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Loss Aversion in Aggregate Macroeconomic Time Series

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  • Rina Rosenblatt-Wisch

Abstract

Prospect theory has been the focus of increasing attention in many Fields of economics. However, it has scarcely been addressed in macro-economic growth models - neither on theoretical nor on empirical grounds. In this paper we use prospect theory in a stochastic optimal growth model. Thereafter, the focus lies on linking the Eulerequation obtained from a prospect theory growth model of this kind to real macroeconomic data. We will use Generalized Method of Moments (GMM) estimation to test the implications of such a non-linear prospect utility Euler equation. Our results indicate that loss aversion can be traced in aggregate macroeconomic time series.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2007-06.

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Length: 28 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:snb:snbwpa:2007-06

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Keywords: Ramsey growth model; loss aversion; prospect theory; GMM;

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Cited by:
  1. Edoardo Gaffeo & Ivan Petrella & Damjan Pfajfar & Emiliano Santoro, 2012. "Loss Aversion and the Asymmetric Transmission of Monetary Policy," Discussion Papers 12-21, University of Copenhagen. Department of Economics.
  2. Reto FOELLMI & Rina ROSENBLATT-WISCH & Klaus REINER SCHENK-HOPPE, . "Consumption Paths under Prospect Utility in an Optimal Growth Model," Swiss Finance Institute Research Paper Series 10-38, Swiss Finance Institute.
  3. Lena Dräger & Jan-Oliver Menz & Ulrich Fritsche, 2014. "Perceived inflation under loss aversion," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 282-293, January.
  4. Edoardo GAFFEO & Ivan PETRELLA & Damjan PFAJFAR & Emiliano SANTORO, 2010. "Reference-dependent preferences and the transmission of monetary policy," Center for Economic Studies - Discussion papers ces10.28, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  5. Eleonora Pierucci & Luigi Ventura, 2010. "Risk Sharing: A Long Run Issue?," Open Economies Review, Springer, vol. 21(5), pages 705-730, November.
  6. Peters, Hans, 2012. "A preference foundation for constant loss aversion," Journal of Mathematical Economics, Elsevier, vol. 48(1), pages 21-25.
  7. Mumtaz, Haroon & Surico, Paolo, 2011. "Estimating the Aggregate Consumption Euler Equation with State-Dependent Parameters," CEPR Discussion Papers 8233, C.E.P.R. Discussion Papers.
  8. Amit Kothiyal & Vitalie Spinu & Peter Wakker, 2014. "An experimental test of prospect theory for predicting choice under ambiguity," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 1-17, February.

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