information disclosure and asymmetric speed of learning in booms and busts we consider a model in which agents gradually learn about the aggregate market conditions boom or bust from the information disclosed after a trading round the disclosure rules can generate asymmetric learning and affect the degree of asymmetry in particular when only winning bids are publicly disclosed learning is more rapid in a bust

the brevity and violence of contractions and expansions abstract early studies of business cycles argued that contractions in economic activity were briefer shorter and more violent rapid than expansions this paper systematically investigates this claim and in the process discovers a robust new business cycle fact contractions in employment are briefer and more violent than expansions but we cannot reject the null of equal brevity and violence for expansions and contractions in output the difference arises because employment typically lags output around peaks but they coincide in their troughs we discuss the performance of existing business cycle models in accounting for this fact and conclude that none can fully account for it we then show that a business cycle model with asymmetric adjustment costs on employment and a choice of when to scrap old technologies can account for the business cycle fact both qualitatively and quantitatively

strategic eurasian natural gas market model for energy security and policy analysis formulation and application to south stream abstract the mathematical formulation of a strategic eurasian natural gas market model is presented the model represents horizontal oligopolistic relationships among producers bilateral market power between producer russia and transit ukraine countries detailed transport constraints and operation decisions over a 20 year time horizon to demonstrate the model s capabilities a financial and market analysis of the proposed south stream gas pipeline from russia via the black sea to south europe is summarized insights obtained include the following first expectations of high demand growth in europe and or transit risks do not justify the construction of the south stream pipeline because under all demand and ukraine transit interruption scenarios the net benefits to the south stream participants are negative the npv ranges from 1 9 billion bn to 7 4 bn second ukraine s perception of high transit market power vis a vis russia may trigger the construction of the otherwise unprofitable south stream project thus under ukraine s high transit market power scenario the npv of south stream ranges between 2 4 bn and 24 5 bn third we find that the south stream investment increases the efficiency of the european gas market under the following conditions i when gas demand in europe grows 2 per year up to 2030 ii when ukraine poses high transit market power or iii under a combination of severe transit risks through ukraine and low demand scenarios in europe it should be noted that the value of south stream to both its project sponsors and the market as a whole is much higher when ukraine exercises transit market power than under the high demand scenario therefore whether ukraine is likely to wield market power is crucial to the success of the south stream project because that is the only scenario in which the project yields both a positive expected npv to its sponsors and the highest value to the market as a whole

financial markets the real economy and self fulfilling uncertainties we develop a model of informational interdependence between financial markets and the real economy linking economic uncertainty to information production and aggregate economic activities in general equilibrium the mutual learning between financial markets and the real economy creates a strategic complementarity in their information production leading to self fulfilling surges in economic uncertainties in a dynamic setting our model characterizes self fulfilling uncertainty traps with two steady state equilibria and a two stage economic crisis in transitional dynamics

uncertainty across volatility regimes we propose a nonrecursive identification scheme for uncertainty shocks that exploits breaks in the volatility of macroeconomic variables and is novel in the literature on uncertainty this approach allows us to simultaneously address two major questions in the empirical literature is uncertainty a cause or effect of decline in economic activity does the relationship between uncertainty and economic activity change across macroeconomic regimes results based on a small scale vector autoregression with us monthly data suggest that i uncertainty is an exogenous source of decline of economic activity and ii the effects of uncertainty shocks amplify in periods of economic and financial turmoil

risk and ambiguity in models of business cycles abstract we inject aggregate uncertainty risk and ambiguity into an otherwise standard business cycle model and describe its consequences we find that increases in uncertainty generally reduce consumption but they do not account in this model for either the magnitude or the persistence of the most recent recession we speculate about extensions that might do better along one or both dimensions

openness and inflation a general equilibrium model of a small open economy is developed to analyse the optimal rate of inflation under discretion once agents welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship a greater degree of openness may lead the policy maker to want to exploit the short run phillips curve more aggressively even if involves a smaller short run benefit because changes in export demand affect the terms of trade inflation can then be higher in a more open economy

