heterogeneity and misspecifications in learning abstract in this paper we consider a linear stochastic univariate forward looking model with one lag under adaptive heterogeneous learning the system is populated by two different types of agents who learn through recursive least squares techniques the parameter values in their forecasting models the two groups are constrained to have different information sets one being always a subset of the other we analyze convergence of these two interacting learning processes under different specifications of the forecasting model and in one case we find that an heterogenous expectations equilibrium emerges

fixing exchange rates a virtual quest for fundamentals abstract fixed exchange rates are less volatile than floating rates but the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes this suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful it also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability

a method for solving general equilibrium models with incomplete markets and many financial assets abstract this paper presents a numerical method for solving stochastic general equilibrium models with dynamic portfolio choice the method can be applied to models with heterogeneous agents time varying investment opportunity sets and incomplete asset markets we illustrate the method using a two country model with production we check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties we then apply the method to an incomplete markets version where no analytic solution is available in all versions the standard accuracy tests confirm the effectiveness of our method

targeting inflation by constant interest rate forecasts this paper reviews the concept of constant interest rate inflation forecast cir targeting it stresses the time inconsistent nature of cir targeting and provides a new method for constructing cir forecasts consistently in the context of models with forward looking variables a dynamic new keynesian model with forward looking price setting is used as an illustration suggesting that the main reason for choosing a relatively long forecast targeting horizon lies in the monetary authorities objective to smooth interest rate movements as greater nominal and real stabilization is achieved at a relatively short inflation forecast targeting horizon

adjustment costs and indeterminacy in perfect foresight models abstract this paper suggests a method for resolving indeterminacy of equilibrium in perfect foresight models and applies it to several existing models quadratic adjustment costs are introduced into models with multiple equilibria and the limiting behavior of the resulting solutions is studied as the adjustment costs go to zero the method is shown to be useful in selecting among feasible equilibria in examples in which there is local indeterminacy

exchange market intervention under multiple solutions abstract this paper analyzes exchange market intervention in a small open economy in the analysis the solutions are refined by two alternative criteria under the minimal state solution a simple feedback rule can perfectly stabilize income fluctuation if and only if exogenous shocks are unanticipated and serially correlated however under a collective rational solution the simple rule can always perfectly stabilize income fluctuation regardless of the forms of exogenous shocks and their degrees of anticipation the latter result is surprising because this simple rule may be more effective than the rules derived in the previous literature

multiple solution indeterminacies in monetary policy analysis abstract a sizeable fraction of recent research on monetary policy has been concerned with issues relating to analytical indeterminacies i e multiple solutions in rational expectations re models most of the literature features sophisticated re analysis conducted within dynamic models that reflect optimizing behavior by individual agents and incorporate taylor style policy rules a few papers have suggested that some of the particular indeterminacy arguments are misleading or irrelevant for the most part however there has been little dissent from the position that these indeterminacies present a genuine problem for monetary policy makers the purpose of the present paper by contrast is to argue that conclusions based on multiple solution indeterminacy findings are of dubious merit rather generally

ppp exchange rate rules macroeconomic in stability and learning in order to maintain competitiveness governments in developing economies seem to have pursued purchasing power parity ppp exchange rate rules by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target this article shows that these rules are likely to induce macroeconomic instability as they generate sunspot driven fluctuations that are in fact learnable by agents in the expectational stability sense it finds that the existence of these learnable sunspots depends among others on open economy features including the degree of openness and the degree of exchange rate pass through to consumer s import prices

the butterfly effect of small open economies abstract the rational expectations equilibrium of a small open economy can be subject to indeterminacy if foreign monetary policy does not satisfy the taylor principle we study the implications of foreign induced indeterminacy in the two country version of the sticky price small open economy model our main finding is that smallness is a property of the unique rational expectations equilibrium of the large economy and not a general property of the small open economy model if the large economy fails to anchor expectations shocks to the small economy can affect the large one this form of indeterminacy gives rise to a butterfly effect additional assumptions are required to preserve the smallness of the small economy

