the relative contributions of private information sharing and public information releases to information aggregation we calculate learning rates when agents are informed through public and private observation of other agents actions we characterize the evolution of the distribution of posterior beliefs if the private learning channel is present convergence of the distribution of beliefs to the perfect information limit is exponential at a rate equal to the sum of the mean arrival rate of public information and the mean rate at which individual agents are randomly matched with other agents if however there is no private information sharing then convergence is exponential at a rate strictly lower than the mean arrival rate of public information c 2009 elsevier inc all rights reserved

optimal target zones how an exchange rate mechanism can improve upon discretion abstract using krugman s 1991 target zone model we find an explicit subgame perfect solution for a central bank wishing to stabilise the exchange rate given proportional costs of intervention we demonstrate however that precommitment to narrower bands would yield a welfare gain which provides a theoretical rationale for an exchange rate mechanism erm numerical simulations suggest that the optimal currency band with precommitment via an erm is only half as wide as that under discretion and that the welfare benefits are sufficient to sustain the system

the return motivations of legal permanent migrants evidence from exchange rate shocks and immigrants in australia why do legal permanent migrants return to their home countries how do home country conditions influence this decision this paper uses exogenous home country exchange rate shocks arising from the 1997 asian financial crisis to distinguish return motivations of a national sample of australian immigrants on average a 10 favorable exchange rate shock a depreciation in the home country currency leads to a reduced likelihood of return of 0 37 percentage points for migrants the effect is found to be stronger for those who had pre existing intentions to return weaker for those undecided and zero for those who initially stated their desire to stay these results favor a life cycle explanation for migrant behavior and reject the theory that migrants are target earners who seek to invest upon return home

conversations among competitors conversation is a central part of economic life a wide range of information gets passed from one person to another via word of mouth communication and a number of authors argue that the nature of connections between people i e the structure of social networks can have a

learning from prices and the dispersion in beliefs i study whether investors use an asset s price to update their beliefs about its payos i show that in a dynamic economy the relationship between the dispersion in investor beliefs and returnvolume characteristics can be used to empirically answer this question when investors have rational expectations re and condition on the price i show that belief dispersion is positively related to expected returns return volatility and correlation between volume and absolute returns but negatively related to return autocorrelation when investors do not use the price as in a dierence of opinions do model these relationships are reversed i test these predictions using the crosssection of returns volume and analyst forecast dispersion over dierent horizons the results are consistent with the re model at quarterly and longer horizons but reject both models at the monthly horizon i show that a hybrid model with some do investors and some re investors can match the short horizon evidence the empirical results are consistent with the idea that while some investors do not use the price in the short run they increase their conditioning on the price over time

the impact of public information on the stock market we study the relation between the number of news announcements reported daily by dow jones company and aggregate measures of securities market activity including trading volume and market returns we find that the number of dow jones announcements and market activity are directly related and that the results are robust to the addition of factors previously found to influence financial markets such as day of the week dummy variables news importance as proxied by large new york times headlines and major macroeconomic announcements and non information sources of market activity as measured by dividend capture and triple witching trading however the observed relation between news and market activity is not particularly strong and the patterns in news announcements do not explain the day of the week seasonalities in market activity our analysis of the dow jones database confirms the difficulty of linking volume and volatility to observed measures of information

return migration wage differentials and the optimal migration duration in simple static models migration increases with the wage differential between host and home country in a dynamic framework and if migrations are temporary the size of the migrant population in the host country depends also on the migration duration this paper analyses optimal migration durations in a model which rationalises the decision of the migrant to return to his home country despite persistently higher wages in the host country the analysis shows that if migrations are temporary the optimal migration duration may decrease if the wage differential grows larger using micro data for germany the second part of the paper provides empirical evidence which is compatible with this hypothesis

exchange rate fluctuations and immigrants labour market outcomes new evidence from australian household panel data abstract in this paper we exploit plausibly exogenous changes in exchange rates across home countries over time and panel data to identify the causal impact of exchange rate fluctuations on australian immigrants labour market outcomes we present new and robust evidence that unlike immigrants in the us those in australia as a whole do not reduce their yearly labour market outcomes when the local currency appreciates while female immigrants don t adjust their labour activities male immigrants reduce their weekly labour supply and hence earn less when the australian dollar appreciates this work also highlights the importance of controlling for individual heterogeneity as well as gender when modelling the labour market behaviour of immigrants

why do migrants return to poor countries evidence from philippine migrants responses to exchange rate shocks abstract this paper distinguishes between target earnings and life cycle motivations for return migration by examining how philippine migrants return decisions respond to major unexpected exchange rate changes in their overseas locations due to the asian financial crisis overall the evidence favors the life cycle explanation more favorable exchange rate shocks lead to fewer migrant returns a10 improvement in the exchange rate reduces the 12 month return rate by 1 4 percentage points however some migrants appear motivated by target earnings considerations in households with intermediate foreign earnings favorable exchange rate shocks have the least effect on return migration but lead to increases in household investment

