Dynamic Equilibrium Economies: A Framework for Comparing Models and Data

Francis Diebold, Lee Ohanian and Jeremy Berkowitz

No 174, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: Many recent theoretical papers have come under attack for modeling prices as Geometric Brownian Motion. This process can diverge over time, implying that firms facing this price process can earn infinite profits. We explore the significance of this attack and contrast investment under Geometric Brownian Motion with investment assuming mean reversion. While analytically more complex, mean reversion in many cases is a more plausible assumption, allowing for supply responses to increasing prices. We show a mean reversion process rather than Geometric Brownian Motion and provide an explanation for this result.

JEL-codes: C1 E1 (search for similar items in EconPapers)
Date: 1995-02
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published as Review of Economic Studies, Vol. 65 (1998): 433-452.

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Related works:
Journal Article: Dynamic Equilibrium Economies: A Framework for Comparing Models and Data (1998)
Working Paper: Dynamic equilibrium economies: a framework for comparing models and data (1998)
Working Paper: Dynamic equilibrium economies: a framework for comparing models and data (1997)
Working Paper: Dynamic equilibrium economies: a framework for comparing models and data (1997)
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