real exchange rate volatility financial crises and exchange rate regimes this paper examines real exchange rate rer volatility in eighty countries around the world during the period 1970 to 2011 two main questions are raised are structural breaks in rer volatility related to changes in exchange rate regimes or financial crises and do these two events affect the permanent and transitory components of rer volatility to answer them we employ two complementary procedures that consist in detecting structural breaks in the rer series and decomposing volatility into its permanent and transitory components our results suggest that structural breaks in rer volatility coincidence with financial crises and certain changes in nominal exchange rate regimes moreover our findings confirm that rer volatility does increase with the global financial crises and detect that the more flexible the exchange rate regime the higher the volatility of the rer using a de facto exchange rate classification

performance of monetary policy with internal central bank forecasting abstract recent models of monetary policy have analyzed the desirability of different optimal and ad hoc interest rules under the restrictive assumption that forecasts of the private sector and the central bank are homogeneous this paper studies the implications of heterogeneity in forecasting by the central bank and private agents for the performance of interest rules in a framework of econometric learning

stable near rational sunspot equilibria abstract we introduce a new class of solutions to nonlinear forward looking models called near rational sunspot equilibria nrse nrse are natural nonlinear extensions of the usual sunspot equilibria associated with the linearized version of the economy and are near rational in that agents use the optimal linear forecasting model when forming expectations generic results for existence and stability under learning are established nrse in indeterminate nonlinear models are found to be stable under learning provided that the corresponding linearized model s minimal state variable solution is e stable nrse are readily computable and our results make it possible to use the standard linear tools to search for stable nrse we illustrate our results using a canonical nonlinear new keynesian model

exchange market intervention under alternative forms of exogenous disturbances abstract this paper analyzes exchange market intervention in a stochastic model of a small open economy the distinction is made between disturbances which are unanticipated and anticipated on the one hand and those that are perceived as being transitory or permanent on the other it is shown how the appropriate form of exchange market intervention is sensitive to these aspects of the disturbances of particular interest is the case of an unanticipated permanent disturbance when output may be stabilized perfectly about its frictionless level by the use of a very simple class of intervention rules the optimal rules in other cases are also discussed

tax base and crowding in effects of balanced budget fiscal policy a dynamic general equilibrium business cycle model is constructed with staggered price adjustment monopolistic wage setting and distortionary taxation the government purchases goods runs an unemployment benefit system and balances its budget through a proportional tax on labour income a temporary tax financed increase in government expenditures can lower the tax rate through a demand induced widening of the tax base it is shown analytically that this allows private consumption to rise under realistic conditions despite the negative wealth effect of increased fiscal spending

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

structural breaks in volatility evidence for the oecd and non oecd real exchange rates abstract this paper attempts to determine whether or not nominal exchange rate regimes affect the volatility of bilateral and effective real exchange rates to that end we examine the real exchange rate behaviour for a set of oecd and non oecd countries during the 1960 2006 period therefore covering both the bretton woods system of fixed exchange rates and the adoption of generalised floating exchange rates from 1973 we make use of an econometric methodology based on the hansen s hansen b e 1997 approximate asymptotic p values for structural change tests journal of business and economic statistics 15 1 60 67 approximation to the p values of the supreme exponential and average statistics developed by andrews andrews d 1993 test for parameter instability and structural change with unknown change point econometrica 61 4 821 856 and andrews and ploberger andrews d ploberger w 1994 optimal tests when a nuisance parameter is present only under the alternative econometrica 62 6 1383 1414 this methodology allows us to obtain a profile of p values and to delimit periods of stability and instability in the variance of real exchange rates results suggest that there is clear evidence in favour of the non neutrality of nominal exchange rate regime regarding real exchange rate volatility for developed countries but not in the case of developing or emerging countries

the extreme value in crude oil and us dollar markets abstract this study constructs a flexible range based volatility model by considering extreme value information to explore the volatility and dependence structures between the oil price and the us dollar exchange rate an asset allocation strategy is implemented to evaluate the economic value and confirm the efficiency of this model the empirical results indicate that the use of extreme value information can not only enhance the explanatory power of volatility structures but also sort out the asymmetric volatility effect in the oil market besides investors can obtain extra benefits of between 72 and 713 annualized basis points by incorporating extreme value information into their asset allocation strategies less risk averse investors can generate higher benefits the empirical results have potentially important implications for asset allocation and risk management

land reforms poverty reduction and economic growth evidence from india recognition of the importance of institutions that provide security of property rights and relatively equal access to economic resources to a broad cross section of society has renewed interest in the potential of asset redistribution including land reforms empirical analysis of the impact of such policies is however scant and often contradictory this paper uses panel household data from india together with state level variation in the implementation of land reform to address some of the deficiencies of earlier studies the results suggest that land reform had a significant and positive impact on income growth and accumulation of human and physical capital the paper draws policy implications especially from the fact that the observed impact of land reform seems to have declined over time