learning and capacity expansion under demand uncertainty a competitive dynamic model of entry into a new industry is set up and both its positive and normative aspects are studied the main assumptions are that entry is sequential that it occurs under imperfect information on the size of the market and that better information becomes available as time goes on the gradual improvement in information is due to the fact that later waves of entrants are able to observe the profitability of earlier entrants the major results reported here under suitable restrictions are that the equilibrium rate of entry is monotonically decreasing over time and that at any given point in time it is smaller than the socially optimal one when a new market opens as a result of a product being newly invented for instance or when an existing market starts to expand uncertainty with respect to its size is likely to prevail as a result of this uncertainty entry of firms into such markets typically will occur in waves some firms will enter initially while others will wait to see the consequences of that initial entry if the experience of early entrants is favourable entry will continue otherwise entry will cease hence with the introduction of a new product two phases are associated the growth phase typified by positive operating profits for existing firms and expansion of productive capacity due to entry of new firms and the mature phase typified by erosion of profits and fixed total productive capacity empiricists estimating the time pattern of investments during the growth phase have found an s shaped diffusion curve see mansfield 1986 and gort and klepper 1982 the purpose of the present paper is to theoretically characterize these time patterns and to investigate their welfare properties any attempt to model the type of entry described above must account for differences in both entry dates and resultant earnings in other words the theory must explain why the realized earnings of different cohorts of firms are not equal often such ex post differences are reconciled by assuming heterogeneity with respect to some latent underlying characteristic managerial ability for instance and attributing differences in earnings to differences in that characteristic in this paper instead earning differentials are attributable to luck only ex ante all firms are technologically identical and equally capable of forecasting market prospects and rationally acting upon those forecasts ex post some firms turn out to have entered at the right time and are for that reason more profitable the model developed in this paper analyzes a parametric example of a sequential entry problem in which the uncertainty over market size is gradually resolved over time in a bayesian setting in an environment of perfect competition and constant returns toscale a free entry equilibrium concept is introduced and the aggregate implications of the time path of investments are derived i then compare this actual time path to the optimum this comparison is interesting because the equilibrium is analysed under the

idiosyncratic risk and the equity premium evidence from the consumer expenditure survey abstract this paper investigates whether uninsured idiosyncratic risk accounts for the equity premium following mankiw j financial econ 17 1986 211 the paper develops an equilibrium factor model in which risk premia depend on the covariance between an asset s return and certain moments of the cross sectional distribution for consumption growth cross sectional consumption factors are constructed using data from the consumer expenditure survey but they do not appear to be promising candidates for explaining the equity premium the cross sectional factors are weakly correlated with stock returns and generate equity premia of 2 percent or less for preference specifications with low degrees of risk aversion

slow boom sudden crash abstract many asset markets exhibit slow booms and sudden crashes this pattern is explained by an endogenous flow of information in the model agents undertake more economic activity in good times than in bad economic activity generates public information about the state of the economy if the economic state changes when times are good and information is abundant asset prices adjust quickly and a sudden crash occurs when times are bad scarce information and high uncertainty slow agents reactions as the economy improves a gradual boom ensues data from u s and emerging credit markets support the theory

an exploration of a strategic competition model for the european union natural gas market abstract following jansen et al 2012 we examine an unconventional cournot model of the european union natural gas market with three major suppliers russian gazprom norwegian statoil and algerian sonatrach to reflect russia s other strategic consideration besides profit we incorporate a relative market share into gazprom s objective function we prove that when gazprom pursues the control of market share along with profit it will be good news for consumers but bad news for its pure profit maximising rivals we further show that by seeking a proper market share gazprom can achieve the same profit of a stackelberg leader in a simultaneous move model as in the standard sequential move leader follower model compared with jansen et al s our approach makes both the analysis considerably simpler and more transparent and the model more applicable

financial innovation the discovery of risk and the u s credit crisis abstract financial innovation and overconfidence about the risk of new financial products were key factors behind the 2008 u s credit crisis we show that a model with a collateral constraint in which learning about the risk of a new financial environment interacts with fisherian amplification produces a boom bust cycle in debt asset prices and consumption early realizations of a high borrowing ability regime turn agents optimistic about the persistence probability of this regime conversely the first realization of a low borrowing ability regime turns agents unduly pessimistic the model predicts large increases in household debt land prices and excess returns during 1998 2006 followed by a collapse

the dynamics of credit markets in a model with learning abstract a dynamic credit market is modeled in which the production and processing of information leads to alternating and persistent periods of growth and contraction in the model the number of projects engaged in determines the precision of estimates of future returns obtained from current investment shocks to underlying returns to risky projects are magnified and prolonged by the learning process multiple equilibria may exist and the magnification effect may be even larger since shocks can move the credit market to a new equilibrium the allocation of credit is generally not a constrained pareto efficient allocation

the uncertainty multiplier and business cycles abstract i study a business cycle model where agents learn about the fundamentals by accumulating capital during recessions agents invest less and this generates noisier estimates of macroeconomic conditions and an increase in uncertainty the endogenous increase in aggregate uncertainty further reduces economic activity and thus gives rise to a multiplier effect that amplifies aggregate fluctuations to discipline learning dynamics i parametrize the model so that it matches not only standard business cycle moments but also survey data on macroeconomic forecasts i find that the uncertainty multiplier amplifies output standard deviation by 16

