erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Excess Volatility Puzzles

Costas Azariadis (University of California, LA, USA)

Abstract  

Dynamic general equilibrium models of convex economies with complete markets and rational expectations typically predict smooth reactions of household consumption, GNP and asset prices to temporary shocks in household income, total factor productivity and dividends. Actual impulse responses, inferred from cross-sectional and time series data, show considerable volatility, This essay reviews the evidence on excess volatility and explores, as a potential cause, limits on arbitrage opportunities imposed by the solvency contraints and bounded rationality.

Economic Research Center
Middle East Technical University
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