International commodity and capital flows provide channels for the transmission of the effects of demographic changes in large countries onto small open economies by altering the prices and interest rates facing them. This implies that even small countries with relatively young populations are potentially vulnerable to the effects of population aging in large industrial economies. To address this issue, which has largely been overlooked in previous literature, this paper considers the case of European Union and Turkey and shows, within an overlapping generations general equilibrium framework, that spillovers of the demographic shock in Europe would intensify the changes that Turkey would experience during its own demographic transition.
We develop a model of regime-switching risk premia as well as regimedependent factor risk premia to price real options. The model incorporates the observation that the underlying risky income streams of real options are subject to discrete shifts over time as well as random changes. The presence of discrete shifts is due to systematic and unsystematic risk associated with changes in business cycles or in economic policy regimes or events such as takeovers, major changes in business plans. We analyze the impact of regimeswitching behavior on the valuation of projects and investment opportunities.We find that accounting for Markov switching risk results in a delay in the expected timing of the investment while the regime-specific factor risk premia make the possibility of a regime shift more pronounced.
We examine several continuous-time term structure models in which the short rate is subject both to continuous changes and to discrete shifts. Several regime-switching term structure models are developed, with regime-dependence in various combinations of their drift and diffusion parameters. We examine their predictive power. Our empirical analysis suggests that it is important to attempt to specify the switching model correctly: badly parameterized switching models may not be an improvement (in terms of pricing) over models which do not allow for regime switching, even when there are clear breaks in the data.
This paper provides estimates of the welfare cost of volatility attributable to monetary and fiscal policy shocks. It uses a continuous-time stochastic dynamic general equilibrium model based on a recursive utility function that disentangles risk aversion from intertemporal substitution. We find that monetary and fiscal policy shocks may lead to opposite welfare effects: negative for monetary growth shocks, but positive for government expenditure shocks. Furthermore, we find that welfare costs are sensitive to the parameter values chosen for risk aversion and intertemporal substitution, and we conclude that welfare costs are potentially much larger than that found by Lucas, forcing some modification of the policy conclusions associated with Lucas's pioneering work.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.