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Aggregation of simple linear dynamics: exact asymptotic results

Lippi, Marco and Zaffaroni, Paolo (1998) Aggregation of simple linear dynamics: exact asymptotic results. EM, 350. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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Identification Number: 350

Abstract

his paper deal with aggregation of AR(1) micro variables driven by a common and idiosyncratic shock with random coefficients. We provide a rigorous analysis, based on results on sums of r.v.'s with a possibly finite first moment, of the aggregate variance and spectral density, as the number of micro units tends to infinity. If the AR coefficients lie below a critical away from unity, the aggregate process may exhibit infinite variance and long memory. Surprisingly, if the key parameter of the density function of the AR coefficients lies below a critical value (high density near unity), common and idiosyncratic components have the same importance in explaining aggregate variance, whereas the usual result, i.e. a vanishing importance of the idiosyncratic component, is obtained when the parameter lies above the critical value (low density near unity). Empirical analysis relative to major U.S. macroeconomic series, both in previous literature and in this paper, provides estimates of the parameter below the critical value.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk
Additional Information: © 1998 Marco lippi and Paolo Zaffaroni
Subjects: H Social Sciences > HB Economic Theory
Sets: Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 09 Jul 2008 17:10
Last Modified: 01 Oct 2010 08:58
URI: http://eprints.lse.ac.uk/id/eprint/6872

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