Volume 6, Issue 2, April 2005
The Research Agenda: Dirk Krueger and Fabrizio Perri on Risk
Sharing across Households, Generations and Countries
Risk is pervasive in macroeconomics and the question that our research has
focused on most is whether, how and to what extent this risk is shared
across households or groups of households. Since the risk that a typical
household in the macro economy faces is large the welfare impact of
it can be substantial. We now briefly describe our research in this area,
carried out jointly and with separate coauthors.
Dirk Krueger is Professor of Economics, especially Macroeconomics at
Goethe University Frankfurt (Germany). Fabrizio Perri is Associate
Professor of Economics at the Stern School of Business, New York
University and currently visiting the
Research Department at the Federal Reserve Bank of Minneapolis. They have
both worked, often in
collaboration, on issues of consumption risk sharing,
incomplete markets and distributions of income and consumption. Krueger's
. Perri's RePEc/IDEAS
Risk sharing across households
It is a well known fact that the distribution of earnings across
is very dispersed. For us, it is crucial to understand whether these
earnings differences across households are completely determined at the
beginning of the working life of household members (say by their
skill or endowments) or whether they are the results of idiosyncratic
earnings shocks realized during the working life of the members of the
household. Recent research (see for example Storesletten, Telmer and
2004) seems to indicate that these types of shocks (which we will call
earnings risk) are persistent, large and they can be responsible for as
as 50% of the cross sectional variation in earnings. To get a sense of
their magnitude, note that household earnings shocks have the same order
persistence as business cycles shocks, but that their percentage
has been estimated to be roughly 20 times as large as the percentage
volatility of business cycles shocks! Given the sheer size of household
earnings risk it is relevant to understand how and to what extent this
can be shared across households, or to what extent households are at least
One useful benchmark model to assess the extent of risk sharing is the
Arrow-Debreu complete markets model. In that model households have access
a full set of state contingent securities for every possible realization
their income so they can fully insure against earnings risk. Several
have argued (see for example Attanasio and Davis, 1996) that this model
overstates the actual risk sharing possibilities available to households,
showing that the complete markets model cannot explain the joint
distribution of household earnings and consumption observed in US cross
sectional data. Therefore our research on this issue has focused on two
popular classes of models that imply only partial risk-sharing or
self-insurance of earnings risk.
In the first model (which we refer to as the standard incomplete markets
model, SIM) households cannot explicitly share risk with one another, but
rather can only self-insure by trading a single, uncontingent bond,
potentially subject to borrowing constraints. The second model (which we
refer to as the debt constraint model, DCM) follows the work of Kehoe and
Levine (1993) and has been further developed by Kocherlakota (1996) and
Alvarez and Jermann (2000). In this framework a full set of state
contracts is available to all agents, but that intertemporal contracts can
only be enforced by exclusion from future intertemporal trade. Since
exclusion from credit markets is not infinitely costly, in some states of
the world agents might find optimal not to repay their debts and suffer
consequences of exclusion from financial markets. This possibility
endogenously restricts the extent to which each contingent asset can be
traded and thus limits risk sharing. This is an appealing feature as the
extent of risk sharing is not exogenously assumed but depends on the
fundamentals of the model (i.e. preferences and technology); for some
fundamentals the DCM model generates complete risk sharing, while for
different fundamentals the model generate only partial or no risk sharing
Our main theoretical contribution has been the analysis of the DCM model
with a continuum of agents. In Krueger and Perri (1999) we show how to
characterize and compute stationary equilibria of such a model, using the
dual approach developed by Atkeson and Lucas (1992) for private
economies. The consumption dynamics mirrors the two main assumptions of
model: a complete set of contingent consumption claims and constraints on
allocations that require agents to weakly prefer continuation in the
to reverting to autarky. Since it is agents with currently high income
constraint is binding, agents with high income growth exhibit strong
consumption growth, whereas agents with low income are unconstrained and
have their consumption decline at a common rate as implied by a perfect
consumption insurance Euler equation (we show in the paper that the
equilibrium interest rate lies strictly below the time discount factor,
making consumption drift down over time when unconstrained).
The crucial friction in this model is the inability of households to
to repay their state-contingent debt, leading to endogenously determined
borrowing constraints whose size depends on how the consequences of
are determined. In the standard limited commitment model this is specified
as having to consume the autarkic allocation from the point of default on.
