Loss aversion in aggregate macroeconomic time series

Rina Rosenblatt-Wisch ()

European Economic Review, 2008, vol. 52, issue 7, pages 1140-1159

Abstract: Prospect theory has been the focus of increasing attention in many fields of economics. However, it has scarcely been addressed in macroeconomic growth models--neither on theoretical nor on empirical grounds. In this paper we use prospect theory in a stochastic optimal growth model. Thereafter, the focus lies on linking the Euler equation obtained from a prospect theory growth model of this kind to real macroeconomic data. We will use generalized method of moments (GMM) estimation to test the implications of such a non-linear prospect utility Euler equation. Our results indicate that loss aversion can be traced in aggregate macroeconomic time series.

Keywords: Ramsey; growth; model; Loss; aversion; Prospect; theory; GMM (search for similar items in EconPapers)
Date: 2008

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Working Paper: Loss Aversion in Aggregate Macroeconomic Time Series (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:eecrev:v:52:y:2008:i:7:p:1140-1159

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