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On the Existence and Interpretation of the "Unit Root" in U.S. GNP

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  • J. Bradford De Long
  • Lawrence H. Summers

Abstract

In this paper, we assess the degree to which four of the most commonly used models of risky decision making can explain the choices individuals make when faced with risky prospects. To make this assessment, we use experimental evidence for two random samples of young adults. Using a robust, nonlinear least squares procedure, we estimate a model that is general enough to approximate Kahnenman and Tversky's prospect theory and that for certain parametric values will yield the expected utility model, a subjective expected utility model and a probability-transform model. We find that the four models considered explain the decision-making behavior of the majority of our subjects. Surprisingly, we find that the choice behavior of the largest number of subjects is consistent with a probability-transform model. Such models have only been developed recently and have not been used in applied settings. We find least support for the expected utility model -- the most widely used model of risky decision making.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2716.

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Date of creation: Sep 1988
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Handle: RePEc:nbr:nberwo:2716

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References

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  1. Simon Kuznets & Elizabeth Jenks, 1961. "Capital in the American Economy: Its Formation and Financing," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number kuzn61-1.
  2. J. Bradford DeLong & Lawrence H. Summers, 1986. "The Changing Cyclical Variability of Economic Activity in the United States," NBER Chapters, National Bureau of Economic Research, Inc, in: The American Business Cycle: Continuity and Change, pages 679-734 National Bureau of Economic Research, Inc.
  3. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(4), pages 797-814, November.
  4. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 870, Cowles Foundation for Research in Economics, Yale University.
  5. Campbell, John Y & Mankiw, N Gregory, 1987. "Permanent and Transitory Components in Macroeconomic Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 77(2), pages 111-17, May.
  6. John Y. Campbell & N. Gregory Mankiw, 1986. "Are Output Fluctuations Transitory?," NBER Working Papers 1916, National Bureau of Economic Research, Inc.
  7. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  8. Schwert, G. William, 1987. "Effects of model specification on tests for unit roots in macroeconomic data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(1), pages 73-103, July.
  9. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(3), pages 216-27, June.
  10. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  11. Nathan S. Balke & Robert J. Gordon, 1988. "The Estimation of Prewar GNP: Methodology and New Evidence," NBER Working Papers 2674, National Bureau of Economic Research, Inc.
  12. Nelson, Charles R., 1988. "Spurious trend and cycle in the state space decomposition of a time series with a unit root," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 475-488.
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Cited by:
  1. M. Matilla-Garcia & P. Perez & B. Sanz, 2006. "Testing for parameter stability: the Spanish consumption function," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(7), pages 445-448.
  2. Diego Romero-Ávila, 2012. "Multiple trend shifts and unit roots in US state income levels: implications for long-run growth," The Annals of Regional Science, Springer, Springer, vol. 48(3), pages 641-661, June.

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