While this is motivated by empirical bankruptcy procedures (and can be
relaxed by admitting only temporary exclusion or saving after default, as
Krueger and Perri, 1999), it remains true that the consequence of default
specified essentially exogenous to the model. In Krueger and Uhlig (2005)
endogenize the outside option via competition. The outside option of the
agent after default is determined by the best consumption insurance
a household can obtain from a competing financial intermediary, subject to
the constraint that the intermediary has to at least break even with the
contract. What we also show in that paper is that, even though the extent
consumption insurance depends on the outside option, the consumption
dynamics is essentially the same as in the DCM model.
Bringing the theory to the data
The workhorse for our empirical analysis is the Consumer Expenditure (CE)
Survey which reports data on earnings, hours and detailed consumption
expenditures for a fairly large (5000-8000) repeated cross section of US
households from 1980 to 2004. One important object we can compute from the
data set is within-group income inequality, that is, inequality after
controlling for fixed characteristics of the households such as sex, race
and education: a statistic of this residual inequality (the variance of
logs, say) is the best, if still imperfect, measure of earnings risk we
obtain from the cross sections of the CE.
One striking fact that emerges from the CE is that, over the last 25
within-group earnings inequality has increased substantially while
within-group consumption inequality increased only very modestly. This
suggests that US households were able to insulate fairly well their
consumption profiles from idiosyncratic earnings risk. In Krueger and
(2002) we ask whether the two models discussed above are able to explain
this fact, in a quantitatively satisfactory way. We first estimate a
time-varying process for earnings risk. Following a large previous
literature we model earning risk as the sum of two components: a very
persistent autoregressive process and a purely transitory shock. We
this process on CE data (we are able to identify the two components due to
short panel dimension of the CE) and find that about half of the increase
earnings risk is driven by the persistent component and half by the
transitory component. We then feed this process into both models and find
that both predict an increase in consumption inequality substantially
smaller than the increase in earnings inequality. Comparing models to
consumption data we find that the DCM only slightly understates the
in within-group consumption inequality while the SIM overstates it.
The DCM predicts very little increase in consumption inequality for two
reasons: first households have a full set of state-contingent securities
available so they can insure well against shocks even if they are
persistent. Second the increased earnings risk makes defaulting and living
in financial autarky more costly and thus borrowing constraints (which are
the only limits to risk sharing) expand as a response. In other words, the
increase in earnings risk makes risk sharing more valuable and the DCM
predicts that credit/insurance markets will develop in order to provide
The reason why also the SIM predicts a more modest increase in consumption
inequality, compared to the increase in income inequality, is that even
an uncontingent bond agents can effectively self-insure against the
temporary earnings shocks so that the increase in earnings risk due to the
increase of the variance of temporary shocks does not translate into
consumption. This point was also made by Heathcote, Storesletten and
Another important difference between the two models is the implication for
consumer credit. The development of financial markets generated by the DCM
implies a sizable increase in consumer credit that matches up well with
we observe in US data. In the SIM model, on the other hand, the increase
risk implies that households want to accumulate more assets for self
insurance and make less use of credit lines. Thus along this dimension
model is less consistent with data as it generates a (small) decline in
In Krueger and Perri (2005) we evaluate the two models along a different
dimension. We ask directly how household consumption responds to earnings
shocks, a feature empirically examined by Dynarski and Gruber (1997) with
data. Our results mirror the ones derived in Krueger and Perri (2002):
relative to the data the DCM understates the consumption response to
shocks while the SIM overpredicts it.
From our work we would draw as final assessment of the two models that the
DCM model has the appealing feature that risk sharing is endogenous and
responds to changes in fundamentals. It may, however, overstate the true
insurance possibilities of households, due to the presence of a full set
state contingent securities. On the other hand, the SIM model probably
understates the ability households have to insulate their consumption from
income shocks and does not capture the fact that credit and insurance
markets may evolve in response to change in fundamentals, such as the
stochastic income process households face. We conjecture that a model that
combines aspect of both models has the most chances of perfectly capturing
the empirical facts we have focused on (note that Blundell, Preston and
Pistaferri, 2004 come to similar conclusion by following a different
Welfare and policy implications
After having explored the positive consequences of an increase in earnings
risk for consumption we were ultimately interested in the welfare
implications of this increase. And if the welfare costs of this increase
large, is there something economic policy can do to reduce them? The two
models discussed above provide very different answers to these questions.
