intrinsic bubbles the case of stock prices several puzzling aspects of the behavior of united states stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends the authors call bubbles of this type intrinsic bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors intrinsic bubbles provide a more plausible empirical account of deviations from present value pricing than do the traditional examples of rational bubbles their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods copyright 1991 by american economic association

inflation targeting what can the ecb learn from the recent experience of the bank of england establishment of the european central bank presents a rare opportunity to define the operations of a central bank without a prior track record this paper asks what might be learnt from the recent experience of inflation targeting at the bank of england before the ecb specifies an as yet undefined operational target we consider whether there should be single or multiple targets and which inflation measure should be used if at all if inflation is targeted then a forecast of its value becomes the intermediate variable this raises an issue of transparency and the compensating supply of information necessary to fill the gap but too much openness can also be problematic the ecb must be accountable and the contracting approach may be useful although being seen to say and do the same thing is ultimately most important opportunity presents itself to define the provisions for the structure and operation of a central bank without a prior historical track record some of these are already written into the statutes of the maastricht treaty which for example defines the ecb s primary statutory duty to be that of the pursuit of price stability and it has been the remit of the european monetary institute emi to make recommendations on other aspects critically however the terms of reference for the ecb in relation to an operational target for its monetary policy are yet to be resolved and although a statement from the ecb is expected to clarify the issue by september after this paper was finalised this need not be the end of the matter circumstances could well call for a subsequent recommendation the emi 1997 provisionally narrowed the choice to one between monetary targets and inflation targets since inflation targeting is the latest game in town it seems important to take stock of the experience of those newly independent central banks which have adopted it it is rather too soon to reach a definitive conclusion on the performance of inflation targeting central banks so what we consider are the lessons to be learnt from the mechanisms and structures that have been adopted by various inflation targeting central banks focusing in particular on the policies of the

expectationally driven market volatility an experimental study abstract we study the existence and robustness of expectationally driven price volatility in experimental overlapping generation economies in the theoretical model under study there exist pure sunspot equilibria which can be learned if agents use some adaptive learning rules our data show the existence of expectationally driven cycles but only after subjects have been exposed to a sequence of real shocks and learned a real cycle in this sense we show evidence of path dependent price volatility journal of economic literature classification numbers c62 c92 f17 e32 e44

who inflates the bubble forecasters and traders in experimental asset markets abstract we use a laboratory experiment to study how forecasting contributes to mispricing in the baseline we assign both the task of forecasting and the task of trading to the same subject in treatment samepay we separate these tasks and assign them to two different subjects who share the profits from trade in treatment accuracy we pay forecasters according to the accuracy of their forecasts we find that the separation of tasks induces some mispricing even worse paying for accuracy reduces attention towards the fundamental value and generates major and persistent mispricing as well as trend extrapolation we infer that it can be risky to incentivize only forecasting accuracy and not give forecasters the right skin in the game our findings are informative for tracing the sources of mispricing as well as for enhancing financial stability

is the european community an optimal currency area optimal taxation versus the cost of multiple currencies the authors propose a view of optimal currency areas that is based on the principles of public finance inflation taxes are distortionary and an optimal spreading of tax distortions may require high inflation in one region and low inflation in another each region would need its own currency to do this on the other hand multiple currencies imply valuation and currency conversion costs which impede trade between regions this tradeoff is explored in the context of the european community s debate over a common currency using a two country variant of robert lucas and nancy stokey s cash in advance model copyright 1990 by american economic association

real exchange rates and relative prices an empirical investigation abstract this paper uncovers a striking empirical regularity the consumer price of a good relative to a different good within a country tends to be much less variable than the price of that good relative to a similar good in another country this fact seems to hold for all goods except very simple homogeneous products models of real exchange rates are likely to have predictions regarding this relation so this fact may provide a useful gauge for discriminating among models

optimism pessimism and financial bubbles this paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank dependent expected utility this rdu assumption can be viewed as a transformation of probabilities depending on the pessimism optimism of the agent the results show that pessimism favors the existence of deterministic bubbles when optimism may promote the existence of stochastic bubbles moreover under pessimism the rdu assumption may generate multiple bubbly equilibria the rdu assumption also leads to new conditions ensuring the absence of pareto optimality of the competitive equilibrium without bubbles these conditions still govern the existence of bubbles