riskiness endogenous productivity dispersion and business cycles abstract in the data cross sectional productivity dispersion is countercyclical at both the plant level and the firm level see e g bloom 2009 i incorporate a firm s choice of risk level into a model of firm dynamics with real business cycle features to explain this empirical finding both qualitatively and quantitatively in the model in every period each firm chooses the investment amount and the risk level associated with a production project every period all projects available to each firm have the same expected flow return determined by the aggregate and idiosyncratic shocks to the firm s productivity and differ from one another only in their risk the endogenous option of exiting the market and the limited funding for new investment jointly play an important role in motivating firms risk taking behavior the model predicts that in each period relatively small firms are more likely to take risk and hence exhibit a higher exit rate and that the cross sectional productivity dispersion measured as the standard deviation of the realized individual component of productivity is larger in recessions

credit constraints equity market liberalization and growth rate asymmetry abstract this paper provides evidence that financial openness is an important determinant of growth rate asymmetry in emerging markets i exploit exogenous shocks to financial flows and examine the impact of equity market liberalization on the skewness of output growth for 93 countries during the 1973 2009 period i show that opening the economy to foreign portfolio investment results in a substantially higher negative skewness of output growth this result obtains with equal strength in the aggregate data and in the sectoral data and it is disproportionately stronger in sectors that require more external finance the skewness effect of financial openness is stronger in countries which experienced a banking crisis after liberalization

the reaction of stock returns to news about fundamentals in good times stock prices react negatively to good news and positively to bad news whereas in bad times they react positively to good news and negatively to bad news to account for this stylized fact we consider an asset pricing model where the dividend growth rate switches between different values depending on the underlying state of the economy investors never observe the true dividend growth rate but learn about it through not only its realizations but also external signals such as macroeconomic indicators under plausible assumptions the differing precision of external signals across different states of the economy can change the sign of the market reaction to news from external signals in good and bad times this paper was accepted by brad barber finance

news disaster risk and time varying uncertainty abstract standard real business cycle models are often unable to replicate three empirical facts positive output in response to good news stochastic volatility of macro variables and asymmetric business cycles this paper proposes a unified basis for understanding these facts in a tractable dynamic stochastic general equilibrium dsge model in which the key is the interaction of information flows and disaster risk information flows fluctuate between two regimes with different precision levels for signals regarding future economic fundamentals a shift in forecast precision changes the probability of entering an economic disaster high disaster risk leads to low expected capital returns and a decline in hours investment and output changing information structures results in different volatility and skewness over the business cycle simple theory makes the two expectation effects through information flows and disaster risk transparent quantitatively the model suggests that the interaction of the two expectation effects plays a significant role in accounting for the higher order moments of the business cycle

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

factor substitution and economies of scale and utilisation in kuwait s crude oil industry abstract the cost structure of the crude oil industry in kuwait has been examined with specific focus on factor substitution and economies of scale and utilisation this has been done by estimating translog cost functions both long run and short run using time series data covering the period from 1976 to 1996 the results indicate that the implied production structure is non homothetic and the pattern of scale effect is labour saving but capital and material using the evidence also supports the presence of an induced exogenous technical change which is non neutral labour and capital using and material saving the elasticity of substitution between capital and labour is positive implying that the two inputs are substitute the results also indicate the existence of diseconomies of scale in the production of crude oil but no economies or diseconomies of utilisation

what are uncertainty shocks abstract many modern business cycle models use uncertainty shocks to generate aggregate fluctuations however uncertainty is measured in a variety of ways our analysis shows that the measures are not the same either statistically or conceptually raising the question of whether fluctuations in them are actually generated by the same phenomenon we propose a mechanism that generates realistic micro dispersion cross sectional variance of firm level outcomes higher order uncertainty disagreement and macro uncertainty uncertainty about macro outcomes from changes in macro volatility if we want to consider uncertainty shocks as a unified phenomenon these results show what such a shock might actually entail

why do forecasters disagree lessons from the term structure of cross sectional dispersion abstract key sources of disagreement among economic forecasters are identified by using data on cross sectional dispersion in forecasters long and short run predictions of macroeconomic variables dispersion among forecasters is highest at long horizons where private information is of limited value and lower at short forecast horizons moreover differences in views persist through time such differences in opinion cannot be explained by differences in information sets our results indicate they stem from heterogeneity in priors or models differences in opinion move countercyclically with heterogeneity being strongest during recessions where forecasters appear to place greater weight on their prior beliefs

