A BEJM Topics article.

Abstract

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.

Submitted: February 26, 2004 · Accepted: May 6, 2004 · Published: December 15, 2004

Originally published in Topics in Macroeconomics.

Recommended Citation

Barbie, Martin; Hagedorn, Marcus; and Kaul, Ashok (2004) "Assessing Aggregate Tests of Efficiency for Dynamic Economies," Topics in Macroeconomics: Vol. 4 : Iss. 1, Article 16.
Available at: http://www.bepress.com/bejm/topics/vol4/iss1/art16