Quantitative Economics

Journal Of The Econometric Society

Edited by: Stéphane Bonhomme • Print ISSN: 1759-7323 • Online ISSN: 1759-7331

Quantitative Economics: Jan, 2024, Volume 15, Issue 1

Difficulties in Testing for Capital Overaccumulation

p. 89-114

Narayana R. Kocherlakota

This paper reconsiders the question of testing for the presence of Pareto suboptimal capital overaccumulation in overlapping generations economies. The paper allows generation‐specific technology shocks to evolve over time according to a stationary Markov chain, and assumes that an econometrician observes a finite sample of aggregate quantities. In this setting, any statistical test of the null hypothesis of capital overaccumulation with size less than one also has zero power against the alternative hypothesis of a dynamically efficient steady state. This result means that the standard assessments of capital overaccumulation based on US aggregate quantity data should be viewed as inconclusive.

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Supplemental Material

Supplement to "Difficulties in Testing for Capital Overaccumulation"

Narayana R. Kocherlakota

Section A of this Online Appendix generalizes Definition 2 (of dynamic efficiency) to economics with aggregate risk. Section B describes a simple example economy that illustrates why interest rate-based tests of capital overaccumulation may be unreliable
in the presence of financial market frictions.

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