A widespread misbelief asserts that an efficient market would arbitrage out any cyclical or other... more A widespread misbelief asserts that an efficient market would arbitrage out any cyclical or otherwise partially-predictable, non-random-walk pattern on the observed market prices time series. Hence, when such patterns are observed, they are often attributed to either irrational behavior or market inefficiency. Yet, strictly speaking, the efficient markets hypothesis only rules such patterns out of the expected (i.e. mean) path, whereas, if the probability diffusion process is asymmetric (as in most economic and financial stochastic models), the observed time series will approximate the median path, which is not subject to such constraint. This paper combines a general imperfect-competition production function specification (i.e. one generating economic rents) with the concept of time-to-build to develop a rational-expectations, efficient-markets model displaying a valuation cycle along its median path. This model may therefore help to explain the bull-and-bear cycles observed in asset markets generating economic rents e.g. real estate, commodities or, for that matter, most if not all of the assets quoted in the stock exchange.
Report on MS 734 : “ The power and the weakness of rational expectations ” by Eduard Gracia
Consider re-phrasing “...the mean (i.e. ’expected’) path must be a random walk” since the mean is... more Consider re-phrasing “...the mean (i.e. ’expected’) path must be a random walk” since the mean is either a number/parameter or a deterministic function. Introduction. I think that the “logical fallacy” bit is quite apart from the rest of the paper, which makes a distinct contribution in terms of the dynamic model of the cycle. Consider shortening this part, perhaps leaving the logical fallacy argument for another (methodological?) paper. Page 3, line 3. Typo: “mush”. The example on page 3 and 4. It is good with an intuitive example, so it should be kept. On the other hand, as noted below, it is possible that the even more relevant argument (i.e., for the actual model used) in Appendix 1, can be integrated moved to the main text after some simplification. Paragraph starting in the last line of p 8. The reference to TFP (and the discussion) is not needed. It becomes clear later in the paper that your model does not depend on an exogenous TFP cycle, and your theory of technical progres...
The present paper follows the rationality of the Human Capital theory to explain the heterogeneit... more The present paper follows the rationality of the Human Capital theory to explain the heterogeneity of returns to schooling in a policy evaluation model. The empirical implications of the model are extended further from the properties of ordinary least squares and instrumental variable estimators and centered on predictions about the sign of different policy evaluation parameters and on the shape and variability of marginal returns to education. Empirical evidence shown by a binary choice model supports the assumptions that abler people face lower marginal costs of schooling and higher variability of returns. Evidence obtained from a sequential choice model also supports the former assumption. JEL Classification: C10, D84, I21, J31
In 1975, in the second edition of his landmark work, Human Capital, Gary Becker set the foundatio... more In 1975, in the second edition of his landmark work, Human Capital, Gary Becker set the foundations for an explanation of wage differentials as a return on an investment in education 1. Arguably, however, wage differentials cannot be interpreted solely as a result of different investments in education, for multiple other factors, such as health, luck, discrimination, nepotism or even trade union power all play a crucial role as well. This paper will attempt to contribute to this debate by integrating and formalising some of the new key evidence that has been put forward throughout the last few years. We contend that, despite the volumes of literature this topic has generated, the impact of the positive correlation between ability and education on wage disparity has not yet been fully clarified. Thus, the debate has often been framed as a "nature vs. nurture" exercise to separate the contribution to individual wages of innate ability from that of educational investment, without always acknowledging that education does not just teach new skills and techniques but also allows innate abilities, which are not necessarily distributed evenly across the population, to manifest themselves and develop. In other words: against a "pure" ability premium, which would present no correlation to education, and a "pure" educational premium, which would provide a standard return proportional to the investment made, this ability-developing effect of education would result in returns on education displaying a large variability across individuals, as it would depend not just on the investment itself but also on the presence or not of those latent abilities in the individual. The analysis becomes further complicated by the fact that many other environmental factors in addition to innate ability and education play a role not only in determining the wage premium but also the degree of uncertainty around it. Hence, both this uncertainty and the degree of risk aversion of individuals will have an impact on the wage premium which can, in principle, be attributed neither to ability nor to education or, for that matter, to any correlation between the two.
