Intertemporal empirics

Question 1

RW?

Answer 1

Hall 1978.
Assume u’ linear (remove prudence) and so C(r,Yp)

Question 2

Excess sensitivity?

Answer 2

Flavin, 1981.
Reaction to known Y changes not 0.

Question 3

Liquidity constraint

Answer 3

Campbell and Mankiw 1989 s the model
1980s US =0.2 (Hall and Mishkin, 1982) / Gao and Kim 2014 =0.85 in China.
Possibility of future LC also matters (Hayashi 1987).

However, Shea 1995 suggests corr persists even in households with lots of liquid assets?!

Question 4

Expenditure on C =/= C?

Answer 4

Aguiar and Hurst, 2005 consider food diaries in retirement and find time spent shopping / preparing up!

Question 5

Excess smoothness?

Answer 5

C should immediately react to Yp thus should be just as variable. Campbell and Deaton (1989) ratio of variance =0.64! Further, Yp is in fact more variable than current Y they argue!

Question 6

Near rational in smoothness?

Answer 6

Large (>10%) Y change consistent with PIH (Paxson, 1993). ‘near rational’ Parker, 1999.
Consider costs of changing consumption (Browning and Collada, 2001).
Habits (Constantinides, 1991)

Question 7

Prudence?

Answer 7

Non linear u’. Can show that this means ‘excess smoothness’ in face of uncertainty desirable (Attanasia, 1999)
Especially relevant in young people

Question 8

Ricardian equivalence central idea?

Answer 8

A neo-classical consumer will save all of a transitory tax cut (Tnpv)

Question 9

Support for RE?

Answer 9

Carroll and Summers, 1987: Budget deficits move 1:1 with private savings (US/Canada).
Cheney: Reagan proved deficits did not matter

Question 10

Against RE: LC

Answer 10

Rahman et al (2013): Tax cuts stimulated private consumption in Malaysia

Question 11

Tax effects on distribution (violates Ricardian Equivalence)

Answer 11

Present taxpayers =/= beneficiaries? (Bernheim, 1989)

Question 12

Tax distortionary?

Answer 12

Derive EE with a proportional tax rate. Smooth taxation desirable (Barro, 1979): Less distortionary. Prescott, 2004: This is primary reason for differing Ls across countries (US higher LS)

Question 13

RBC: Volatile investment?

Answer 13

Abel et al 1988: Change in I is roughly 90% of variation of AD

Question 14

RBC: Procyclical Ls to prod/wage.
Is this prediction supported by evidence?

Answer 14

No. Ls moves more to w, not w1/w2 as it should based upon EE! (Altongi, 1982).
Underpredicts Var(employment) (Stadler,1994): Inelastic Ls and market imperfections.
Mankiw, 1989: Requires ppl willing to sub leisure over time?!

Question 15

RBC: Capital Utilization rate?

Answer 15

Using the Solow residual to estimate prod assumes constant K utilization rate! But, procyclical (Bernanke and Rotenburg, 1995) eg labour hoarding (Fay and Medoff, 1985). Indicates lower prod

Question 16

Is the RBC prediction of Procyclical prod supported?

Answer 16

Fits sign, overpredicts magnitude: only equal to 30-60% delta Y (Burnside et al 1993)
Importance of AD?! (Summers, 1986)
Also, be wary of using Solow residual (see capital utilization rate)

Question 17

RBC: Persistence of output fluctuations

Answer 17

Tech innovations persist. Cambell and Mankiw: Shocks ARE followed up by larger movements. Although this doesn’t say anything on why / if it reverts LR!

Question 18

RBC consider RW

Answer 18

See all the RW evidence

Question 19

Conclusion to RBC

Answer 19

Doesn’t hold well enough to be considered to hold! Thus, policy makers should smooth Y and or other variables

Question 20

Micro-founded: Kenynes was wrong

Answer 20

Micro-founded uses the classical story (Lucas and Sargent 1979)

Question 21

UK: IE vs SE

Answer 21

IE dominates (Blundell et al 2010

Question 22

Life cycle approach / PIH

Answer 22

Modigliani 1986 / Friedman

Question 23

Estimates of depreciation rate
Where is this useful?

Answer 23

4-15% for machines / 2-4% for buildings (Blanchard, 2013).
Volatile investment in RBC! This is because replacing depreciating capital is not so large relative to new capital requirements

Question 24

NBC: r pro/ counter

Answer 24

Perma: Pro - US 1990s to early 2000s
Temp: Eg Denslow and Rush 1989: Fall of French r due to harvest shortfalls

Question 25

Liquidity constraint evidence for?

Answer 25

Coibion et al 2020: LC consumers spent 10% more of transfer by CARES act

Question 26

New Ricardian Equivalence

Answer 26

Barro, 1974
TNPV matters
Government debt represents an asset and liability (Ricardo, 1820)

Question 27

Evidence of wars and fiscal policy

Answer 27

Barro 1997: Wars in US (eg Vietnam, Korea, WW) show Y up, C down, LS up in war (consistent with temporary FP prediction)

Question 28

Evidence that income effect dominates in LR

Answer 28

US weekly manufacturing hours 60 to 42 1890-1996 (Doppelhofer, 2009)

Question 29

LCH evidence against

Answer 29

Prudence and bequests to children mean we don’t observe LCH (Browning and Crossley, 2001)

Question 30

Poor likely to go on benefits so don’t have incentive to smooth C?

Answer 30

Use benefits as insurance! Moral Hazard issue (Hubbard et al, 1994). Large proportion of population with virtually no savings: heterogeneity of savings motives (asset based means testing).
Thus, we see individuals consuming entirety of current income

Question 31

Accumulation of wealth due to bequests important so PIH>LCH

Answer 31

Kotlikoff and Summers (1981)
Closer to a ‘representative agent for family’ than individual, self-interested individuals

Question 32

RBC prediction: Pro-cyclical wages

Answer 32

Only mildly procyclical, corr(w, Y) = 0.12 (King and Rebelo, 1999)

Question 33

Wealthy hand to mouth?

Answer 33

Cost of accessing illiquid wealth too high so just consume income (Parker et al, 2013)

Question 34

Hysteresis DF test?

Answer 34

Strongest form of hysteresis (Ue as random walk) rejected (Lee and Chang, 2008)