In the DCM, in principle the endogenous increase in risk sharing can
mitigate the adverse welfare consequences of increased earnings risk.
Actually in Krueger and Perri (1999, 2002) we show that there can be
situations in which the increase in risk sharing opportunities triggered
the increase in earnings risk is so large that overall consumption risk
falls, and welfare rises. In those situations economic policies intended
reduce income volatility (such as unemployment insurance) may have the
perverse effect of increasing consumption inequality, because those
may crowd out the private provision of consumption insurance more than
one-to-one. This crowding-out mechanism is similar to the effect at work
in Attanasio and Rios-Rull (2001).
On the other hand in the context of the SIM an increase in earnings risk
always welfare reducing as self-insurance can only partially offset it. As
consequence policies that reduce earnings risk are welfare improving. For
example, in Conesa and Krueger (2005) we find that in the SIM the optimal
income tax code is likely to be progressive because it provides a partial
substitute for missing private insurance markets.
Because theory does not give an unambiguous answer to the welfare
in Krueger and Perri (2004) we use a more empirically guided approach.
concretely, we ask how much would a household in 1973 have been willing to
pay to avoid the increase in earnings dispersion that has taken place from
1973 to 2002. In order to do so we first estimate stochastic processes for
household consumption and hours worked that are consistent with the
evolution of the empirical cross-sectional distributions and with one year
consumption mobility matrices from the CE. For consumption we also
separate stochastic processes for the between- and within-group component
dispersion, thus capturing both the change in consumption risk and the
change in permanent consumption dispersion. Consistently with our previous
work we find that the increase in consumption risk has been very modest
thus it has had a very mild welfare impact. On the other hand the increase
in between-group dispersion, although not extremely large either, has a
more persistent nature and thus more important welfare consequences. To
quantify these we employ a standard lifetime utility framework, together
with our estimates of the stochastic processes for the relevant variables.
We find that the welfare losses for a substantial fraction of the US
population amount to 2 to 3 percent of lifetime consumption and that for
some groups (in particular households with low education) the cost can be
large as 6% of lifetime consumption. Heathcote, Storesletten and Violante
(2004, 2005) use incomplete markets models to assess the welfare
consequences of the recent increase in wage inequality and find numbers
comparable to ours. Their approach also captures the interesting effect
that, in a model with endogenous labor supply, an increase in wage
dispersion raises earnings risk but also raises average earnings, so that
the negative welfare impact of higher risk is further mitigated.
Risk sharing across generations
If wages and returns to capital are imperfectly correlated, then there is
scope to share aggregate wage and capital income risk across generations.
Young households derive most of their income from labor, whereas old
households finance old-age consumption mostly via income generated from
their assets. If financial markets are incomplete in that households
trade a full set of contingent claims on aggregate uncertainty, then a
policy such as social security that provides old, asset rich households a
claim to labor income, may endow households with welcome risk
diversification. In Krueger and Kubler (2002, 2004) we show that even if
economy is dynamically efficient in the sense of Samuelson's seminal work
the Overlapping Generations model, the introduction of social security may
constitute a Pareto-improving reform because it helps to achieve a better
allocation of wage/return risk across households. But we also show that
this argument to work quantitatively, shocks to private asset returns have
to be as big as return risk to the US stock market, fairly uncorrelated
wage risk and households have to be very risk averse and fairly willing to
intertemporally substitute consumption. High risk aversion (a coefficient
relative risk aversion of at least 15) is needed for households to value
better risk allocation, while high intertemporal elasticity of
is required to keep in check the capital-crowding out effect of social
security in general equilibrium. We conclude that, for a realistically
calibrated OLG economy the intergenerational risk-sharing effects
alone are unlikely to provide a normative argument for the introduction of
social security. However, Conesa and Krueger (1999) argue that the
intragenerational insurance and redistribution effects from
current US social security system may be sufficient to make a transition
from the current system to no social security undesirable for a majority
households currently alive.