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed

the limits to land reform the land acts in ireland 1870 1909 ireland experienced two great waves of land reform during the late nineteenth and early twentieth centuries land reform was a central demand of irish political factions of the time and by acceding to this demand successive british governments hoped to pacify ireland this article reconsiders the economic significance of the several irish land reform measures by examining them in the context of economic theory and by comparing them to other land reform episodes in currently developing countries and in european history the irish reforms contained little that could better the allocation of resources and so had little impact on economic efficiency even though the end result was the creation of a class of peasant proprietors operating in a free market the analysis focuses on the structure of the laws and their relation to irish institutions although we also discuss the aggregate evidence on the evolution of agricultural efficiency following the reforms moreover the irish legislation missed an important opportunity to improve smallholders access to credit some facets of the land legislation interacting with some unusual institutional features of land tenure in ireland made credit conditions worse land reform in ireland was much more a wealth redistribution program financed by britain than a serious effort to improve the efficiency of agriculture land tenure and land reform occupy central roles in both the history and historiography of the political struggles that culminated in the partition of ireland in the 1920s successive waves of irish politicians sought to harness essentially nationalist ambitions to the more mundane dissatisfactions of the irish farmer convincing the latter that economic prosperity required alterations to or complete abolition of an agrarian system

behavioral learning equilibria we propose behavioral learning equilibria where boundedly rational agents learn to use a simple univariate linear forecasting rule with correctly specified unconditional mean and first order autocorrelation in the long run agents learn the best univariate linear forecasting rule without fully recognizing the more complex structure of the economy an important feature of behavioral learning equilibria is simplicity and parsimony which makes coordination of individual expectations on such an aggregate outcome more likely in a first application an asset pricing model driven by ar 1 ar 1 dividends a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility and it is stable under learning in a second application the new keynesian phillips curve multiple equilibria coexist learning exhibits path dependence and inflation may switch between low and high persistence regimes

the diversity of land markets and regulations in europe and some of its causes abstractthe creation of optimal land institutions attracted renewed attention in the 1990s because of its central role in the transition process in former communist countries in the former soviet union and eastern europe and more recently because of large scale land investments in developing countries this article documents the existence of large variations in land institutions markets and regulation using current and historical data from western and eastern europe it then offers explanations for these differences and draws implications for the role and optimality of land institutions in development with special reference to the current debate on large scale land acquisitions

why ireland starved a quantitative and analytical history of the irish economy 1800 1850 acknowledgements page ix ensp 1 introduction 1 ensp 2 a poverty stricken economy 6 ensp 3 the problem of population was maithus right 30 ensp 4 land leases and length of tenure 81 ensp 5 the economics of rural conflict and unrest 112 ensp 6 the problem of wealth 151 ensp 7 the human factor entrepreneurship and labor 197 ensp 8 emigration and the prefamine economy 230 ensp 9 the great famine the economics of vulnerability 261 10 explaining irish poverty 278 bibliography 295 index 317

learning monetary policy and asset prices this working paper should not be reported as representing the view s of the imf the views expressed in this working paper are those of the author s and do not necessarily represent those of the imf or imf policy working papers describe research in progress by the author s and are published to elicit comments and to further debate

intrinsic heterogeneity in expectation formation we introduce the concept of misspecification equilibrium to dynamic macroeconomics agents choose between a list of misspecified econometric models and base their selection on relative forecast performance a misspecification equilibrium is a stochastic process in which agents forecast optimally given their choices with forecast model parameters and predictor proportions endogenously determined under appropriate conditions the misspecification equilibrium will exhibit intrinsic heterogeneity in which all predictors are used at all times even in the neoclassical limit in which only the most successful predictors are used this equilibrium is attainable under least squares learning and dynamic predictor selection based on average profits