forecasting the forecasts of others implications for asset pricing we develop a dynamic asset pricing model with heterogeneously informed agents unlike previous research we focus on the general case where differential information leads to the problem of forecasting the forecasts of others and to non trivial dynamics of higher order expectations in particular we prove that the model does not admit a finite number of state variables using numerical analysis we compare equilibria characterized by identical fundamentals but different information structure we demonstrate that the distribution of information has substantial impact on equilibrium prices and returns in particular we show that asymmetric information can generate momentum in returns and high trading volume

information trading and stock returns lessons from dually listed securities this paper compares the intra day patterns on the nyse and amex of volatility trading volume and bid ask spreads for european and japanese dually listed stocks with american stocks of comparable average trading volume and volatility it is shown that the intra day patterns for these stocks are remarkably similar even though public information flows differ markedly across these stocks during the trading day in the early morning all stocks have higher volatility than later in the day but this phenomenon is most pronounced for japanese stocks and affects american stocks the least we argue that these patterns are consistent with markets reacting to the overnight accumulation of public information but are inconsistent with the view that early morning volatility can be attributed to monopolistic specialist behavior

hyperinflation and stabilisation cagan revisited using a variant of the cagan model with rational expectations this paper shows that expected stabilisation can result in a budget deficit in excess of the maximum inflation tax a cap on the deficit dampens inflation expectations and raises real balances thus increasing the yield of the inflation tax for any given rate of inflation this study extends the work of drazen and helpman 1990 by including a stochastic budgetary process and using option pricing theory it uses parameter values of the semi elasticity of demand for money to provide estimates of the maximum viable real deficit

an epidemic model of investor behavior i test whether social influence affects individual investors trading and stock returns in each of the 20 most active stocks in finland over 9 years the number of owners in a municipality multiplied by the number of investors who do not own a stock a measure of the rate of transmission of diseases and rumors through social contact predicts individual investor trading i control for known determinants of trade including daily news and show that competing explanations for the relation are unlikely socially motivated trades predict stock returns and the effects are not reversed suggesting that individuals share useful information individuals susceptibility to social influence has declined during the period but the opportunities for social influence have increased

differential information and dynamic behavior of stock trading volume this article develops a multiperiod rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock investors trade competitively in the stock market based on their private information and the information revealed by the market clearing prices as well as other public news we examine how trading volume is related to the information flow in the market and how investors trading reveals their private information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

inflationary consequences of anticipated macroeconomic policies budget deficits implying an unbounded present value of government debt are infeasible and hence induce expectations of a future policy change we study how expectations of a policy switch whose timing or mix between expenditure cuts tax increases or increases in money growth rates may be uncertain affect economic dynamics before the switch takes place we are especially concerned with the correlation between changes in the deficit and inflation of particular interest is our finding that timing uncertainty may induce fluctuations in the rate of inflation that seem to be unrelated to the budget deficit at a time when the budget deficit is responsible for inflation

survey evidence on diffusion of interest and information among investors abstract questionnaire surveys of institutional and individual investors were undertaken to learn about patterns of communications it was found that direct interpersonal communications are very important in investor decisions questions elicited what fraction of investors were unsystematic and allowed themselves to be influenced by word of mouth communications or other salient stimuli randomly sampled investors were studied as well as investors in stocks whose price had recently increased dramatically contagion or epidemic models of financial markets are proposed in which interest in individual stocks is spread by word of mouth the survey evidence is interpreted as supporting such models