Risk Sharing across countries
One type of risk that has received a lot of attention in the
macroeconomic literature is country specific aggregate risk. Booms and
recessions are not perfectly synchronized across nations. Thus
international risk sharing could greatly reduce the costs of business
However, some early research (Backus, Kehoe and Kydland, 1992) has shown
that, in the context of a standard one-good complete markets international
business cycles model (IRBC), complete cross-country risk sharing is not
consistent with basic business cycles facts, suggesting that international
risk sharing might be limited. In Kehoe and Perri (2002) we analyze
limited enforcement of international contracts could be responsible for
limited risk sharing. We characterize and solve the IRBC model with
enforcement and find that this imperfection can greatly reduce the amount
international risk sharing in the model. We also find that, although the
IRBC model with limited enforcement can account for business cycle facts
much better than the complete markets model, discrepancies remain between
theory and data.
In some recent work (Heathcote and Perri, 2005) we are exploring this
in the context of a richer model, namely the IRBC model with two goods and
with taste shocks. In that context we find that a high degree of
international risk-sharing is consistent with several observations for
developed economies, especially in the last 10-15 years. In particular for
this period, it is consistent with most international business cycle facts
(including the relatively low cross-country correlation of consumption),
with the proportion of foreign asset in country portfolios (the
international diversification puzzle) and with the low observed
of the real exchange rate with relative consumption. This suggests that
of the roles of financial globalization (which has happened in the last
15-20 years) has been to improve international risk sharing among
In our empirical work on inequality a crucial component for the evolution
consumption inequality are service flows from consumer durables. Our
empirical results also suggest that these services make up a growing share
of consumption of households. This motivates us to explore an extension of
the limited commitment model that explicitly incorporates consumer
and collateralized debt, in the same spirit as Fernandez-Villaverde and
Krueger (2002). The asset pricing implications of such a model have
successfully been explored by Lustig and van Nieuwerburgh (2004). We
to use this model to assess to what extent relaxed collateral constraints
and improved risk sharing can affect the dynamics of aggregate
on durables over the business cycle, and more concretely, whether these
factors have had role in the decline of US Business cycles volatility
many researchers have documented
Alvarez, Fernando, and Urban Jermann (2000),
Equilibrium, and Asset Pricing with Risk of
, 68, 775-798.
Atkeson, Anthony, and Robert E. Lucas, Jr. (1992), On
Efficient Distribution with Private Information
Review of Economic Studies
, 59, 427-453.
Attanasio, Orazio, and Stephen Davis (1996),
Wage Movements and the Distribution of Consumption
Journal of Political Economy
, 104, 1227-1262.
Attanasio, Orazio, and José-Víctor Ríos-Rull (2000),
Smoothing in Island Economies: Can Public Insurance Reduce
, European Economic Review
Backus, David, Patrick Kehoe and Finn Kydland (1992),
Real Business Cycles
Journal of Political Economy
, 101, 745-775.
Blundell, Richard, Luigi Pistaferri and Ian Preston (2005),
and Partial Insurance
, mimeo, Stanford
Conesa, Juan Carlos, and Dirk Krueger (1999),
Security Reform with Heterogeneous Agents
of Economic Dynamics
, 2, 757-795.
Conesa, Juan Carlos, and Dirk Krueger (2005), On the Optimal
Progressivity of the Income Tax Code
, NBER Working Paper
Dynarski, Susan, and Jonathan Gruber (1997), Can Families
Smooth Variable Earnings?, Brookings Papers on Economic
Fernández-Villaverde, Jesús, and Dirk Krueger (2002),
Saving over the Life Cycle: How Important are Consumer
, Proceedings of the 2002 North American Summer
of the Econometric Society: Macroeconomic Theory
Heathcote, Jonathan, and Fabrizio Perri (2004), The International
Puzzle is not as Bad as You Think
, mimeo, New York University
Heathcote, Jonathan, Kjetil Storesletten and Giovanni Violante (2003),
Macroeconomic Implications of Rising Wage Inequality in the US
mimeo, Georgetown University.
Heathcote, Jonathan, Kjetil Storesletten and Giovanni Violante
Insurance and Opportunities: The Welfare Implications of
Rising Wage Dispersion, mimeo, Georgetown
Kehoe, Timothy, and David Levine (1993), Debt
Constrained Asset Markets
, Review of Economic
, 60, 865-888.
Kehoe, Patrick, and Fabrizio Perri (2002),
Business Cycles with Endogenous Incomplete
, 70, 907-928.