learning asymmetries in real business cycles when a boom ends the downturn is generally sharp and short when growth resumes the boom is more gradual our explanation rests on learning about productivity when agents believe productivity is high they work invest and produce more more production generates higher precision information when the boom ends precise estimates of the slowdown prompt decisive reactions investment and labor fall sharply when growth resumes low production yields noisy estimates of recovery noise impedes learning slows recovery and makes booms more gradual than downturns a calibrated model generates growth rate asymmetry similar to macroeconomic aggregates fluctuations in agents forecast precision match observed countercyclical errors of forecasters

can miracles lead to crises the role of optimism in emerging markets crises emerging market financial crises are abrupt and dramatic usually occurring after a precrisis bonanza this paper develops an equilibrium asset pricing model with informational frictions in which crisis itself is a consequence of the investor optimism in the period preceding the crisis if preceded by a sequence of positive signals a small negative noise shock can trigger a downward adjustment in investors beliefs asset prices and consumption the magnitude of this downward adjustment increases with the level of optimism attained prior to the negative signal moreover with informational frictions asset prices display persistent effects in response to transitory shocks

signal extraction and rational inattention i introduction the objective of this paper is to compare two theories of information frictions in the first theory agents observe the state of the world with exogenously imposed noise we refer to this environment as the signal extraction se model 1 the second theory permits agents to design the distribution of noise terms by focusing limited attention on certain variables at the expense of others following sims 2003 we refer to this model as the rational inattention ri model 2 in both models agents respond to changes in the true underlying state slowly because it takes time for them to learn exactly what the new state is the key difference is that the noise distribution under ri is an outcome of optimal choice and thus can adapt to changing circumstances in the economy whereas under se the noise distribution is technologically fixed our goal is to explore this crucial distinction we explore the distinction between se and ri within a linear quadratic gaussian lqg setting we first study a univariate case for which the variance covariance matrix of the noise shocks can be solved in closed form first we note that at least within the lqg framework any variance covariance structure for the noise shocks derived from the ri problem can be exogenously imposed in the se environment so there is a sense in which the two environments are observationally equivalent the next result we find is that if the variance of the noise itself is fixed we can use a policy experiment to distinguish se from ri suppose that the variance of an exogenous shock is scaled up because of a change in policy in the se problem where the distribution of noise is exogenous an increase in the variance of the shock will lead to a different solution for the conditional variance and kalman gain consequently the change in policy will lead to a change in the model s dynamic behavior and the agent s payoffs in contrast in the ri problem if channel capacity is fixed a change in the variance of the exogenous shock will lead to the same change in the conditional variance of the state and the variance of the noise but will not affect the kalman gain that is inattentive agents with fixed capacity will behave as if they face noise shocks whose nature changes systematically as the dynamic properties of the economy change with policy furthermore we show that if we assume that the marginal cost of information is fixed capacity will be elastic with respect to a change in policy consequently the kalman gain in this case will also adjust in response to the policy change the losses of agents due to imperfect information depend on the value of the kalman gain therefore in general se and ri imply different policy recommendations in contrast we also find that in the univariate case if the ratio of the variance of the exogenous shock to that of the noise i e the signal to noise ratio snr is fixed the se and ri problems are observationally equivalent in the sense that they lead to the same dynamics of the model economy when the ratio of the conditional variance to that of the noise in the se problem equals a particular function of the channel capacity in the ri problem our results do not depend on the presence or absence of correlation between fundamental and noise shocks specifically in the presence of the correlation a change in the variance of the exogenous shock does not change the dynamic behavior of the model in the fixed capacity case whereas it changes the model s dynamics in the fixed information processing cost case in which both the variance of noise and the kalman gain are affected by the interactions between the correlation the variance of the fundamental shock and the conditional variance we then move on to study the multivariate case in this case given channel capacity the conditional variance covariance matrix can be obtained by solving a semidefinite programming problem in which the inattentive agent minimizes the expected loss due to information processing constraints

understanding liquidity shortages during severe economic downturns abstract one feature of economic recessions is the appearance of aggregate liquidity shortages that can exacerbate the economic downturn we develop a model in which the demand for liquidity arises suddenly in response to continued funding needs of partially completed investment projects whose outcomes are subject to idiosyncratic shocks and moral hazard when the economy experiences an adverse aggregate productivity shock incentive constraints that underlie equity contracts may bind provided the shock is severe enough in this case credit rationing appears and the heightened demand for liquidity coincides with a greater reluctance to take on equity positions or deepen investments in on going investment projects the consequence is a reduction in new investment and termination of on going projects due to a lack of liquidity thereby worsening the economic slowdown

