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Non-parametric counterfactual analysis in dynamic general equilibrium

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  • Felix Kubler

    ()
    (Department of Economics, University of Pennsylvania)

  • Karl Schmedders

    ()
    (Kellogg MEDS, Northwestern University)

Abstract

In this paper we examine non-parametric restrictions on counterfactual analysis in a simple dynamic stochastic general equilibrium model. Under the assumption of time-separable expected utility and complete markets all equilibria in this model are stationary, the Arrow-Debreu prices uniquely reveal the probabilities and discount factor and the equilibrium correspondence defined as the map from endowments to stationary (probability-free) state prices, is identical to the equilibrium correspondence in a standard Arrow-Debreu exchange economy with additively separable utility. We examine observable restriction on this correspondence and give necessary as well as sufficient conditions on profiles of individual endowments that ensure that associated equilibrium prices cannot be arbitrary. While often there are restrictions on possible price changes we also show that in most cases results from a single agent economy do not carry over to a setting with heterogeneous agents.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 07-027.

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Length: 26 pages
Date of creation: 17 Sep 2007
Date of revision:
Handle: RePEc:pen:papers:07-027

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Keywords: Dynamic general equilibrium; non-parametric analysis; observable restrictions;

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References

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  1. Danthine, Jean-Pierre & Donaldson, John B. & Giannikos, Christos & Guirguis, Hany, 2004. "On the consequences of state dependent preferences for the pricing of financial assets," Finance Research Letters, Elsevier, Elsevier, vol. 1(3), pages 143-153, September.
  2. Felix KUBLER & Karl SCHMEDDERS, . "Non-parametric counterfactual analysis in dynamic general equilibrium," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 09-05, Swiss Finance Institute.
  3. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(3), pages 514-540, June.
  4. Chiaki Hara & James Huang & Christoph Kuzmics, 2006. "Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules," KIER Working Papers 620, Kyoto University, Institute of Economic Research.
  5. Yves Balasko & Mich Tvede, 2010. "Individual preference rankings compatible with prices, income distributions and total resources," Economic Theory, Springer, Springer, vol. 45(3), pages 497-513, December.
  6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  7. Bernard Dumas & Raman Uppal & Tan Wang, 1998. "Efficient Intertemporal Allocations with Recursive Utility," NBER Technical Working Papers 0231, National Bureau of Economic Research, Inc.
  8. Balasko, Yves & Tvede, Mich, 2009. "The geometry of finite equilibrium datasets," Journal of Mathematical Economics, Elsevier, vol. 45(5-6), pages 391-396, May.
  9. Varian, Hal R, 1983. "Non-Parametric Tests of Consumer Behaviour," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(1), pages 99-110, January.
  10. Angelo Melino & Alan X. Yang, 2003. "State Dependent Preferences Can Explain the Equity Premium Puzzle," Working Papers melino-03-01, University of Toronto, Department of Economics.
  11. Felix Kubler & Karl Schmedders, 2003. "Generic inefficiency of equilibria in the general equilibrium model with incomplete asset markets and infinite time," Economic Theory, Springer, Springer, vol. 22(1), pages 1-15, 08.
  12. Constantinides, George M, 1982. "Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 55(2), pages 253-67, April.
  13. Yves Balasko & Mich Tvede, . "Equilibrium Data Sets and Compatible Utility Rankings," Discussion Papers 05-23, University of Copenhagen. Department of Economics, revised Nov 2005.
  14. Mas-Colell, Andreu, 1977. "On the equilibrium price set of an exchange economy," Journal of Mathematical Economics, Elsevier, vol. 4(2), pages 117-126, August.
  15. Brown, Donald J & Matzkin, Rosa L, 1996. "Testable Restrictions on the Equilibrium Manifold," Econometrica, Econometric Society, Econometric Society, vol. 64(6), pages 1249-62, November.
  16. Kubler, Felix, 2003. "Observable restrictions of general equilibrium models with financial markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 110(1), pages 137-153, May.
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Cited by:
  1. Felix KUBLER & Karl SCHMEDDERS, . "Non-parametric counterfactual analysis in dynamic general equilibrium," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 09-05, Swiss Finance Institute.
  2. Andrés Carvajal, 2010. "The testable implications of competitive equilibrium in economies with externalities," Economic Theory, Springer, Springer, vol. 45(1), pages 349-378, October.

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