Kocherlakota, Narayana (1996), Implications
of Efficient Risk Sharing without Commitment
, Review of Economic
, 63, 595-609.
Krueger, Dirk, and Felix Kubler (2002),
Risk Sharing via Social Security when Financial Markets
, American Economic Review
Krueger, Dirk, and Felix Kubler (2002),
Social Security Reform when Financial Markets are
, NBER Working Paper
Krueger, Dirk, and Fabrizio Perri (1999), Risk
Sharing: Private Insurance Markets or Redistributive
, Federal Reserve Bank of Minneapolis Staff Report
Krueger, Dirk, and Fabrizio Perri (2002), Does
Inequality Lead to Consumption Inequality? Evidence and
, NBER Working Paper
Krueger, Dirk, and Fabrizio Perri (2004), On the
Welfare Consequences of the Increase in Inequality in the United
, in Mark Gertler and Kenneth Rogoff (eds.) NBER
Macroeconomics Annual 2003
, 83-121, The MIT Press, Cambridge, MA.
Krueger, Dirk, and Fabrizio Perri (2005),
Understanding Consumption Smoothing: Evidence from the U.S. Consumer
Expenditure Survey Data, forthcoming, Journal
the European Economic Association
Krueger, Dirk, and Harald Uhlig (2005),
Risk Sharing Contracts with One-Sided Commitment,
mimeo, Goethe University Frankfurt.
Lustig, H, and S van Nieuwerburgh (2004),
A Theory of Housing Collateral, Consumption Insurance and Risk
Premia, mimeo, UCLA.
Storesletten, Kjetil, Chris Telmer and Amir Yaron (2004),
and Risk Sharing over the Life
, Journal of Monetary Economics
EconomicDynamics Interviews Ellen McGrattan on Business Cycle Accounting
and Stock Market Valuation
Ellen McGrattan is Monetary Advisor at the Research Department of the
Federal Reserve Bank of Minneapolis and Adjunct Professor of Economics at
the University of Minneapolis. She has worked on a large number
of topics, such as business cycles, equity premiums, optimal debt and
solution methods. McGrattan's
EconomicDynamics: With V.V. Chari and Pat Kehoe, you show that the driving
business cycle model are well summarized by efficiency, labor and
investment wedges. Using the Great Depression and the 1982 recession in
the US, you argue that investment wedges are not relevant. In work with
Prescott, you demonstrate that the recent stock market boom can be
to changes in dividend taxation. Are these two result not contradictory?
No they are not contradictory.
But to explain that
requires some background.
In 'Business Cycle Accounting', we propose a methodology---one that is, in
opinion, much better than the SVAR methodology---to isolate
promising classes of business cycle theories.
There are two parts. The first is to show that a large
class of models are equivalent to a prototype growth model
with time-varying "wedges" resembling time-varying
productivity, labor income tax rates, investment tax
rates, and government consumption. The second is the
accounting part: measure wedges using data and feed
them into the prototype growth model to determine their
contributions to aggregate fluctutations.
We find that the investment "wedge" (which looks just
like a time-varying tax rate on investment) does not
contribute significantly to aggregate fluctuations.
Therefore, models in which frictions manifest themselves
as investment wedges are not promising for studying
business cycles. These include those with credit market
frictions such as Bernanke and Gertler (1989).
In the paper with Ed entitled 'Taxes, Regulations, and the
Value of US and UK corporations', we consider the
dramatic secular changes in the value of US and
UK corporate equities that occurred between the 1960s
and 1990s, when there was little change in corporate capital
stocks, after-tax corporate earnings, or corporate
net debt. In particular, we ask what growth theory predicts
for equities given estimates of
taxes and productive capital stocks. There were
two innovations that we made that are worth noting. The
first innovation was a method to estimate the value of corporate
intangible capital, which is not included in measures
of productive capital but adds to the value of corporations.
Our estimate for intangible corporate capital is large,
roughly 2/3 as big as tangible corporate capital.
The second innovation was to bring public finance
back into finance and relate the large movements
in equity values to large movements in the effective
tax rate on corporate distributions (e.g., dividends).
A key proposition is that a decline in the tax rate on corporate
distributions implies a rise in stock values and (if revenues
are rebated back) no change in the reproducible cost of capital.
This is what we see in the data.
