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

  • Gong, Liutang
  • Zou, Heng-fu

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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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 26 (2002)
Issue (Month): 2 (February)
Pages: 247-270

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Handle: RePEc:eee:dyncon:v:26:y:2002:i:2:p:247-270
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Obstfeld, Maurice, 1994. "Risk-Taking, Global Diversification, and Growth," American Economic Review, American Economic Association, vol. 84(5), pages 1310-29, December.
  2. 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.
  3. Bakshi, Gurdip S & Chen, Zhiwu, 1996. "The Spirit of Capitalism and Stock-Market Prices," American Economic Review, American Economic Association, vol. 86(1), pages 133-57, March.
  4. Fershtman, Chaim & Murphy, Kevin M & Weiss, Yoram, 1996. "Social Status, Education, and Growth," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 108-32, February.
  5. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  6. Grinols, E.L. & Turnovsky, S.J., 1992. "Risk, the Financial Market and Macroeconomic Equilibrium," Working Papers 92-01, University of Washington, Department of Economics.
  7. Fershtman, Chaim & Weiss, Yoram, 1993. "Social Status, Culture and Economic Performance," Economic Journal, Royal Economic Society, vol. 103(419), pages 946-59, July.
  8. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
  9. Zou, Heng-fu, 1994. "'The spirit of capitalism' and long-run growth," European Journal of Political Economy, Elsevier, vol. 10(2), pages 279-293, July.
  10. 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.
  11. 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.
  12. Harold L. Cole & George J. Mailath & Andrew Postlewaite, . ""Incorporating Concern for Relative Wealth into Economic Models''," CARESS Working Papres 95-14, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  13. 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.
  14. Corsetti, G., 1992. "A Portfolio Approach to Endogenous Growth Eaton's Model Revisited," Papers 678, Yale - Economic Growth Center.
  15. Heng-fu Zou, 1995. "The spirit of capitalism and savings behavior," CEMA Working Papers 79, China Economics and Management Academy, Central University of Finance and Economics.
  16. 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.
  17. 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.
  18. 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.
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