Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks

By Robert J. Shiller | Go to book overview

income from labor in that region, and changes in capital product per capita for that region. The last independent variable is measured from the production side of accounts rather than from the income side. The coefficient of the change in per capita income from labor term is of interest here: if people in that region were using the capital markets perfectly to hedge, then we might expect a coefficient of the change in per capita income from labor in that region of minus one. Atkeson and Bayoumi ran these regressions with the constraint that the coefficients were the same across regions. When the regions were the states of the United States of America 1966-86, the estimated coefficient of the change in per capita income from labor was -0.004. Although this coefficient was significant at conventional levels, it was far from minus one; it was really inconsequential in magnitude. The coefficient of change in aggregate per capita income from capital was 0.983, virtually 1.000, the coefficient of the change in capital product per capita 0.022, virtually zero. When the regions were six members of the European Common Market ( Germany, France, the United Kingdom, Belgium, the Netherlands and Greece) 1970-87, and the aggregate across regions was the sum of the incomes for the six countries, the coefficient of the change in per capita income from labor was -0.045. This is a little more substantially negative than was the case for the individual states in the United States, but still very far from minus one. Their evidence indicates a near-total failure to hedge income risk in existing markets, further confirming the potential value for macro markets in national incomes.


Appendix to Chapter 4: Econometric methods

The log-linearized present value model, or 'dividend-ratio model' ( Campbell and Shiller, 1988; 1989) is attractive because it deals in percentage changes rather than levels of variables entering the present-value relation; the former are more plausibly assumed to be stationary stochastic processes. In place of price, which may not be stationary, the model is cast in terms of a ratio, the dividend price ratio. We define δ as the (demeaned) natural log of the dividend-price ratio, equal to dt-1 -pt (demeaned) where dt-1 is lagged log dividend and pt is log price. The dividend is lagged

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Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks
Table of contents

Table of contents

  • Title Page iii
  • Preface v
  • Acknowledgements x
  • Contents xiii
  • 1 - Introduction 1
  • 2 - Psychological Barriers 17
  • 3 - Mechanisms for Hedging Long Streams of Income 31
  • 4 - National Income and Labor Income Markets 52
  • Appendix to Chapter 4: Econometric methods 72
  • 5 - Real Estate and Other Markets 78
  • 6 - The Construction of Index Numbers for Contract Settlement 116
  • 7 - Index Numbers: Issues and Alternatives 152
  • 8 - The Problem of Index Revisions 182
  • 9 - Making It Happen 201
  • Notes 215
  • References 228
  • Author Index 241
  • Subject Index 245
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