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

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Author Info

  • Liutang Gong

    (Institute for Advanced Study, Wuhan University
    Guanghua School of Management, Peking University)

  • Heng-fu Zou

    (Development Research Group, The World Bank
    Institute for Advanced Study, Wuhan University
    Guanghua School of Management, Peking University)

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

Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 53.

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Date of creation: 2001
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Publication status: Published in Journal of Economic Dynamics and Control, Volume 26, Issue 2, February 2002, Pages 247-270
Handle: RePEc:cuf:wpaper:53

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Web page: http://cema.cufe.edu.cn/
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Keywords: Social status; The spirit of capitalism; Fiscal policies; Asset pricing; Stochastic growth;

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References

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  1. Harold L. Cole & George J. Mailath & Andrew Postlewaite, 1995. "Incorporating concern for relative wealth into economic models," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 12-21.
  2. Chaim Fershtman & Yoram Weiss, 1991. "Social Status, Culture and Economic Performance," Discussion Papers 1007, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Maurice Obstfeld, 1992. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
  4. Grinols, E.L. & Turnovsky, S.J., 1992. "Risk, the Financial Market and Macroeconomic Equilibrium," Working Papers 92-01, University of Washington, Department of Economics.
  5. 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.
  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, 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.
  8. 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.
  9. Corsetti, G., 1992. "A Portfolio Approach to Endogenous Growth Eaton's Model Revisited," Papers 678, Yale - Economic Growth Center.
  10. 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.
  11. 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.
  12. 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.
  13. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
  14. 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.
  15. Fershtman, C. & Murphy, K.M., 1993. "Social Status, Education and Growth," Papers 8-93, Tel Aviv.
  16. 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.
  17. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  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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