Toute économie-monde se partage en zones successives. Le coeur, c'est-à-dire la région qui s'éten... more Toute économie-monde se partage en zones successives. Le coeur, c'est-à-dire la région qui s'étend autour du centre […]. Puis viennent des zones intermédiaires, autour du pivot central. Enfin, très larges, de marges […] Dans ces zones périphériques, la vie des hommes évoque souvent the Purgatoire, ou même l'Enfer. Et la raison suffisante en est, bel et bien, leur situation géographique." 1-Fernand Braudel (1985) La dynamique du capitalisme P a g e 2 | 15 Eduard Gracia has more than twenty years of management consulting experience across Europe, the Americas, Middle East, and Asia. He is also a former lecturer of Economic Theory at the University of Barcelona, and has authored numerous papers on various topics related to applied economics, as well as a management book, The Fable of the Sharks. He currently works as a principal for a global strategy consultancy and is based in Dubai, UAE.
We use a sample of OECD countries in order to better understand why the US health care expenditur... more We use a sample of OECD countries in order to better understand why the US health care expenditure as a per centage of its Gross Domestic Product («health care effort») is so far above any other. To this end we employ a descriptive cross-country methodology based partially on econometric estimations, synthetic indicators and the Lerner's formula of market power, that allows us to dismiss as explanatory variables all those factors that were not differential across the sample. We advance the exploratory hypothesis that the availability of a universal pu blic health coverage would increase the price elasticity of demand and thus would reduce the control of prices by the suppliers.
Ivie working papers offer in advance the results of economic research under way in order to encou... more Ivie working papers offer in advance the results of economic research under way in order to encourage a discussion process before sending them to scientific journals for their final publication. * Special thanks to Gema Zamarro for useful discussion. Bernarda Zamora gratefully acknowledges financial
European Journal of Economics and Economic Policies: Intervention
For the last quarter of a century, the Real Business Cycle model has dominated the interpretation... more For the last quarter of a century, the Real Business Cycle model has dominated the interpretation of business cycles in mainstream economics; yet a number of signifi cant empirical objections to it justify exploring an alternative approach. Th is paper proposes to base such an approach on a predator-prey mechanism, along the lines of the classical Lotka-Volterra model for ecosystem dynamics, where agency costs play the role of the predatory activity, in a process very similar to the one proposed by the classical Austrian School interpretation of the cycle (Hayek/Schumpeter). Th e model is consistent with both Rational Expectations and the Effi cient Markets Hypothesis, and predicts that stock market valuations will regularly present bubbles and crashes synchronised with the business cycle without this implying any irrational behaviour on the part of the investors. JEL Classifi cation: E »When in fact a community has overcome many and serious dangers and has reached unquestioned power and lordship, new factors come into play. Prosperity takes its seat in that community and life turns towards luxury. Men become ambitious in their rivalries to achieve magistracies and other distinctions. As this takes place, the aspirations to magistracies, the protests of those who see themselves rejected, the pride and luxury, will give rise to decadence.« (Polybius (ca. B. C.), Histories, quoted by Mazzarino ())
Economics: The Open-Access, Open-Assessment E-Journal
A popular interpretation of the Rational Expectations/Efficient Markets hypothesis states that, i... more A popular interpretation of the Rational Expectations/Efficient Markets hypothesis states that, if it holds, market valuations must follow a random walk; hence, the hypothesis is frequently criticized on the basis of empirical evidence against such a prediction. Yet this reasoning incurs what we could call the 'fallacy of probability diffusion symmetry': although market efficiency does indeed imply that the mean (i.e. 'expected') path must rule out any cyclical or otherwise arbitrage-enabling pattern, if the probability diffusion process is asymmetric the observed path will most closely resemble not the mean but the median, which is not subject to this condition. In this context, this paper develops an efficient markets model where the median path of Tobin's q ratio displays regular, periodic cycles of bubbles and crashes reflecting an agency problem between investors and producers. The model is tested against U.S. market data, and its results suggest that such a regular cycle does indeed exist and is statistically significant. The aggregate production model in Gracia (Uncertainty and Capacity Constraints: Reconsidering the Aggregate Production Function, 2011) is then put forward to show how financial fluctuations can drive the business cycle by periodically impacting aggregate productivity and, as a consequence, GDP growth.
