Article ID Journal Published Year Pages File Type
5067503 European Economic Review 2008 20 Pages PDF
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.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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