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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. Merton, Robert C., 1975. "Option pricing when underlying stock returns are discontinuous," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Alessandro Penati & George Pennacchi, . "Optimal Portfolio Choice and the Collapse of a Fixed-Exchange Rate Regime," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 25-86, Wharton School Rodney L. White Center for Financial Research.
  3. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(4), pages 373-413, December.
  4. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, Elsevier, vol. 33(1-2), pages 21-40, August.
  5. Jarrow, Robert A & Rosenfeld, Eric R, 1984. "Jump Risks and the Intertemporal Capital Asset Pricing Model," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 57(3), pages 337-51, July.
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Cited by:
  1. Venegas-Martínez, Francisco & Rodríguez-Nava, Abigail & Palafox-Roca, Alfredo Omar, 2014. "Impacto de una reforma fiscal sobre el bienestar económico en un ambiente de incertidumbre
    [Impact of Tax Reform on Economic Welfare in an Uncertainty Environment]
    ," MPRA Paper 57108, University Library of Munich, Germany.
  2. Francisco Venegas-Martínez, 2005. "Temporary Stabilization and the Real Option of Waiting when Consumption can be Delayed: an Extreme Value Approach," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c010_043, DEGIT, Dynamics, Economic Growth, and International Trade.

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