The combination of a zero notional rate in period 0 and a mean reverting discount factor
causes the period 1 nominal interest rate to rise above its ZLB in 59 % of the simulations without a monetary policy shock.
The emerging market economies differ from the advanced economies in their shares of government spending in GDP, in the volatility of their productivity levels, and in their discount factors
. Table 2 shows that total government expenditures in China and India are low compared with the advanced economies at 21.9 percent and 20.2 percent of GDP, respectively.
In fact, these profits are each increasing in [delta].(19) This leads the fees [K.sup.max.sub.S] and [K.sup.max.sub.B] able to incite agents to sign directly with the middleman to be decreasing in the discount factor
. For the middleman, this means that the shortfall that stems from the decrease of the fees [K.sub.S] and [K.sub.B] is increasing in the discount factor
(19) Recent models of intergenerational altruism modified the standard altruism models by taking into account investment by altruistic parents to affect their children's discount factors
and preferences in order to make them patient and hence increase their human capital.
It depicts possible combinations of risk-free interest rate ([R.sup.f]) and risk premium for different values of the parameters describing discount factor
([beta]) and risk aversion ([alpha]).
The term [beta] plays the usual role of the discount factor
in a representative-household economy given its relationship with the real interest rate (with an adjustment for steady-state real GDP growth).
In the repeated game with optimal punishment and discounting, we need two inequalities to find the range of the discount factor
such that collusion is sustainable; (1) absence of private incentives to deviate, and (2) absence of private incentives to deviate from the punishment phase.
Moreover, the explanation that the discount factor
is the main driver of movements in the price-to-dividend ratio has potentially falsifiable implications.
To check the robustness of our results, the discount factor
[delta] is set to 0.999, 0.950, and 0.900.
By assuming that the amount of alcohol that individuals consume in the first period affect their discount factor
when choosing a lottery in the second period, we are assuming that individuals' preferences of the lotteries in the second period may change with their consumption of alcohol in the first period.
In order to calculate its present value we multiply it by the three-year annuity factor at 5 per cent and the one-year discount factor
at 5 per cent.
So, a natural explanation for both the failure of UIP and the profitability of our currency trading strategies is the presence of a risk premium that compensates investors for the covariance between the payoffs to the currency strategies and their stochastic discount factor
. In BEKR (2006), BER (2011), and Burnside, Eichenbaum, Kleshchelski, and Rebelo (2011) [henceforth BEKR (2011)], and in Burnside (2010), (7) we argue that the profitability of these strategies is not a compensation for risk, at least as conventionally measured.