investment cycles strategic delay and self reversing cascades we study investment cycles and information flows in a model of social learning in which investment returns fluctuate according to a markov process in our waiting game agents observe the investment history and a private signal correlated with the current period s investment return agents then decide whether to invest in round 1 or to delay their decision to round 2 of the current period cascades in which everyone invests and no one invests eventually correct themselves as compared to the no waiting game with no opportunity for delay the waiting game has shorter investment cascades longer recessions and shorter booms the waiting game also has more underinvestment and less overinvestment

gas trade in the european community during the 1970s a model analysis abstract the european gas market has the reputation of being ruled by secrecy and particular deals this paper tries to explain its development during the 1970s in terms of market equilibrium more precisely we focus with a partial equilibrium model gtm on three important years for gas industry and show that while equilibrium can easily qualify 1974 short term considerations have to be introduced to explain the market in 1978 the analysis is further pursued until 1980 where we investigate the price increases that took place during that period

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

total factor productivity growth and characteristics of the production technology in the uk chemicals and allied industries an insight to the structure of technology in the uk chemicals and allied industries is provided employing both the conventional index number and the cost function methods to measure productivity growth the amount of information lost in the former approach is emphasized moreover some of the crucial assumptions underlying the conventional approach have been found to be invalid for the industries in question

growth forecast revisions over business cycles evidence from the survey of professional forecasters abstract this paper studies how expectations regarding current and future output growth are revised as the state of the economy evolves we study this issue using gdp growth forecasts from the survey of professional forecasters we find an asymmetric relationship between forecast revisions and gdp growth forecasters make larger forecast revisions during contractions than during expansions when the deviation of the economy from its normal state is controlled for

ambiguous information permanent income and consumption fluctuations abstract this paper studies asymmetric responses in consumption where the asymmetries are endogenously generated by agents preferences and incomplete knowledge about information quality agents form expectations about the future based on incomplete information which is assumed to be ambiguous and these future expectations distorted by ambiguity affect spending asymmetrically with a noisy signal of uncertain quality consumption features asymmetric responses the absolute size of the responses depends on whether the signal delivers good or bad news i estimate the model on the data for g7 countries by maximum likelihood and the estimation results suggest that the ambiguity mechanism plays a modest role in driving observed skewness in the data

decomposing energy demand across briic countries energy plays an important role within the production technology of fast emerging economies such that firms reaction to changes in energy prices provides useful information on factor productivity and factor intensity as well as the likely outcome of energy policy initiatives among other things drawing on duality theory this paper decomposes changes in energy demand into substitution and output effects using annual sector level production data for brazil russia india indonesia and china briic for the period 1995 2009 unlike previous studies this study analyzed the economic properties of the underlying production technology results indicate that changes in energy demand are strongly dominated by substitution effects more importantly an intriguing finding that emerges from our analysis is the role of economies of scale and factor accumulation as opposed to technical progress in giving rise to the growth performance of sampled economies

comovement information production and the business cycle abstract recent theoretical research suggests that information production is a positive externality of aggregate economic activity veldkamp 2005 both the quantity and quality of information increase during periods of economic expansion and decrease during periods of contraction based on this insight we hypothesize and confirm that time varying information production drives the comovement patterns observed in stock returns we examine stock return comovement in 36 countries from 1980 to 2007 and show that consistent with the theory comovement patterns are countercyclical that is when information production is high low comovement is low high we also find that the relation between comovement and the business cycle is stronger in countries that experience large intertemporal swings in information production finally we show that the relation between business cycle and comovement is stronger in poor countries countries with less developed financial markets and countries with weaker accounting and transparency standards these results suggest that financial development and transparency are conducive to a steady flow of financial information over the business cycle

adaptive learning endogenous uncertainty and asymmetric dynamics abstract i present a simple model where forecasting confidence affects aggregate demand it is shown that this model has similar stability properties under statistical and evolutionary learning as a model without a confidence affect from this setup i introduce expectational business cycles where output fluctuates due to learning heterogeneous forecasting models and random changes in the efficient forecasting model agents use one of two forecasting models to forecast future variables while heterogeneity is dictated via an evolutionary process increased uncertainty due to a shock to the structure of the economy may result in a sudden decrease in output as agents learn the equilibrium output slowly increases to its equilibrium value expectational business cycles tend to arrive faster last longer and are more severe as agents possess less information