trade foreign direct investment and industry performance abstract this paper investigates the us margins effect of imports and fdi using a panel of 448 manufacturing industries for 1982 1990 in the single equation two way fixed effects regressions greenfield fdi has no significant effect on margins while there is some indication that non greenfield fdi affect margins and the effect is found to depend on the level of industry concentration when potential endogeneity among variables are taken into account both types of fdi are found to increase margins however for non greenfield fdi the effect appears with a lag of two periods for the most part the results indicate that the positive effect on margins holds for industries with low levels of concentration beyond some critical level the competitive effect of fdi predominates

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

do core inflation measures help forecast inflation abstract we conduct cointegration and granger causality tests for traditional and new measures of core inflation we find that both measures are consistent with desired properties of measures of underlying inflation but neither is very useful for forecasting purposes

two monies two markets variability and the option to segment abstract this paper examines the decision to create barriers to arbitrage for a firm selling on two national markets real exchange rate changes affect the incentives to create such barriers since they influence the optimal prices sunk costs of market segmentation imply that the option to segment markets is more valuable the greater the variability of the real exchange rate if a monetary union reduces future real exchange rate variability it could thus stimulate market integration

endogenous market structures in international trade natura facit saltum abstract almost all of the large literature on international trade with imperfect competition assumes exogenous market structures the purpose of this paper is to develop a simple model that generates alternative market structures as nash equilibria for different parameterizations of the basic model equilibrium market structure is a function of the underlying technology familiar configurations such as a duopoly competing in exports or a single multinational producing in both markets arise as special cases small tax policy changes can produce large welfare effects as the equilibrium market structure shifts implying discontinuous jumps in prices quantities and profits

stabilizing expectations at the zero lower bound experimental evidence abstract our study demonstrates how agents expectations can interact dynamically with monetary and fiscal policy at the zero lower bound we study expectation formation near the zero lower bound using a learning to forecast laboratory experiment under alternative policy regimes in our experimental economy monetary policy targets inflation around a constant or state dependent target we find that subjects expectations significantly over react to stochastic aggregate demand shocks and historical information leading many economies to experience severe deflationary traps neither quantitatively nor qualitatively communicating the state dependent inflation targets reduce the duration or severity of economic crises introducing anticipated and persistent fiscal stimulus at the zero lower bound reduces the severity of the recessions when the recovery of fundamentals is sufficiently slow participants expectations become highly pessimistic and neither monetary nor fiscal policy are effective at stabilizing the economy

speculative prices and popular models t he rational expectations revolution in economics was born of the recognition that the expectations people hold for future economic variables are fundamental to their behavior thus our economists economic models require their those who make up the economy economic models models which they use to generate their expectations the key idea of rational expectations models is to collapse the two models into one to assume that people know or behave as if they know the true model that describes the economy this idea allows economists to construct simple and elegant models of the economy models that are appealing theoretically and that can be studied without collecting any data about the models in the minds of economic actors the problem with the rational expectations models is that collapsing the two kinds of models into one is a gross oversimplification obviously the popular models the models that are used by the broad masses of economic actors to form their expectations are not the same as those held by economists once one accepts the difference economic modelling cannot proceed without collecting data on the popular models themselves this paper reports on such a data collection effort on popular models using questionnaire survey methods with the purpose of understanding speculative markets i will report here on my research to understand the u s stock market crash of october 1987 research fumiko konya yoshiro tsutsui and i undertook to understand the japanese stock market crash of october 1987 research karl case and i undertook to understand recent real estate booms and research john pound and i undertook to understand the periodic hot markets for initial public offerings ipo s of common stock