does the lucas critique apply during hyperinflation empirical evidence from four hyperinflationary episodes farmer review of economic studies 58 321 32 1991 suggests that in a model in which there are multiple rational expectations equilibria agents may find it useful to coordinate their expectations in a unique rational expectations equilibrium which is supported by a self fulfilling forecast rule having the property of being immune to the lucas critique in this paper farmer s hypothesis is tested using data from hyperinflationary episodes it is believed that those episodes are suitable for testing this hypothesis because an agent who lives in a hyperinflationary environment usually faces frequent changes in policy regime the agent may thus choose a selffulfilling forecast rule which is immune to the lucas critique as a way of hedging against unanticipated policy regime switches the empirical results show mixed evidence on farmer s hypothesis during the hyperinflationary episodes studied

adjustment costs learning and indeterminacy abstract i compare the adjustment cost and learning approaches to resolving indeterminacy of perfect foresight equilibrium in a continuous time model with local indeterminacy rapid learning tends to select different perfect foresight equilibria of the original model than does the inclusion of vanishing adjustment costs this difference has implications for the dynamic response of the economy to unanticipated shocks

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

price level determinacy with an interest rate policy rule and rational expectations abstract this paper reconsiders a result obtained by sargent and wallace namely that price level indeterminacy obtains in their model if the monetary authorities adopt a feedback rule for the interest rate rather than the money stock it is shown that the indeterminacy vanishes if the interest rate rule is chosen so as to have a desired effect on the expected quantity of money demanded this holds even if considerable weight is given in the choice of a rule to the aim of smoothing interest rate fluctuations

comparative statics and perfect foresight in infinite horizon economies does a pure exchange economy with an infinite time horizon have determinate perfect foresight equilibria when there is a finite number of infinitely lived agents equilibria are generically determinate this is not true with overlapping generations of finitely lived agents we ask whether the initial conditions together with the requirement of convergence to a steady state locally determine an equilibrium price path in this framework there are many economies with isolated equilibria many with continua of equilibria and many with no equilibria at all with two or more goods in every period not only can the price level be indeterminate but relative prices as well furthermore such indeterminacy can occur whether or not there is fiat money and whether or not the equilibria are pareto efficient this paper considers whether infinite horizon economies have determinate perfect foresight equilibria this question is of crucial importance if instead equilibria are locally indeterminate not only are we unable to make comparative static predictions but the agents in the model are unable to determine the consequences of unanticipated shocks the idea underlying perfect foresight is that agents expectations should be the actual future sequence predicted by the model if the model does not make determinate predictions the concept of perfect foresight is meaningless we consider two extreme cases the first with a finite number of infinitely lived consumers and the second with an infinite number of finitely lived consumers an overlapping generations model both are models of stationary pure exchange economies no production including the storage of goods between periods can occur these models are unrealistic but are the easiest to study extensions of the results of this paper to models with production infinitely lived assets and mixtures of the two types of consumers are presented by muller and woodford 29 when there is a finite number of infinitely lived consumers we argue that equilibria are generically determinate this is because the effective number of equations determining equilibria is not infinite but equal to the number of agents minus one and must determine the marginal utility of income for all but one agent generically near an equilibrium these equations are independent and exactly determine the unknowns when there are infinitely many overlapping generations this reasoning breaks down an infinite number of equations is not necessarily sufficient to determine

a simple nonnegative process for equilibrium models abstract this paper presents a general specification for dynamic equilibrium models where nonnegative variables follow the autoregressive gamma process in jasiak and gourieroux 2006 the model solution implies linear dynamics for endogenous variables and provides conditional and unconditional moments in closed form finding the solution is computationally inexpensive requiring only to solve linear and quadratic equations the specification can be applied to a wide variety of models in finance and economics two applications are presented first a time varying volatility premium in a long run risks asset pricing model second time varying volatility in policy shocks in a simple new keynesian model accuracy in these models solutions is high and not significantly affected by time varying volatility

realized and optimal monetary policy rules in an estimated markov switching dsge model of the united kingdom this paper investigates underlying changes in the u k economy over the past thirty five years using a small open economy dsge model using bayesian analysis we find uk monetary policy nominal price rigidity and exogenous shocks are all subject to regime shifting a model incorporating these cha nges is used to estimate the realised monetary policy and derive the optimal mon etary policy for the uk this allows us to assess the effectiveness of the realis ed policy in terms of stabilising economic fluctuations and in turn provide an ind ication of whether there is room for monetary authorities to further improve their polic ies