spatially analysing the impact of a no new nukes policy on european natural gas markets abstract the recent chernobyl accident has increased both concerns over the safety of nuclear energy and opposition to its further development in the event that such opposition led to a moratorium on new nuclear generation it would have a dramatic effect on european natural gas markets evaluating total welfare effects of such a policy would require information on the effects in such related markets in light of these concerns this study quantifies the effects of a moratorium that would allow no new nuclear plants in a number of western european countries after 1990 to determine the maximum effect on the gas market it is assumed that all new planned nuclear facilities would be replaced by natural gas facilities since the gas market is heavily dependent on the oil market and gas transport is expensive this moratorium is simulated using a spatial model that includes both gas and oil in this model econometric estimates of oil and gas demand are combined with supply scenarios and oil and gas transport costs for 13 european demand regions seven world supply regions for oil and four supply regions for gas to western europe this two commodity spatial model is solved by reactive programming to forecast trade flows of oil and gas prices at both supply and demand nodes for 2000 both with and without a moratorium the most probable gas price increase from a moratorium was found to be in the range of 25 50 m 3 10 3 it caused a significant reallocation of natural gas with higher oil prices higher income elasticities and more variance across elasticities tending to increase the amount of gas reallocated aggregate annual net consumer welfare gains for the countries modelled from a moratorium were 1 1 billion for the oil market and 912 million for the gas market given very different patterns of nuclear development across the countries modelled spatial modelling finds quite different welfare effects of a moratorium than a similar aggregate model

learning and asset price jumps w e develop a general equilibrium model in which income and dividends are smooth but asset prices contain large moves jumps these large price jumps are triggered by optimal decisions of investors to learn the unobserved state we show that learning choice is determined by preference parameters and the conditional volatility of income process an important model prediction is that income volatility predicts future jump periods while income growth does not consistent with the model large moves in returns in the data are predicted by consumption volatility but not by consumption growth the model quantitatively captures these novel features of the data jel g00 g12 g14 d83 a prominent feature of financial markets is infrequent but large price movements jumps 1 in this article we develop a model in which income and dividends have smooth gaussian dynamics however asset prices are subject to large infrequent jumps in our model large moves in asset prices obtain from the actions of the representative agent to acquire more information about the unobserved state of the economy for a cost we show that the optimal decision to incur a cost and learn the true economic state is directly related to the level of uncertainty in the economy this implies that aggregate economic volatility as well as market volatility should predict jumps in returns we show that indeed in the data consistent with the model return jumps are predicted by consumption volatility market volatility further the implied asset price implications from our model are consistent with the key findings from parametric models about frequency and predictability of jumps as well as nonparametric jump detection analysis of barndorff nielsen and shephard 2006 based on

learning and the great moderation we study a stylized theory of the volatility reduction in the u s after 1984 the great moderation which attributes part of the stabilization to less volatile shocks and another part to more difficult inference on the part of bayesian households attempting to learn the latent state of the economy we use a standard equilibrium business cycle model with technology following an unobserved regime switching process after 1984 according to kim and nelson 1999a the variance of u s macroeconomic aggregates declined because boom and recession regimes moved closer together keeping conditional variance unchanged in our model this makes the signal extraction problem more difficult for bayesian households and in response they moderate their behavior reinforcing the effect of the less volatile stochastic technology and contributing an extra measure of moderation to the economy we construct example economies in which this learning effect accounts for about 30 of a volatility reduction of the magnitude observed in the postwar u s data

fluctuations in uncertainty this review article tries to answer four questions i what are the stylized facts about uncertainty over time ii why does uncertainty vary iii do fluctuations in uncertainty matter and iv did higher uncertainty worsen the great recession of 2007 2009 on the first question both macro and micro uncertainty appears to rise sharply in recessions on the second question the types of exogenous shocks like wars financial panics and oil price jumps that cause recessions appear to directly increase uncertainty and uncertainty also appears to endogenously rise further during recessions on the third question the evidence suggests uncertainty is damaging for short run investment and hiring but there is some evidence it may stimulate longer run innovation finally in terms of the great recession the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in gdp

how does financial development alter the impact of uncertainty abstract how does the impact of uncertainty on output vary with financial development levels we investigate this question empirically using a quarterly panel data set of 50 countries between 1971 and 2009 and an instrumental variables model the results support the conjecture that financial development mitigates the negative impact of uncertainty on output at the lower end of the distribution of the financial development levels one standard deviation increase in uncertainty decreases output by more than two standard deviations at the higher end of financial development the impact on output is statistically insignificant these results suggest that strengthening the financial system and increasing liquidity and credit availability improce the robustness of growth performance during periods of uncertainty

energy and capital substitutes or complements a note on the importance of testing for non neutral technical progress this note investigates the importance of testing the validity of the hicks neutral technical progress assumption in the context of examining the substitutability or complementarity between capital labour and energy in the uk industrial sector it is found that the hypothesis of neutral technical progress must be rejected in favour of the non neutral hypothesis with technical progress thus biased to using both capital and energy but to saving labour in addition it is found that all three factors are substitutable for one another when non neutral technical progress is modelled