Now let me go back to your question about possible
inconsistencies between Chari-Kehoe-McGrattan and
One reason they are not inconsistent is the key
tax rate for MP is the tax rate on corporate distributions.
The level of the tax rate on distributions does not
enter the dynamic Euler equation, only the growth rate
if it is time-varying. If the variation in tax rates
quarter by quarter is not large, then the implied
investment wedge in big downturns is relatively small and not
particularly relevant for cyclical behavior.
MP focus on secular change over 40 or 50 years.
Again with V.V. Chari and Pat Kehoe, you have recently worked on
sudden stops and how financial crises alone cannot trigger drops in
output. In fact, such a crisis would increase output. What critical
ingredient is our basic intuition missing here?
EM: The basic intuition of the paper is simple. Using the
idea in 'Business Cycle Accounting,' we show an equivalence
between equilibrium outcomes in a small open economy
and a closed-economy growth model. A rise in net exports
in the small open economy (a sudden stop) is equivalent
to a rise in government spending in the closed economy.
We know what happens when government spending goes up
in the closed economy model: output rises. Thus, we show
that sudden stops, by themselves, do not lead to decreases
in output. They lead to increases. To account for both
sudden stops and output drops, one needs some other friction.
I think what the literature has missed is that the
sudden stop is not the primary shock but rather a
symptom of domestic problems, bad policies, or distortions.
If one treats it as the primary shock, the economy
will look just like one that had a big increase in
government spending (since government spending and
net exports enter the resource constraint in the same
way). Researchers should be thinking about the
driving forces behind the sudden stops.
With your business cycle accounting procedure, you determine what
of the output volatility can be accounted for by the various wedges. But is
it fitting to call this business accounting? We all learned that the
business cycle is not just characterized by output volatility, but also by
relative volatilities and comovements. In other words, isn't reducing all
possible shocks and frictions to three or four wedges oversimplifying?
We don't just look at output -- we decompose
labor and investment as well. And we are (in a
revision) putting in details of relative volatilities
and comovements because a referee was interested in
comparing the results to other papers in the business cycle literature.
Because the wedges are correlated, there are subtle
issues about exactly how one should attribute total
variances to each shock. We acknowledge that -- but
it is something one can't avoid. We do compare our
realization-based accounting procedure to spectral
decompositions. The two ways of accounting for the
business cycle are both informative in my opinion.
Bernanke, Ben & Gertler, Mark, 1989.
Costs, Net Worth, and Business Fluctuations
, vol. 79(1), pages 14-31.
Chari, V. V.,
J. Kehoe and Ellen R. McGrattan,
2004. Business Cycle
328, Federal Reserve Bank of Minneapolis.
Chari, V. V., Patrick Kehoe and Ellen R. McGrattan, 2005.
Sudden Stops and
American Economic Review
Papers and Proceedings, forthcoming.
McGrattan, Ellen R., and Edward C. Prescott, 2000.
the stock market overvalued?
Federal Reserve Bank of Minneapolis, pages 20-40.
McGrattan, Ellen R., and Edward C. Prescott, 2005.
and the Value of U.S. and U.K. Corporations
of Economic Studies
Review of Economic
Dynamics: Letter from the Coordinating Editor
The Review of Economic Dynamics is now in its 8th
year and going strong.
fact, the number of submissions received so far this year is almost double
the number received by this point last year. And, I think the average
quality of our submissions has been increasing rapidly as well. There is
doubt that the success of the journal has followed hand in hand with the
incredible success of the Society. The number and average quality of
submissions to the SED Annual Meeting has also been growing substantially
But, continuing growth and success requires that new editorial blood be
introduced on a regular basis. I began serving as Coordinating Editor of
RED in the summer of 2000, when Tom
Cooley needed to step down after seeing
the journal through its first critical years. It is now my turn to step
down in order to move on to other activities.
I am please to announce that Narayana
Kocherlakota will be taking over as Coordinating Editor of RED
this summer. Of course, Narayana is well known to members of the Society
and anyone who follows research on economic dynamics. He has been an
of RED since 2003 after serving as an Associate Editor beginning in 2002.