monetary policy expectations and commitment commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies a number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy we assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents a reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts

spending reversals and fiscal multipliers under an interest rate peg this paper examines whether fiscal stimuli are more effective when the monetary policy is less responsive to inflation first we provide empirical evidence suggesting that in the period of u s passive monetary policy a positive government spending shock was followed over time by a spending cut second our theoretical analysis reveals that the pegged nominal interest rate is not a sufficient condition to generate a large fiscal multiplier an increase in government spending could increase the long run real interest rate if it is associated with a government spending reversal and a less responsive monetary policy consequently the response of private consumption can be negative and the government spending multiplier is not necessarily greater than 1

trend inflation sticky prices and expectational stability abstract micro evidence indicates that each period a fraction of prices is kept unchanged under a positive trend inflation rate in a sticky price model based on this evidence recent research shows that high trend inflation is a serious cause for indeterminacy of rational expectations equilibrium under the taylor rule this paper examines implications of trend inflation for expectational stability of the equilibrium an empirically plausible calibration of the model demonstrates that a fundamental rational expectations equilibrium is likely to be expectationally stable even in cases of indeterminacy induced by high trend inflation

productivity growth transparency and monetary policy abstract this study examines whether central bank transparency about views of future productivity growth contributes to stabilizing macroeconomic fluctuations in a standard new keynesian model the central bank and private agents make their subjective estimates on the persistence of productivity growth in this situation if private agents believe that the central bank s projections include forecast errors on future productivity growth these beliefs can destabilize private agents own expectations because the central bank s forecast errors may lead to policy mistakes in the future consequently central bank transparency does not necessarily stabilize the variations of the output gap and inflation rate the central bank should respond strongly to the inflation rate if the impact of transparency is uncertain

inequality as a determinant of malnutrition and unemployment policy this paper explores the policy implications that are obtained once it is recognized that at low nutrition intakes a person s productivity is an increasing function of intake in the context of a fully general equilibrium model it is shown that if aggregate assets in an economy are neither large nor small certain patterns of lorenz improving asset redistributions or nutrition transfers increase aggregate output and reduce the volume of involuntary unemployment and the incidence of undernourishment copyright 1987 by royal economic society

inflation expectations and macroeconomic dynamics the case of rational versus extrapolative expectations the motivation of this paper is to understand the effects of coupling a macroeconomic model of inflation rate dynamics relying on an aggregate expectation to a heterogeneous expectations framework a standard macroeconomic textbook model consisting of okun s law an expectations augmented phillips curve and an aggregate demand relation is extended to allow agents the possibility of selecting between different types of forecasting strategies to predict the future inflation rate rules that have produced low prediction errors in the recent past are favored by agents here we consider trend following and rational expectations using a mixture of analytical and numerical tools we investigate the model s dynamics and discuss the conditions under which the extended model leads to endogenous fluctuations in macroeconomic variables some preliminary results are offered for the case in which a taylor like monetary policy rule is included in the model jel classification c61 c62 e31 e32

shifts in volatility driven by large stock market shocks abstract this paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns known as structural breaks these shifts are endogenously driven by large return shocks innovations reflecting large pieces of market news these shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model one for the negative shocks and one for the positive shocks the model can be employed to investigate different sources of stock market volatility shifts driven by market news without relying on exogenous information in addition to this it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility the above properties of the model are shown based on a study for the us stock market volatility

monetary policy with heterogeneous and misspecified expectations in the recent literature on monetary policy and learning it has been suggested that private sector s expectations should play a role in the policy rule implemented by the central bank as they could improve the ability of the policymaker to stabilize the economy private sector s expectations in these studies are often taken to be homogeneous and rational at least in the limit of a learning process in this paper instead we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium we investigate the impact of this heterogeneity in expectations on central bank s policy implementation and on the ensuing economic outcomes and the general result that emerges is that the central bank should disregard inaccurate private sector expectations and solely base its policy on the accurate ones