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch ge... more Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public.
In 1975, in the second edition of his landmark work, Human Capital, Gary Becker set the foundatio... more In 1975, in the second edition of his landmark work, Human Capital, Gary Becker set the foundations for an explanation of wage differentials as a return on an investment in education 1. Arguably, however, wage differentials cannot be interpreted solely as a result of different investments in education, for multiple other factors, such as health, luck, discrimination, nepotism or even trade union power all play a crucial role as well. This paper will attempt to contribute to this debate by integrating and formalising some of the new key evidence that has been put forward throughout the last few years. We contend that, despite the volumes of literature this topic has generated, the impact of the positive correlation between ability and education on wage disparity has not yet been fully clarified. Thus, the debate has often been framed as a "nature vs. nurture" exercise to separate the contribution to individual wages of innate ability from that of educational investment, without always acknowledging that education does not just teach new skills and techniques but also allows innate abilities, which are not necessarily distributed evenly across the population, to manifest themselves and develop. In other words: against a "pure" ability premium, which would present no correlation to education, and a "pure" educational premium, which would provide a standard return proportional to the investment made, this ability-developing effect of education would result in returns on education displaying a large variability across individuals, as it would depend not just on the investment itself but also on the presence or not of those latent abilities in the individual. The analysis becomes further complicated by the fact that many other environmental factors in addition to innate ability and education play a role not only in determining the wage premium but also the degree of uncertainty around it. Hence, both this uncertainty and the degree of risk aversion of individuals will have an impact on the wage premium which can, in principle, be attributed neither to ability nor to education or, for that matter, to any correlation between the two.
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch ge... more Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public.
A widespread misbelief asserts that an efficient market would arbitrage out any cyclical or other... more A widespread misbelief asserts that an efficient market would arbitrage out any cyclical or otherwise partially-predictable, non-random-walk pattern on the observed market prices time series. Hence, when such patterns are observed, they are often attributed to either irrational behavior or market inefficiency. Yet, strictly speaking, the efficient markets hypothesis only rules such patterns out of the expected (i.e. mean) path, whereas, if the probability diffusion process is asymmetric (as in most economic and financial stochastic models), the observed time series will approximate the median path, which is not subject to such constraint. This paper combines a general imperfect-competition production function specification (i.e. one generating economic rents) with the concept of time-to-build to develop a rational-expectations, efficient-markets model displaying a valuation cycle along its median path. This model may therefore help to explain the bull-and-bear cycles observed in asset markets generating economic rents e.g. real estate, commodities or, for that matter, most if not all of the assets quoted in the stock exchange.
Report on MS 734 : “ The power and the weakness of rational expectations ” by Eduard Gracia
Consider re-phrasing “...the mean (i.e. ’expected’) path must be a random walk” since the mean is... more Consider re-phrasing “...the mean (i.e. ’expected’) path must be a random walk” since the mean is either a number/parameter or a deterministic function. Introduction. I think that the “logical fallacy” bit is quite apart from the rest of the paper, which makes a distinct contribution in terms of the dynamic model of the cycle. Consider shortening this part, perhaps leaving the logical fallacy argument for another (methodological?) paper. Page 3, line 3. Typo: “mush”. The example on page 3 and 4. It is good with an intuitive example, so it should be kept. On the other hand, as noted below, it is possible that the even more relevant argument (i.e., for the actual model used) in Appendix 1, can be integrated moved to the main text after some simplification. Paragraph starting in the last line of p 8. The reference to TFP (and the discussion) is not needed. It becomes clear later in the paper that your model does not depend on an exogenous TFP cycle, and your theory of technical progres...
