Jean-Pierre Danthine

Methodological and Empirical Issues in Real Business Cycle Theory

Abstract In this paper, we argue that the major impact of the RBC literature has been to propose a new methodology for macroeconomics. This methodology is distinguished first by the importance it attributes to the empirical description of the phenomena to be explained and, second, by the use of this description in conjunction with ‘quantitative theorizing’, i.e., the construction of computable general equilibrium models whose characteristic statistics match those of the data. In accordance with this approach, we first report on the current state of knowledge concerning business cycle regularities and conclude that additional empirical effort is called for in order to arrive at the appropriate basis for theorizing. We then examine the performance of existing models and evaluate the case for integrating monetary factors and demand shocks into them. Lastly we review the recent efforts to explain the employment variability puzzle, and argue that the search for a solution naturally leads to the incorporation of significant non-Walrasian features into the RBC framework.

Business cycles in Switzerland: A comparative study

Abstract The goal of this paper is to provide an empirical description of business cycles in Switzerland and a comparison with business cycles in other countries. We adopt a view of business cycles as a set of regularities in the movements and the co-movements of economic aggregates common to all decentralized economies [Lucas (1977)] and test whether Switzerland conforms to this view. In order to identify the appropriate cyclical series, we follow a procedure proposed by Hodrick and Prescott (1980). We then compute correlations of various types, we test their stability through time and compare with corresponding estimates for the U.S., France, Germany and the U.K.

HEDGER DIVERSITY IN FUTURES MARKETS

This paper is a theoretical study of the equilibrium relationship between futures prices and spot prices. A much discussed but still unresolved issue is whether a futures price coincides with the expected value of the spot price for the date when the futures contract matures. One view is that speculative trading acts to assure that the futures price equals the expected spot price and in this sense is an unbiased predictor of the spot price. Another view is that the two are unequal and that hedgers pay a risk premium to speculators in the form of a futures price which lies below the expected spot price by an amount called the normal backwardation. These two views are based on different, implicit assumptions concerning the trading opportunities, beliefs, and preferences of hedgers and speculators. We investigate the relationship between fundamental economic structures and the bias reflected in equilibrium futures prices. This is not a simple task. To accomplish it we must consider in some detail the expected-utility-maximisation problems of the individual producers and users of the good traded on the futures markets. Based on these explicit micro-foundations we then study the properties of equilibrium futures prices in a variety of settings, in each case ultimately closing the model with the assumption that expectations are rational. It is shown that systematic backwardation or contangol can exist if there is an imbalance of futures sales and purchases carried out for hedging purposes. Such an imbalance can arise if an element of future cash market participation is withheld from the futures market. An important example of this is a storage companys next period demand for cash good. Alternatively, hedging imbalance may follow from asymmetries in the types of uncertainty faced by agents. This may arise, for example, when processors of a futures-traded good face a random output price, an uncertainty not shared by the original producers of the good. As a result of these different hedging needs, futures positions of producers and users may be, in a sense, incompatible, in which case the futures price will be biased. All these factors can operate for both perishable and storable goods, and all can contribute to the predominance of either short or long hedgers even in a rational expectations equilibrium. Only the bounded participation of * This paper is based on one presented at the North American and European Meetings of the

Efficiency wages and the business cycle puzzle

Abstract The main thrust of this work is to open the Real Business Cycle (RBC) methodology to non-Walrasian considerations and, reciprocally, to submit some non-Walrasian models to the discipline of the RBC approach. In doing so, we provide a first RBC model with involuntary unemployment and a suboptimal equilibrium path. We also demonstrate the promise and difficulty of resolving the business cycle puzzle by appealing to quantity rationing in the labor market.