on the fragility of sunspot equilibria under learning and evolutionary dynamics abstract in this article we investigate the possibility of sunspot equilibria to emerge from a process of learning and adaptation on agents beliefs we consider both finite state markov sunspots and sunspots in autoregressive form and derive conditions for the existence of an heterogeneous equilibrium where only a fraction of agents condition their forecasts on the sunspot we then show that when the fraction of agents conditioning their forecasts on a sunspot changes over time under evolutionary dynamics these restrictions need to evolve endogenously with population shares we argue that such requirement questions the possibility of sunspot equilibria to emerge through a process of evolution and adaptation on agents beliefs in order for a sunspot equilibrium to emerge all agents must simultaneously coordinate on the same sunspot variable at the same time

seasonal cycles business cycles and monetary policy abstract this paper presents a dynamic general equilibrium model that is consistent with both seasonal and business cycle facts in the u s economy the model features consumption durability and a transaction technology both crucial in accounting for seasonal patterns of nominal variables a calibrated version of the model is used to quantitatively evaluate welfare consequences of three alternative monetary policy rules 1 the fed s historical policy that smooths nominal interest rates at the seasonal frequency but not at the business cycle frequency 2 a constant money growth rule and 3 a constant interest rate rule we find that the historical policy is associated with higher welfare than both alternatives

fundamentalists vs chartists learning and predictor choice dynamics abstract in a simple forward looking univariate model of price determination we investigate the evolution of expectations dynamics in the presence of two types of agents fundamentalists and chartists in particular we combine evolutionary selection among heterogeneous classes of models through predictor choice dynamics based on a logit model with adaptive learning in the form of parameters updating within each class of rules we find that for different parameterizations it can happen that fundamentalists drive chartists completely out of the market or vice versa and also that heterogeneous equilibria in which fundamentalists and chartists coexist are possible interestingly though only equilibria in which fundamentalists outperform chartists turn out to be adaptively learnable by agents

are hyperinflation paths learnable abstract earlier studies of the seigniorage inflation model have found that the high inflation steady state is not stable under learning we reconsider this issue and analyze the full set of solutions for the linearized model our main focus is on stationary hyperinflationary paths near the high inflation steady state these paths are shown to be stable under least squares learning if agents can utilize contemporaneous data in an economy with a mixture of agents some of whom only have access to lagged data stable hyperinflationary paths emerge only if the proportion of agents with access to contemporaneous data is sufficiently high

a test for speculative bubbles in the sterling dollar exchange rate 1981 84 the u s dollar price of the u k pound sterling is tested for a speculative bubble defined as a period with a nonzero median in excessreturns a nonparametric procedure is developed which controls for data mining over the period of flexible exchange rates and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981 84 possible interpretations arebootstrap equilibria rational bubbles nonsym metric fundamentals and nonrational expectations copyright 1986 by american economic association

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

home biased expectations and macroeconomic imbalances in a monetary union abstract under monetary union economic dynamics may diverge across countries due to regional inflation differentials and a pro cyclical real interest rate channel yet stability is generally ensured through endogenous adjustment of the real exchange rate the speed of adjustment depends inter alia on the way agents form expectations we propose a model in which agents expectations are largely based on domestic variables and less so on foreign variables we show that such home bias in expectations strengthens the real interest rate channel and causes country specific shocks to generate larger and more prolonged macroeconomic imbalances

business cycles and the exchange rate system some international evidence this paper investigates the differences in time series behavior of key economic aggregates under alternative exchange rate systems we use a postwar sample of 49 countries to compare the behavior of output consumption trade flows government consumption spending and real exchange rates under alternative exchange rate systems pegged floating and cooperative systems such as the ems we then examine evidence from two particular episodes involving canada and ireland of changes in the exchange rate system aside from greater variability of real exchange rates under flexible than under pegged nominal exchange rate systems we find little evidence of systematic differences in the behavior of macroeconomic aggregates or international trade flows under alternative exchange rate systems these results are of interest because a large class of theoretical models implies that the nominal exchange rate system has important effects on a number of macroeconomic quantities