an introduction to the theory of rational expectations under asymmetric information every good economics textbook contains the cliche that market prices provide signals which facilitate the allocation of resources to their best use in a world not subject to random shocks consumers and producers when faced with competitive prices need look no further than their own preferences or production technology to be able to make a decision they need give no thought to the tastes endowments or technology of other agents however in a world subject to random shocks this is no longer the case agents are faced with the problem of forecasting future states of nature and more importantly of forecasting the impact of these states on the actions of other agents rational expectations theories provide a model of how agents make those forecasts in a world subject to random shocks it will be the case that agents acquire or at least attempt to acquire information about the future realization of the shocks it will in general be the case that different agents have access to different information the fact that information is dispersed throughout the economy has the potential to cause a misallocation of resources relative to what would be the case if all agents knew everything an efficient allocation of resources will in general require the transfer of information from consumers who have some information about their future demands to producers who can take current actions to mitigate avoidable scarcities or surpluses though many classical and neo classical writers emphasize the informational role of prices the standard marshallian or walrasian model of competitive equilibrium does not involve prices transferring information across traders the purpose of this paper is to show that rational expectations models are radically different from walrasian models in an economy where traders have diverse information this is demonstrated by showing that unlike what occurs in a walrasian equilibrium of an economy with heterogeneous information if there is a complete set of insurance markets and utility is additively separable over time then there exists a rational expectations equilibrium which gives consumers the same allocation as if each consumer has access to all of the economy s information this implies that under the above assumptions a central planner with all the economy s information could not pareto dominate the competitive allocation achieved when traders have diverse information and rational expectations this paper makes no attempt to survey the literature on rational expectations the reader is referred to shiller 1978 barro 1981 for a survey of macroeconomics and rational expectations and radner 1980 for a survey of the microeconomics and mathematical theory of rational expectations this paper will however try to outline the evolution of the rational expectations concept from a notion of optimal forecasting to a virtually complete departure from the walrasian model of equilibrium the rest of this section is devoted to a discussion of pre rational expectations ideas

information percolation momentum and reversal abstract we propose a joint theory of time series momentum and reversal based on a rational expectations model we show that a necessary condition for momentum to arise in this framework is that information flows at an increasing rate we focus on word of mouth communication as a mechanism that enforces this condition and generates short term momentum and long term reversal investors with heterogeneous trading strategies contrarian and momentum traders coexist in the marketplace although a significant proportion of investors are momentum traders momentum is not completely eliminated word of mouth communication spreads rumors and generates price run ups and reversals our theoretical predictions are in line with empirical findings

information percolation in large markets we introduce a simple model of the percolation of information of common interest through a large market as agents encounter each other over time and reveal information to each other some of which they may have received earlier from other agents we are particularly interested in the evolution over time of the cross sectional distribution in the population of the posterior probability assignments of the various agents we provide a market example based on privately held auctions and obtain a relatively explicit solution for the cross sectional distribution of posterior beliefs at each time our results contribute to the literature on information transmission in markets hayek 1945 argues that markets allow information that is dispersed in a population to be revealed through prices grossman s 1981 notion of a rational expectations equilibrium formalizes this idea in a setting with price taking agents milgrom 1981 pesendorfer and swinkels 1997 and reny and perry 2006 provide strategic foundations for the rational expectations equilibrium concept in centralized markets a number of important markets however are decentralized these include over the counter markets and private auction markets wolinsky 1990 and blouin and serrano 2002 study information transmission in decentralized markets in contrast to these two papers equilibrium behavior in our market example leads to full revelation of information we happily acknowledge conversations with manuel amador frank kelly jeremy stein and pierre olivier weill and research assistance from sergey lobanov rubinstein and wolinsky 1985 and gale 1986a 1986b study decentralized markets without asymmetric information satterthwaite and shneyerov 2003 study decentralized market with private value asymmetric information amador and weill 2006 study a more abstract setting regarding transmission of common and private i nformation

information percolation with equilibrium search dynamics we solve for the equilibrium dynamics of information sharing in a large population each agent is endowed with signals regarding the likely outcome of a random variable of common concern individuals choose the effort with which they search for others from whom they can gather additional information when two agents meet they share their information the information gathered is further shared at subsequent meetings and so on equilibria exist in which agents search maximally until they acquire sufficient information precision and then search minimally a tax whose proceeds are used to subsidize the costs of search improves information sharing and can in some cases increase welfare on the other hand endowing agents with public signals reduces information sharing and can in some cases decrease welfare

using privileged information to manipulate markets insiders gurus and credibility access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted announcements the fact that privileged information is noisy interferes with the public s attempts to learn whether such announcements are honest it allows opportunistic individuals to manipulate prices repeatedly without ever being fully found out this leads us to extend sobel s 1985 model of strategic communication to the case of noisy private signals our results show that when truthfulness is not easily verifiable restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices

trigger points and budget cuts explaining the effects of fiscal austerity we propose and solve an optimizing model which explains counterintuitive effects of fiscal policy in terms of expectations if government spending follows an upward trending stochastic process which the public believes may fall sharply when it reaches specific trigger points then optimizing consumption behavior and simple budget constraint arithmetic imply a nonlinear relationship between private consumption and government spending this theoretical relation is consistent with the experience of several countries jel e62 e21 textbook aggregate demand models suggest simple relationships between the government budget and economic activity a cut in the government deficit for example depressing consumption and output though such models heavily influence the design of stabilization policies their micro foundations are unclear and their sharp predictions are not always consistent with reality in many countries large cuts in government spending carried out as part of stabilization programs have led to expansions rather than contractions in economic activity the absence of simple relationships be