The Choice Channel of Financial Innovation

Iachan, Felipe S.; Nenov, Plamen; Simsek, Alp

doi:10.1257/mac.20180429

Cited by 6 publications

(3 citation statements)

References 115 publications

(81 reference statements)

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“…and Simsek (2021) show that expanding portfolio choice (which they refer to as financial innovation) increases savings if EIS is greater than 1. Our analysis is complementary since we put little structure on the model and consider many other types of comparative statics, whereas they focus on one channel but also study general equilibrium implications.…”

Section: Introductionmentioning

confidence: 99%

“…Our paper is different because we focus on the response of consumption behavior to arbitrary shocks and impose much weaker restrictions, allowing for general recursive preferences and stochastic processes. More recently, in independent work, Iachan, Nevov, and Simsek (2021) show that expanding portfolio choice (which they refer to as financial innovation) increases savings if EIS is greater than 1. Our analysis is complementary since we put little structure on the model and consider many other types of comparative statics, whereas they focus on one channel but also study general equilibrium implications.…”

Section: Introductionmentioning

confidence: 99%

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Robust comparative statics for the elasticity of intertemporal substitution

Flynn

Schmidt

Toda

2023

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We study a general class of consumption–savings problems with recursive preferences. We characterize the sign of the consumption response to arbitrary shocks in terms of the product of two sufficient statistics: the elasticity of intertemporal substitution (EIS) between contemporaneous consumption and continuation utility, and the relative elasticity of the marginal value of wealth (REMV). Under homotheticity, the REMV always equals 1, so the propensity of the agent to save or “dis‐save” is always signed by the relationship of the EIS with unity. We apply our results to derive comparative statics in classical problems of portfolio allocation, consumption–savings with income risk, and entrepreneurial investment. Our results suggest empirical identification strategies for both the value of the EIS and its relationship with unity.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Robust comparative statics for the elasticity of intertemporal substitution

Flynn

Schmidt

Toda

2023

View full text Add to dashboard Cite

show abstract

“…Our paper is different because we focus on the response of consumption behavior to arbitrary shocks and impose much weaker restrictions, allowing for general recursive preferences and stochastic processes. More recently, in independent work, Iachan, Nevov, and Simsek (2021) show that expanding portfolio choice (which they refer to as financial innovation) increases savings if EIS is greater than one. Our analysis is complementary since we put little structure on the model and consider many other types of comparative statics, whereas they focus on one channel but also study general equilibrium implications.…”

Section: Introductionmentioning

confidence: 99%

Robust Comparative Statics for the Elasticity of Intertemporal Substitution

Flynn¹,

Schmidt²,

Toda³

2022

Preprint

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We study a general class of consumption-savings problems with recursive preferences.We characterize the sign of the consumption response to arbitrary shocks in terms of the product of two sufficient statistics: the elasticity of intertemporal substitution between contemporaneous consumption and continuation utility (EIS), and the relative elasticity of the marginal value of wealth (REMV). Under homotheticity, the REMV always equals one, so the propensity of the agent to save or dis-save is always signed by the relationship of the EIS with unity. We apply our results to derive comparative statics in classical problems of portfolio allocation, consumption-savings with income risk, and entrepreneurial investment. Our results suggest empirical identification strategies for both the value of the EIS and its relationship with unity.

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The Macroeconomics of Financial Speculation

Simsek

2021

Annu. Rev. Econ.

Self Cite

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I review the literature on financial speculation driven by belief disagreements from a macroeconomics perspective. To highlight unifying themes, I develop a stylized macroeconomic model that embeds several mechanisms. With short-selling constraints, speculation can generate overvaluation and speculative bubbles. Leverage can substantially inflate speculative bubbles, and leverage limits depend on perceived downside risks. Shifts in beliefs about downside tail scenarios can explain the emergence and the collapse of leveraged speculative bubbles. Speculative bubbles are related to rational bubbles, but they match better the empirical evidence on the predictability of asset returns. Even without short-selling constraints, speculation induces procyclical asset valuation. When speculation affects the price of aggregate assets, it also influences macroeconomic outcomes such as aggregate consumption, investment, and output. Speculation in the boom years reduces asset prices, aggregate demand, and output in the subsequent recession. Macroprudential policies that restrict speculation in the boom can improve macroeconomic stability and social welfare. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

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The Choice Channel of Financial Innovation

Cited by 6 publications

References 115 publications

Robust comparative statics for the elasticity of intertemporal substitution

Robust comparative statics for the elasticity of intertemporal substitution

Robust Comparative Statics for the Elasticity of Intertemporal Substitution

The Macroeconomics of Financial Speculation

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