The present paper follows the rationality of the Human Capital theory to explain the heterogeneit... more The present paper follows the rationality of the Human Capital theory to explain the heterogeneity of returns to schooling in a policy evaluation model. The empirical implications of the model are extended further from the properties of ordinary least squares and instrumental variable estimators and centered on predictions about the sign of different policy evaluation parameters and on the shape and variability of marginal returns to education. Empirical evidence shown by a binary choice model supports the assumptions that abler people face lower marginal costs of schooling and higher variability of returns. Evidence obtained from a sequential choice model also supports the former assumption. JEL Classification: C10, D84, I21, J31
In 1975, in the second edition of his landmark work, Human Capital, Gary Becker set the foundatio... more In 1975, in the second edition of his landmark work, Human Capital, Gary Becker set the foundations for an explanation of wage differentials as a return on an investment in education 1. Arguably, however, wage differentials cannot be interpreted solely as a result of different investments in education, for multiple other factors, such as health, luck, discrimination, nepotism or even trade union power all play a crucial role as well. This paper will attempt to contribute to this debate by integrating and formalising some of the new key evidence that has been put forward throughout the last few years. We contend that, despite the volumes of literature this topic has generated, the impact of the positive correlation between ability and education on wage disparity has not yet been fully clarified. Thus, the debate has often been framed as a "nature vs. nurture" exercise to separate the contribution to individual wages of innate ability from that of educational investment, without always acknowledging that education does not just teach new skills and techniques but also allows innate abilities, which are not necessarily distributed evenly across the population, to manifest themselves and develop. In other words: against a "pure" ability premium, which would present no correlation to education, and a "pure" educational premium, which would provide a standard return proportional to the investment made, this ability-developing effect of education would result in returns on education displaying a large variability across individuals, as it would depend not just on the investment itself but also on the presence or not of those latent abilities in the individual. The analysis becomes further complicated by the fact that many other environmental factors in addition to innate ability and education play a role not only in determining the wage premium but also the degree of uncertainty around it. Hence, both this uncertainty and the degree of risk aversion of individuals will have an impact on the wage premium which can, in principle, be attributed neither to ability nor to education or, for that matter, to any correlation between the two.
Toute économie-monde se partage en zones successives. Le coeur, c'est-à-dire la région qui s'éten... more Toute économie-monde se partage en zones successives. Le coeur, c'est-à-dire la région qui s'étend autour du centre […]. Puis viennent des zones intermédiaires, autour du pivot central. Enfin, très larges, de marges […] Dans ces zones périphériques, la vie des hommes évoque souvent the Purgatoire, ou même l'Enfer. Et la raison suffisante en est, bel et bien, leur situation géographique." 1-Fernand Braudel (1985) La dynamique du capitalisme P a g e 2 | 15 Eduard Gracia has more than twenty years of management consulting experience across Europe, the Americas, Middle East, and Asia. He is also a former lecturer of Economic Theory at the University of Barcelona, and has authored numerous papers on various topics related to applied economics, as well as a management book, The Fable of the Sharks. He currently works as a principal for a global strategy consultancy and is based in Dubai, UAE.
We use a sample of OECD countries in order to better understand why the US health care expenditur... more We use a sample of OECD countries in order to better understand why the US health care expenditure as a per centage of its Gross Domestic Product («health care effort») is so far above any other. To this end we employ a descriptive cross-country methodology based partially on econometric estimations, synthetic indicators and the Lerner's formula of market power, that allows us to dismiss as explanatory variables all those factors that were not differential across the sample. We advance the exploratory hypothesis that the availability of a universal pu blic health coverage would increase the price elasticity of demand and thus would reduce the control of prices by the suppliers.