Labour Relations and Asset Returns

This paper proposes a dynamic GE model with standard business cycle properties that also achieves a satisfactory replication of the major financial stylized facts. We ride on two major ideas. First, we show that operating leverage, originating in the priority status of wage claims given the observed business cycle characteristics of the latter, magnifies the risk properties of the residual payments to firm owners and justifies a substantial risk premium. Further we build on the observation that the low frequency variations in income shares constitute a significant source of risk, one that is unlikely to be insurable. When we price this risk in an incomplete market framework, we obtain a GE model with return volatilities close to observations and a sizable equity premium. This is accomplished in a world of low risk aversion and standard utility function but with agent heterogeneity. Workers with restricted access to financial markets are insured by firms and the consumption and preferences of firm owners solely determine the pricing kernel. Copyright 2002, Wiley-Blackwell.

The equity premium and the allocation of income risk

Abstract This paper examines the extent to which the equity premium puzzle can be resolved by taking account of the fact that stockholders bear a disproportionate share of output uncertainty. We do this in the context of a non-Walrasian RBC model where risk reallocation is justified by borrowing restrictions. The risk shifting mechanism we propose has the same effect as would arise from an increase in the risk aversion parameter of the representative agent and thus contributes to a rise in the equity premium. As with more standard RBC models, it remains that our model is unable to replicate key financial statistics. In particular, the observation that the equity return is more variable than national product cannot be accounted for under standard technology assumptions.

Martingale, market efficiency and commodity prices

Abstract The martingale model of market efficiency is based on a hypothesis of efficient utilization of information and on the possibility of expressing market equilibrium in terms of expected returns. The paper is concerned with providing an answer to the two following questions: (1) Under which (microeconomic) conditions is it feasible to describe equilibrium in efficient spot commodity markets in terms of expected returns? (Are the two underlying assumptions consistent?) (2) Is the ‘expected return’ assumption necessary to test market efficiency and what alternative can be proposed?

On the superneutrality of money in a stochastic dynamic macroeconomic model

Abstract This paper explores the robustness of the superneutrality of money result to the introduction of uncertainty. While, qualitatively, superneutrality fails to obtain in our model, quantitatively the observed Tobin effect is insignificant. The equilibrium time paths of real variables are nearly unaffected by changes in the money growth rule. We argue that our conclusions reinforce the theoretical case for superneutrality.

Risk sharing in the business cycle

Why do all developed economies experience fluctuations in their economic activity? The real business cycle (RBC) literature has provided an answer to this question by demonstrating that a well functioning decentralized model economy subject to exogeneous productivity shocks will behave in a way similar, in many respects, to the business fluctuations experienced by actual economies [Kyland and Prescott (1982)]. This is particularly true if one imposes restrictions on the choice set of the representative consumer-worker [Hansen (1985)]. Taking account of demand shocks in the form of variations in government spending further improves the performance of the model [Christian0 and Eichenbaum (1990)]. Should we be content with this answer? First, we must observe that the set of facts current RBC models are able to replicate is very limited and thus that claims of theoretical success should be proportionately modest [Danthine and Donaldson (1990)]. Second, at this level of explanation, it is quite likely that the same modest set of facts currently used to define the business cycle will be consistent with models of the economy which are significantly different from the pure Walrasian formulations which have predominated to date. It is this latter issue tihich we propose to address in this paper. Our starting point is the observation that all industrial economies have developed institutional and social arrangements designed to improve the distribution of income and risks over what would prevail in Walrasian equilibrium. Trade unions, minimum wage laws, and unemployment compensation mechanisms are examples of such arrangements, and they could be all interpreted as having the objective either of moving the economy away from

Volatility, information and noise trading

We construct a dynamic competitive model with futures markets where price volatility comes from information arrival and noise trading. In this model, we address three issues: What does informational efficiency mean in a multi-period setting? How do information arrival and noise trading interact to generate price volatility? What are the effects of futures trading on volatility and welfare? Without noise trading, we show that a fully revealing equilibrium price is unlikely to exist if information flows are serially correlated. If it exists, futures trading affects the time pattern of volatility, but volatility over time sums up to a constant. Information arrival has ambiguous welfare effects and the desirability of a futures market may be controversial. With noise trading, total volatility over time increases with the noise variance but it is reduced by information arrival. The period volatility may now be reduced by the arrival of information as prices are less responsive to noise trading.