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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Mertens, Karel

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Kambourov, Gueorgui / Lambertini, Luisa / Pavoni, Nicola / Ruhl, Kim / Nimark, Kristoffer / Wang, Pengfei

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Assessing Aggregate Tests of Efficiency for Dynamic Economies

Martin Barbie1 / Marcus Hagedorn2 / Ashok Kaul3

1Universität Karlsruhe,

2University of Bonn,

3Universitat Pompeu Fabra,

Citation Information: Topics in Macroeconomics. Volume 4, Issue 1, ISSN (Online) 1534-5998, DOI: 10.2202/1534-5998.1207, December 2004

Publication History

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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.

Keywords: Overaccumulation of Capital; Dynamic Efficiency; Interim Pareto Optimality

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