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

uncovered interest parity monetary policy and time varying risk premia abstract in a recent paper mccallum argued that monetary policy behavior can be responsible for the apparent empirical failure of uncovered interest parity uip the present paper investigates whether optimizing policy behavior can account for the observed regime dependence of uip evidence the main result is that the tradeoff between interest rate and exchange rate stability is a potential candidate for the explanation of the apparent failure of uip and that the consideration of policy reactions can explain why deviations from uip differ systematically by the exchange rate regime

switching equilibria the present value model for stock prices revisited abstract this paper analyzes the dynamic features displayed by alternative rational expectations equilibria in the context of the present value model for stock prices with feedback in particular it shows that there exists a unique equilibrium implying cointegration and that equilibrium is characterized by either the fundamental or alternatively the backward solution depending on the size of the feedback parameter it is shown analytically that the existence of switching equilibria induces large stock market swings using us data and structural estimation the hypotheses of feedback and switching equilibria are tested the empirical results provide evidence of both switching equilibria and feedback

learning benevolent leadership in a heterogenous agents economy abstract this paper studies the potential commitment value of cheap talk announcements in an agent based dynamic extension of the kydland prescott model in every period the policy maker makes a non binding inflation announcement before setting the actual inflation rate it updates its decisions using individual evolutionary learning the private agents can choose between two different forecasting strategies they can either set their forecast equal to the announcement or use an adaptive learning scheme to potentially forecast the true inflation they switch between these two strategies as a function of information about the associated payoffs they obtain through word of mouth choosing always the currently most favorable one while all agents using the first strategy make the same forecast those using the second strategy may generate different individual forecasts in spite of the complexity of the environment the boundedly rational policy maker learns to sustain a situation with a positive but fluctuating fraction of believers this outcome is pareto superior to the outcome predicted by standard theory interestingly enough the actions taken by the policy maker undergo marked qualitative changes as a function of the prevailing heterogeneity among and learning characteristics of the private agents

fiscal policy in the new neoclassical synthesis we analytically derive the cyclical effects of fiscal policy shocks in a new neoclassical synthesis model price stickiness has the consequence that a rise in government demand affects labor demand while at the same time the usual wealth effect boosts labor supply the strength of the demand effect depends on the response of the real interest rate governed by the monetary policy regime when the central bank controls money growth fiscal expansions are deflationary and might even be contractionary whereas output wages and inflation can increase when the rise in the real interest rate is dampened by an interest rate rule however price stickiness alone is not sufficient to explain a rise in consumption as predicted by keynesian theory

equilibrium beliefs in linear rational expectations models abstract non unique equilibria are widely found in dynamic models with money increasing returns and imperfect competition this paper provides a convenient method for representing the entire set of equilibria in a large class of models similar to those studied by blanchard and kahn the method utilizes restrictions imposed on comovements implied by the structures of such models it is an aid in theoretical analysis and can be instrumental in the development of econometric tests of indeterminacy and sunspots important restrictions on admissible non fundamental uncertainty and on model forecasts are also highlighted

nominal exchange rate regimes and the real exchange rate abstract two assumptions about the real exchange rate are common in the literature on international finance 1 the real exchange rate is a random walk 2 the time series properties of the real exchange rate depend on the nominal exchange rate regime this paper presents evidence that indicates that the random walk behavior of the real exchange rate is only a characteristic of the post world war ii period moreover our findings also suggest that what is crucial to the real exchange rate behavior is the particular historical period rather than the nominal exchange rate arrangement

learning in a credit economy abstract in this paper we analyze a credit economy a la kiyotaki and moore 1997 credit cycles journal of political economy 105 211 248 enriched with learning dynamics where both borrowers and lenders need to form expectations about the future price of the collateral we find that under homogeneous learning the msv ree for this economy is e stable and can be learned by agents but when heterogeneous learning is allowed and uncertainty in terms of a stochastic productivity is added expectations of lenders and borrowers can diverge and lead to bankruptcy default on the part of the borrowers

phillips curve instability and optimal monetary policy this paper assesses the implications for optimal discretionary monetary policy if the slope of the phillips curve changes the paper first derives a phillips curve from the optimal pricing decision of a monopolistic firm that faces a changing cost of price adjustment the second aspect of the paper constructs a utility based welfare criterion a novel feature of this criterion is that is has a relative weight on output gap deviations that changes synchronously with changes in the cost of price adjustment the systematic component of the targeting rule that implements the optimal discretionary policy under the utility based criteria is constant in contrast the systematic component of the targeting rule under an ad hoc criteria changes along with changes in the slope of the phillips curve

