Philippe Weil

Nonexpected Utility in Macroeconomics

This paper introduces, within the context of an infinite horizon optimal consumption problem, a parametric class of Kreps-Porteus nonexpected utility preferences—generalized isoelastic utility—which distinguishes attitudes toward risk from behavior toward intertemporal substitution. Some of the theoretical and empirical implications for macroeconomics of these state- and time-nonseparable preferences are examined.

Overlapping families of infinitely-lived agents

Abstract This paper develops a model in which new and infinitely-linked dynasties, which are, by definition, not linked to pre-existing families through operative intergenerational transfers, continuously enter the economy over time. This model of infinitely-lived families possesses most of the properties characteristic of standard overlapping generation frameworks: competitive equilibria can be inefficient, bubbles may exist, and Ricardian neutrality does not in general hold. Contrary to a widespread but erroneous belief, the terms ‘infinite horizon model’ and ‘representative agent model’ are, therefore, not interchangeable.

The Macroeconomics of Labor and Credit Market Imperfections

Labour market frictions are not the only possible source of high unemployment. Credit market imperfections, driven by microeconomic frictions and influenced by macroeconomic factors, could also be to blame. To develop this idea in a simple and tractable macroeconomic model, we treat credit and labour market imperfections in a symmetrical way. Accordingly, we introduce specificity in credit relationships, and assume that credit to potential entrepreneurs is rationed due to endogenous search frictions, in the spirit of Diamond (1990). These imperfections mirror job search frictions in the labour market. We study the determination of equilibrium unemployment in the presence of credit market frictions both with exogenous and endogenous wages. We explore a number of possible extensions or extensions: endogenous destruction, monetary policy and the short-run effects of financial liberalization.

Love thy children: Reflections on the Barro debt neutrality theorem

This paper proves that Barros (1974) debt neutrality proposition, whose relevance hinges, in an economy with bequest motives, on bequests being operative in the economy without public debt, is not applicable to a wide class of overlapping generation economies — those with a ‘weak’ bequest motive. In particular, it is shown that the bequest motive is always too weak, and public debt therefore non-neutral, when non-physical assets have a well-defined function (reducing oversavings) in the corresponding economy without bequest motive, i.e., when the non-altruistic economy is dynamically inefficient.

Precautionary Savings and the Permanent Income Hypothesis

This paper derives the explicit solution of a dynamic stochastic optimal consumption problem for infinitely-lived agents whose preferences exhibit, in the presence of non-diversifiable labour income uncertainty, a constant elasticity of intertemporal substitution and constant absolute risk aversion. The constancy of the elasticity of intertemporal substitution, which implies that marginal utility at zero consumption is infinite, guarantees that the non-negativity constraint on consumption is never binding along the optimal path. The assumption of constant absolute risk aversion allows an explicit computation of human wealth, and provides a simple representation of the precautionary savings motive.

Equilibrium Asset Prices with Undiversifiable Labor Income Risk

In a two-period Lucas tree economy in which ex ante identical, but ex post dissimilar, agents face undiversifiable labor income risk, calibrating a (wrong) representative agent model results in overstating the equilibrium riskfree rate and in understanding the equilibrium equity premium if the utility function exhibits decreasing absolute risk aversion and decreasing absolute prudence. These behavioral assumptions provide, as a consequence, a theoretical rationale for the often advanced conjecture that non-traded risk contributes to the solution of the riskfree rate and equity premium puzzles.

Is Money Net Wealth

This paper develops a simple monetary model, a hybrid of the Sidrauski and overlapping generation frameworks, in which new dynasties of infinitely-lived agents continuously enter the economy. It is shown that the long-run nonsuperneutrality of money in life-cycle models is a modality of the violation of the Ricardian debt neutrality proposition: the very same intergenerational redistribution effects which, on the fiscal side, are the source of debt nonneutrality are at work on the monetary side to create monetary wealth effects and make money nonsuperneutral in the long run. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Permanent budget deficits and inflation

Abstract The issue of whether permanent primary budget deficits have to be monetized is re-examined in a simple monetary model, hybrid of the Sidrauski and overlapping-generations frameworks, in which intergenerational effects are generated by the arrival of new infinitely-lived cohorts. The presence of intergenerational effects enlarges, for a given fiscal policy, the set of admissible monetary policies and weakens the need to monetize the deficit. Comparisons between the growth and interest rates are in general insufficient to predict whether increased deficit must be monetized, because of the existence of both bond and money seigniorage Laffer curves.

Hand-to-mouth consumers and asset prices

Many consumers seem to lead a hand-to-mouth existence: they simply consume their current income. This may be the result of unsophisticated behavior (non-optimizing, or ‘rule-of-thumb’ consumers), or the reflection of an inability to trade in asset markets due to infinite transactions costs. The objective of this paper is to explore, in a very simple model, the implications for equilibrium asset prices of the presence of hand-to-mouth consumers. I will establish that allowing for the existence of hand-to-mouth consumers contributes, under plausible assumptions, to the resolution of the equity premium puzzle’ and of the riskfree rate puzzle.2 As a consequence, the same phenomenon hand-to-mouth consumption which Campbell and Mankiw (1989) have shown to be crucial to the description of the time-series behavior of aggregate consumption has the potential of explaining asset market data. I lay out in section 2 the structure of the economy, and compute, in section 3, equilibrium asset prices and returns. I then show in section 4 that, under plausible assumptions, the presence of hand-to-mouth consumers depresses the equilibrium riskless rate and raises the equity premium relative to what would be predicted by a calibrator mistakenly believing in the existence of a fictitious representative average consumer with free access to asset markets. The conclusion takes stock of the results, and offers some directions for future research.

Nontraded assets and the CAPM

Abstract Asset pricing models that rely on the presence of non-tradable assets (such as human wealth) to solve the equity premium puzzle have to confront the effect of decreasing absolute risk aversion: rich investors, who according to micro data hold the stock market and whose behavior is the one that matters, at the margin, for the determination of equilibrium asset prices, are less risk averse, ceteris paribus, than the average consumer. This paper highlights a channel through which the effect of decreasing absolute risk aversion can be overcome: the existence of a positive correlation between the rates of return on traded assets and on the human capital of marginal investors.