Ivie working papers offer in advance the results of economic research under way in order to encou... more Ivie working papers offer in advance the results of economic research under way in order to encourage a discussion process before sending them to scientific journals for their final publication. * Special thanks to Gema Zamarro for useful discussion. Bernarda Zamora gratefully acknowledges financial
European Journal of Economics and Economic Policies: Intervention
For the last quarter of a century, the Real Business Cycle model has dominated the interpretation... more For the last quarter of a century, the Real Business Cycle model has dominated the interpretation of business cycles in mainstream economics; yet a number of signifi cant empirical objections to it justify exploring an alternative approach. Th is paper proposes to base such an approach on a predator-prey mechanism, along the lines of the classical Lotka-Volterra model for ecosystem dynamics, where agency costs play the role of the predatory activity, in a process very similar to the one proposed by the classical Austrian School interpretation of the cycle (Hayek/Schumpeter). Th e model is consistent with both Rational Expectations and the Effi cient Markets Hypothesis, and predicts that stock market valuations will regularly present bubbles and crashes synchronised with the business cycle without this implying any irrational behaviour on the part of the investors. JEL Classifi cation: E »When in fact a community has overcome many and serious dangers and has reached unquestioned power and lordship, new factors come into play. Prosperity takes its seat in that community and life turns towards luxury. Men become ambitious in their rivalries to achieve magistracies and other distinctions. As this takes place, the aspirations to magistracies, the protests of those who see themselves rejected, the pride and luxury, will give rise to decadence.« (Polybius (ca. B. C.), Histories, quoted by Mazzarino ())
Economics: The Open-Access, Open-Assessment E-Journal
A popular interpretation of the Rational Expectations/Efficient Markets hypothesis states that, i... more A popular interpretation of the Rational Expectations/Efficient Markets hypothesis states that, if it holds, market valuations must follow a random walk; hence, the hypothesis is frequently criticized on the basis of empirical evidence against such a prediction. Yet this reasoning incurs what we could call the 'fallacy of probability diffusion symmetry': although market efficiency does indeed imply that the mean (i.e. 'expected') path must rule out any cyclical or otherwise arbitrage-enabling pattern, if the probability diffusion process is asymmetric the observed path will most closely resemble not the mean but the median, which is not subject to this condition. In this context, this paper develops an efficient markets model where the median path of Tobin's q ratio displays regular, periodic cycles of bubbles and crashes reflecting an agency problem between investors and producers. The model is tested against U.S. market data, and its results suggest that such a regular cycle does indeed exist and is statistically significant. The aggregate production model in Gracia (Uncertainty and Capacity Constraints: Reconsidering the Aggregate Production Function, 2011) is then put forward to show how financial fluctuations can drive the business cycle by periodically impacting aggregate productivity and, as a consequence, GDP growth.
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch ge... more Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public.
In 1975, in the second edition of his landmark work, Human Capital, Gary Becker set the foundatio... more In 1975, in the second edition of his landmark work, Human Capital, Gary Becker set the foundations for an explanation of wage differentials as a return on an investment in education 1. Arguably, however, wage differentials cannot be interpreted solely as a result of different investments in education, for multiple other factors, such as health, luck, discrimination, nepotism or even trade union power all play a crucial role as well. This paper will attempt to contribute to this debate by integrating and formalising some of the new key evidence that has been put forward throughout the last few years. We contend that, despite the volumes of literature this topic has generated, the impact of the positive correlation between ability and education on wage disparity has not yet been fully clarified. Thus, the debate has often been framed as a "nature vs. nurture" exercise to separate the contribution to individual wages of innate ability from that of educational investment, without always acknowledging that education does not just teach new skills and techniques but also allows innate abilities, which are not necessarily distributed evenly across the population, to manifest themselves and develop. In other words: against a "pure" ability premium, which would present no correlation to education, and a "pure" educational premium, which would provide a standard return proportional to the investment made, this ability-developing effect of education would result in returns on education displaying a large variability across individuals, as it would depend not just on the investment itself but also on the presence or not of those latent abilities in the individual. The analysis becomes further complicated by the fact that many other environmental factors in addition to innate ability and education play a role not only in determining the wage premium but also the degree of uncertainty around it. Hence, both this uncertainty and the degree of risk aversion of individuals will have an impact on the wage premium which can, in principle, be attributed neither to ability nor to education or, for that matter, to any correlation between the two.
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch ge... more Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public.
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Papers by Eduard Gracia