographic Info

Article provided by in its journal Economia Mexicana NUEVA EPOCA.

Volume (Year): IX (2000)
Issue (Month): 2 (July-December)
Pages: 227-244

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Handle: RePEc:emc:ecomex:v:9:y:2000:i:2:p:227-244

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  1. Penati, Alessandro & Pennacchi, George, 1989. "Optimal portfolio choice and the collapse of a fixed-exchange rate regime," Journal of International Economics, Elsevier, vol. 27(1-2), pages 1-24, August.
  2. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  3. Jarrow, Robert A & Rosenfeld, Eric R, 1984. "Jump Risks and the Intertemporal Capital Asset Pricing Model," The Journal of Business, University of Chicago Press, vol. 57(3), pages 337-51, July.
  4. Svensson, L.E., 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," Papers 475, Stockholm - International Economic Studies.
  5. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
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Cited by:
  1. Francisco Venegas-Martínez, 2005. "Temporary Stabilization and the Real Option of Waiting when Consumption can be Delayed: an Extreme Value Approach," DEGIT Conference Papers c010_043, DEGIT, Dynamics, Economic Growth, and International Trade.

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