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Most Downloaded Articles
- Comparing Wealth Effects: The Stock Market versus the Housing Market by Case, Karl E./ Quigley, John M. and Shiller, Robert J.
- Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium by Heylen, Freddy and Van de Kerckhove, Renaat
- The Effects of the Great Recession on Central Bank Doctrine and Practice by Bernanke, Ben S.
- Dynamics of Wealth and Consumption: New and Improved Measures for U.S. States by Zhou, Xia and Carroll, Christopher D.
Assessing Aggregate Tests of Efficiency for Dynamic Economies
Citation Information: Topics in Macroeconomics. Volume 4, Issue 1, ISSN (Online) 1534-5998, DOI: 10.2202/1534-5998.1207, December 2004
- Published Online:
In a seminal contribution Abel, Mankiw, Summers, and Zeckhauser (1989) show that from an aggregate dynamic perspective the US economy is Pareto efficient. We argue that, when applying their test, they implicitly make strong assumptions about the economy's future behavior. We show how time series evidence may easily lead to wrong conclusions about the welfare properties of real world economies.We present a test criterion based on Zilcha (1991) and robust evidence that the US economy does not overaccumulate capital. Our contribution highlights that the distinction between efficient capital accumulation and Pareto efficiency is empirically relevant. The latter efficiency benchmark - encompassing also risk sharing issues - cannot be rigorously tested based on available approaches in the literature.