Fellow’s Opinion Article: Tastes and Technology: Curvature is not Sufficient for Regularity
In specifications of tastes and technology, econometricians often impose curvature globally, but monotonicity only locally or not at all. In fact monotonicity rarely is even mentioned in that literature. But without satisfaction of both curvature and monotonicity, the second order conditions for optimizing behavior fail, and duality theory fails. The resulting first order conditions, demand functions, and supply functions become invalid. Although unconstrained specifications of technology are more likely to produce violations of curvature than monotonicity, I believe that induced violations of monotonicity become common, when curvature alone is imposed. Hence the now common practice of equating regularity with curvature is not justified.
|Date of creation:||Sep 2012|
|Date of revision:||Sep 2012|
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"Estimating policy-invariant deep parameters in the financial sector when risk and growth matter,"
Federal Reserve Bank of Cleveland, pages 1402-1440.
- Barnett, William A & Kirova, Milka & Pasupathy, Meenakshi, 1995. "Estimating Policy-Invariant Deep Parameters in the Financial Sector When Risk and Growth Matter," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1402-29, November.
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