He has also served as Program Chair for the 2002 Annual Meeting held in New
York and gave a plenary lecture
at last year's meeting in
Florence, Italy. His research contributions are unusually broad and have
spanned a wide range of theoretical and applied topics, including ones
related to dynamic public finance, monetary economics, dynamic games, real
business cycle theory, and macro-econometrics. I feel extremely fortunate
to be turning the management of this journal over to such qualified and
Over the next few months, we will be adding some additional Associate
Editors to replace several who have recently stepped down. Outgoing
Associate Editors include Jordi
Galí, Per Krusell, Aldo Rustichini,
Robert Shimer. I have
enjoyed working with each of these editors and the
journal has benefited substantially from their efforts. I want to take
opportunity to publicly thank them for their valuable service to RED.
In closing, I want to urge all of you to submit your work to RED.
Instructions for submitting online can be found
RED Coordinating Editor
Dynamics: 2005 Meetings
The SED 2005 Meetings in Budapest on June 23-25 are the first to be held
in Eastern Europe. A cocktail party the first night, held in the
Hungarian Academy of the Sciences building along the picturesque Danube
River, will see Robert Lucas presenting a tribute to Nobel prize winners
Edward Prescott and Finn Kydland. The Europa River Boat will cruise the
Danube with participants for the Conference Dinner on Saturday night.
Paper sessions are to be held at George Soros's Central European
University, with plenary sessions in the nearby Hungarian Academy
building. Everything is centrally located in Pest near to the Danube,
and directly across from the famous Castle district in Buda. Sponsors
are the Hungarian National Bank and the CIB commercial bank.
Details are available at
Web review: QM&RBC at 10
Launched in June 1995, the Quantitative
Macroeconomics & Real Business Cycle was one of the very first topical
web sites in Economics. At that time, the web was little organized and in
fact still unknown to most. The QM&RBC web site thus helped organize the
material already available on the web and contributed some of its own as
BibTex files of a comprehensive bibliography, data and papers.
Since then, most people have learned how to find material on the web, most
researchers now have a homepage, and the profession is much better
organized in disseminating its efforts through the Internet. Thus, in ten
years, the value added of the QM&RBC has shifted. Instead of showing that
there is something out there, the focus is now on sorting and presenting
the most interesting contributions. The bibliography and conference
announcements are now selective.
In addition, the web site is now in the midst of a drive to collect
computer codes that can replicate many of the important papers of the
literature, on top of the various tools for solving standard models.
As of this writing, 125 pieces of code are assembled. Not only does this
allow to have all this code conveniently in one place, it also preserves
them from being lost.
In the age of Google, there is still a place for topical web sites
in academics. QM&RBC can be found at dge.repec.org.
Review: Lengwiler's Microfoundations of Financial Economics
Microfoundations of Financial Economics
by Yvan Lengwiler
This textbook is written for Masters or PhD students in Finance and
Macroeconomics and builds the classic theories of financial economics from
the ground up. Starting with contigents claim makets and the welfare
theorems, the book gradually builds equilibrium concepts and different
representations of risk. It covers the basic theories, CAPM, CCAPM, and
dynamic trading. The main empirical puzzles are exhibited along with the
main attempts to explaim them.
This book can be a great asset for PhD students that are overwhelmed by
asset pricing as it is covered in, say, Ljungqvist and Sargent and need a
less concise presentation. In this sense, it nicely complements the more
advanced textbooks. It also makes asset pricing accessible to even
moderately quantitatively inclined MBA or terminal Masters students. Yvan
produced a nice addition to recent publications that bridge the gap
between undergraduate and advanced PhD textbooks.
"Microfoundations of Financial Economics" is
published by Princeton University Press.
The EconomicDynamics Newsletter is a free supplement
the Review of Economic
(RED). It is distributed through the
mailing list and archived at http://www.EconomicDynamics.org/newsletter/. The
editors are Christian
Zimmermann (RED associate editor)
Hansen (RED coordinating editor).
The EconomicDynamics Newsletter is published twice a
in April and November.
subscribe to the EconomicDynamics mailing list,
a message to firstname.lastname@example.org with
join economicdynamics myfirstname mylastname
To unsubscribe to the EconomicDynamics mailing
a message to email@example.com with the
To change a subscription address, please first
and then subscribe. In case of problems, contact
The EconomicDynamics mailing list has very low
less that 8 messages a year. For weekly
about online papers in Dynamic General
or relevant conferences, you may to subscribe to
in the same way as described above.