energy conservation in electricity generation a case study of the electricity and water industry in kuwait this paper has examined possibilities of energy conservation in the generation of electricity and water in kuwait this has been done through analysing the underlying production structure by employing a translog flexible cost function and using series data the results show that in the absence of changes in factor prices fuel intensity of electricity and water is expected to increase with increase in output furthermore capital and fuel are found to be substitutes overall the evidence suggests that energy conservation can be achieved by using fuel prices as instruments this is likely to induce demand for new capital and hence promote productivity gains

energy and capital substitutes or complements some results for the uk industrial sector this paper investigates the substitutability or complementarity possibilities between capital labour and energy in the uk industrial sector with particular attention to the captial energy relationship it is found using the translog cost function approach that capital and labour as well as energy and labour are substitutes however capital and energy are found to be complements

economic forces in the european gas market a 1985 prospective abstract future gas supply and demand patterns of the european community are simulated using a gas trade model gtm this study is intended to provide an economic background for exploring the future policies of the main suppliers of the community the type of price movements that can be expected and the possible role of high cost gas simulations are provided for both short term 1985 1990 and long term 1995 2000 developments a decrease in dutch gas prices algeria s price concession and abandonment of high prices for norwegian gas are the main trends arising from the analysis they all materialized between 1985 and the first half of 1986

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

news and financial intermediation in aggregate fluctuations an important disconnect in the news view of fluctuations is the lack of consistent evidence suggestive of significant macroeconomic effects of news shocks findings from estimated dsge models that in theory allow news shocks to matter quantitatively suggest that they do not this disconnect can be resolved once we augment a dsge model with a financial channel that provides amplification to news shocks our results suggest that news shocks to the future growth prospects of the economy are significant drivers of u s fluctuations explaining as much as 50 and 37 of the variance in hours worked and output respectively in cyclical frequencies

volume volatility and public news announcements we provide new empirical evidence for the way in which financial markets process information our results rely critically on high frequency intraday price and volume data for the s p 500 equity portfolio and u s treasury bonds along with new econometric techniques for making inference on the relationship between trading intensity and spot volatility around public news announcements consistent with the predictions derived from a theoretical model in which investors agree to disagree our estimates for the intraday volume volatility elasticity around important news announcements are systematically below unity our elasticity estimates also decrease significantly with measures of disagreements in beliefs economic uncertainty and textual based sentiment further highlighting the key role played by differences of opinion

information revelation and strategic delay in a model of investment we model investment as an n player game with a pure informational externality each player s payoff depends only on his own action and the state of nature however because a player s action reveals his private information players wait to see what other players will do equilibrium is inefficient because delay is costly and information is imperfectly revealed we characterize the unique symmetric perfect bayesian equilibrium and study the robustness of delay which turns out to be sensitive to the reaction speed and the number of players we establish the following results i when the period length is very short the game ends very quickly and there is a form of herding or informational cascade which results in a collapse of investment ii as the period length increases the possibility of herding disappears iii as the number of players increases the rate of investment and the information flow are eventually independent of the number of players adding more players simply increases the number who delay iv in the limit the time profile of investment is extreme a period of low investment followed either by an investment surge or a collapse

growth cycles and market crashes abstract market booms are often followed by dramatic falls to explain this requires an asymmetry in the underlying shocks a straightforward model of technological progress generates asymmetries that are also the source of growth cycles assuming a representative consumer we show that the stock market generally rises punctuated by occasional dramatic falls with high risk aversion bad news causes dramatic increases in prices bad news does not correspond to a contraction of existing production possibilities but to a slowdown in its expansion this economy provides a model of endogenous growth cycles in which recoveries and recessions are dictated by the adoption of innovations journal of economic literature classification numbers o40 g12 o41 o30

information rigidities and asymmetric business cycles abstract we study the link between asymmetries of markups and firm exit rates and asymmetries in information acquisition along the u s business cycle we argue that a model of optimal firm exit under rational inattention produces lagged counter cyclical and positively skewed markups together with counter cyclical exit rates consistent with the empirical evidence our model also predicts counter cyclical information rigidities consistent with survey evidence

feedback effects and asset prices feedback effects from asset prices to firm cash flows have been empirically documented this finding raises a question for asset pricing how are asset prices determined if price affects fundamental value which in turn affects price in this environment by buying assets that others are buying investors ensure high future cash flows for the firm and subsequent high returns for themselves hence investors have an incentive to coordinate which may generate self fulfilling beliefs and multiple equilibria using insights from global games we pin down investors beliefs analyze equilibrium prices and show that strong feedback leads to higher excess volatility