heterogeneous expectations sunspot equilibria and their fragility abstract in a simple univariate forward looking model we show how a class of sunspot equilibria can depend on the relative fraction of agents under heterogeneous expectations we then investigate if such equilibrium could be brought about by endogenous predictor choice dynamics

making negotiated land reform work initial experience from colombia brazil and south africa abstract the paper describes background initial experience and future challenges associated with a new negotiated approach to land reform this approach has emerged as following the end of the cold war and broad macroeconomic adjustment many countries face a second generation of reforms to address deep rooted structural problems and provide the basis for sustainable poverty reduction and economic growth it reviews possible theoretical links through credit market or political channels between asset ownership and economic performance program characteristics in each country as well as lessons for implementation and implications for monitoring and impact assessment are discussed

learnability of an equilibrium with private information abstract this paper investigates the learnability of an equilibrium with private information agents of each type have their own private information about an exogenous variable and conduct adaptive learning with a heterogeneously misspecified perceived laws of motion plm that includes only this variable the paper shows that the existence of private information has a nonnegative impact on the learnability of the equilibrium that is the condition for learnability is unaffected or relaxed by heterogeneity and or misspecification in plms caused by private information in a new keynesian model with private information about fundamental shocks the learnability of the equilibrium is ensured by the taylor principle of monetary policy the paper also confirms that these results hold true not only in the presence of private information but also in a variety of informational structures

interest rate rules vs money growth rules a welfare comparison in a cash in advance economy abstract this paper considers the welfare consequences of two particularly simple rules for monetary policy an interest rate peg and a money growth peg the model economy consists of a real side that is the standard real business cycle model and a monetary side that amounts to imposing cash in advance constraints on certain market transactions the paper also considers the effect of assuming a rigidity in the typical household s cash savings choice the competitive equilibrium of the economy is not pareto efficient partly because of two distortions a distortion on the capital accumulation decision and a distortion on portfolio choice that arises from the assumed rigidity the principal result of the paper is that the interest rate rule but not the money growth rule entirely eliminates these two distortions and is thus the benevolent central banker s policy choice

the phillips curve the persistence of inflation and the lucas critique evidence from exchange rate regimes comment we present evidence from the united states and the united kingdom that the persistence of price inflation is significantly higher under managed exchange rate regimes than under gold based fixed exchange rate regimes these differences are also reflected in expectations augmented phillips curves we use a two country macro model with forward looking price setters to demonstrate that higher monetary accommodation of inflation and exchange rate accommodation of inflation differentials increase inflation persistence the evidence does not contradict this hypothesis it supports the hypothesis of forward looking price setters and highlights the empirical significance of the lucas critique jel e31 e42 f33

optimal monetary policy in a new keynesian model with heterogeneous expectations abstract in a world where expectations are heterogeneous what is the design of the optimal policy are canonical policies robust when heterogeneous expectations are considered or would they be associated with large welfare losses we aim to answer these questions in a stylized simple new keynesian model where agents beliefs are not homogeneous assuming that a fraction of agents can form their expectations by some adaptive or extrapolative schemes we focus on an optimal monetary policy by second order approximation of the policy objective from the consumers utility function we find that the introduction of bounded rationality in the new keynesian framework matters the presence of heterogeneous agents adds a new dimension to the central bank s optimization problem consumption inequality optimal policies must be designed to stabilize the cross variability of heterogeneous expectations in fact as long as different individual consumption plans depend on different expectation paths a central bank aiming to reduce consumption inequality should minimize the cross sectional variability of expectations moreover the traditional trade off between the price dispersion and aggregate consumption variability is also quantitatively affected by heterogeneity

backward and forward solutions for economies with rational expectations in models where anticipations of future endogenous variables influence current behavior there exists an infinity of solutions under the assumption of rational expectations this problem has been dealt with in the study of macro economic models by the implicit or explicit use of one of three additional requirements optimality consistency with alleged economic behavior or conformity of the endogenous variables to an imposed stationarity condition these requirements have coincided in existing models leading to the choice of a unique solution a forward solution the purpose of this paper is to review the problem characterize the solutions and examine whether these requirements are acceptable section i presents a simple model and derives the set of solutions the model makes no claim to generality but has the major advantage that the issues are easily understood in this simple case section ii discusses the requirement of consistency with economic behavior section iii discusses the requirement of stationarity and section iv provides some conclusions