securitization under asymmetric information over the business cycle l auteur etudie l efficience de la titrisation comme moyen d intermediation financiere a l aide d un modele ou sont formalises des projets d investissement heterogenes et l asymetrie de l information sur la qualite des actifs titrises il montre qu en conservant une partie du risque l emetteur des actifs titrises signale de maniere credible leur qualite

news and noise in g 7 gdp announcements revisions to gdp announcements are known to be quite large in all g 7 countries quarterly growth rate revisions are regularly more than a full percentage point at an annualized rate we examine the predictability of these revisions using standard statistical tests of whether the preliminary announcement is a rational forecast of the subsequently revised data previous work suggests that u s gdp revisions are largely unpredictable as would be the case if the revisions reflect news not available at the time that the preliminary number is produced we find that the degree of predictability varies throughout the g 7 although we find little predictability in u s revisions the data revisions for several foreign countries are highly predictable we also perform a simple real time forecasting exercise showing that for several countries the predictability of data revision could be used to generate improved preliminary data

cyclical changes in firm volatility we estimate changes in the volatility of firm level sales earnings and employment growth of us firms our method differs from existing measures for firm level sales and employment volatility in that it not only captures longer run changes in volatility but also measures cyclical changes in firm volatility we detect substantial cyclical variation in firm specific volatility around trend firm specific volatility was low in the early 1990s rose in the mid and late 1990s and was high around 2000 our results are consistent with the hypothesis deduced from models with financial frictions that rising idiosyncratic volatility before 2001 contributed to the coincident rise in the external finance premium and to the 2001 recession endogenous pricing models imply that price adjustment is less frequent and disinflation more costly when firm specific volatility is low consistent with endogenous pricing models we find that the output cost of disinflation was three times larger in the early 1990s than in the early 2000s

uncertainty shocks and asymmetric dynamics in korea a non linear approach this study investigates the impact of uncertainty shocks on macroeconomic activity in korea for this purpose a smooth transition var model is employed to document the state dependent dynamics of

estimating the potential for electricity savings in households abstract improving efficiency in the use of energy is an important goal for many nations since end use energy efficiency can help to reduce co 2 emissions furthermore since the residential sector in industrialised countries requires around one third of the end use electricity it is important for policy makers to estimate the scope for electricity saving in households to reduce electricity consumption by using appropriate steering mechanisms we estimate the level of technical efficiency in the use of electricity using data from a swiss household survey we find an average inefficiency in electricity use by swiss households of around 20 to 25 bottom up economic engineering models estimate the potential in switzerland to be around 15 in this paper we use a sub vector input distance frontier function based on economic foundations our estimates lie at the upper end of the electricity saving potential estimated by the afore mentioned economic engineering approach

information acquisition and learning from prices over the business cycle abstract we study firms incentives to acquire costly information in booms and recessions to investigate the role of endogenous information in accounting for business cycles our model predicts that for a wide range of parameter values firms have a stronger incentive to acquire information when the economy has been in a recession and a pessimistic belief about the state of the economy prevails than after a boom when firms share an optimistic belief the equilibrium price system which features endogenous information transmission dampens aggregate fluctuations by discouraging information acquisition our welfare analysis reveals that information acquisition in the decentralized economy is not efficient this is due to inefficient employment dispersion arising from information heterogeneity in equilibrium time series data for the u s economy support the model s prediction of wages being more informative about total factor productivity after recessions than following booms

asymmetric business cycles theory and time series evidence abstract we offer a theory of economic fluctuations based on intertemporal increasing returns agents who have been active in the past face lower costs of action today this specification explains the observed persistence in individual and aggregate output fluctuations even in the presence of i i d shocks because individuals respond to the same shock differently depending on their recent past experience the exact process for output the sharpness of turning points and the degree of asymmetry are determined by the form of heterogeneity our general formulation under certain assumptions reduces to a number of popular state space unobserved components models we find that on us data our general formulation performs better than many of the existing econometric models largely because it allows sharper downturns and more pronounced asymmetries than linear models and is smoother than discrete regime shift models our estimates imply that only modest intertemporal returns are needed for our model to explain us gnp and that heterogeneity across agents plays an important role in the propagation of business cycle shocks

emerging market business cycles learning about the trend abstract emerging market business cycles feature a higher variability of consumption relative to output and a strongly countercyclical trade balance an equilibrium business cycle model in which agents learn to distinguish between the permanent and transitory components of total factor productivity shocks using the kalman filter accounts for these features calibrated to mexico the model accounts for the behavior of consumption and the trade balance for a wide range of variability and persistence of permanent shocks relative to transitory shocks estimation for mexico and canada suggests more severe informational frictions in emerging markets than in developed economies