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

strategy switching in the japanese stock market abstract this paper investigates the expectation formation process of japanese stock market professionals by utilizing a monthly forecast survey dataset on the topix distributed by quick corporation we sort forecasters into buy side and sell side professionals we empirically demonstrate that the buy side and sell side professionals use either fundamental or trend following strategies throughout their expectation formation processes and that they switch between fundamental and trend following strategies over time we also discuss that strategy switching can be key in understanding the persistent deviation of the topix from the fundamentals

can firms see into the future survey evidence from germany abstract this paper presents new evidence on the expectation formation process of firms from a survey of the german manufacturing sector first firms become too optimistic after their business has improved consistent with the over extrapolation of their experience second firms extrapolate improvements in their business more than deteriorations third firms are more optimistic pessimistic than usual during business cycle peaks troughs suggesting that they do not anticipate reversals fourth the german reunification provided a positive exogenous shock to the business of west german products the industries most positively affected by the shock initially over extrapolated the past downward trend just as much as the less affected industries and thus failed to anticipate the reversal fifth more overoptimistic firms subsequently report larger inventories and lower profits suggesting that expectation errors entail opportunity costs sixth older and larger firms show a smaller extrapolation bias indicating that time and resources can alleviate the extrapolation bias seventh firms that expect their business to improve tend to also expect their prices to increase suggesting that firms mostly try to forecast demand shocks as opposed to supply shocks overall these observations suggest that firms have a limited ability to anticipate changes in their activity and extrapolate their experience too much

the allocation of seigniorage in a common currency area this paper considers the allocation of seigniorage in a common currency area with an independent central bank it is shown that if the central bank retains autonomy in the allocation of seigniorage inflation will be suboptimally high and taxes and government spending will be suboptimally low constitutionally mandating the rate of money growth will result in optimal inflation but taxes and government spending will be too low as long as consumers do not put too much weight on public good consumption relative to private it is better to constitutionally mandate seigniorage allocation shares than the level of money growth

on the differential behaviour of national and multinational firms a within and across sectors approach this paper looks for different patterns of behaviour of national firms and multinational enterprises mnes its main contribution is the use of a computable general equilibrium perspective to analyse firms performance the model is calibrated for the case of the czech republic which has been a very attractive foreign direct investment location in the last three decades we replicate the arrival of mnes to different sectors of this country in turn and analyse the responses of both types of firms across the 20 different sectors in which the czech economy has been split our results grasp the short run impact the higher labour intensity of national firms leads them to different patterns of production and labour demand compared with mnes operating within the same sector the demand side of the model particularly exports and private consumption drives the evolution of production and labour demand across sectors regarding prices we also find a differential pattern between both types of firms within and across sectors our analysis offers detailed evidence on how the impact of mnes will differ depending on the sector to which they arrive finally the aggregate results suggest that a completely different microeconomic panorama may underlie rather similar macroeconomic outcomes

domestic market power and foreign trade abstract this paper develops a conjectural variation model to include foreign trade and applies it to the swedish industry the main conclusions emerging from the empirical application are that the degree of implicit collusion is generally very low in sweden and further that while high seller concentration exerts a positive influence on this degree there is strong and counteracting competitive pressure from foreign trade a more general conclusion is that it is important to include foreign trade in analyses of market power in open economies

fiscal solvency and price level determination in a monetary union abstract this paper applies the fiscal theory of price level determination to the case of a monetary union a fiscal perspective suggests first that the focus of past studies on seigniorage per se may be misplaced second a rise in the level of debt by one member government can raise the common price level throughout the union suggesting a role for fiscal rules third conditions are discussed under which fiscal solvency is not necessary for each member government in a monetary union

foreign investment and technology transfer a simple model abstract this paper develops a model in which international technology transfer through foreign direct investment emerges as an endogenized equilibrium phenomenon resulting from the strategic interaction between subsidiaries of multinational corporations and host country firms the model explicitly recognizes two types of costs the costs to the multinational of transferring technology to its subsidiaries and the learning costs of domestic firms the analysis points to the importance of the learning efforts of host country firms in increasing the rate at which mncs transfer technology the paper also explores some of the reasons why learning investment in host country firms may be suboptimal

the impact of monetary policy on stock market bubbles and trading behavior evidence from the lab we investigate the effect of monetary policy on stock market bubbles and trading behavior in experimental asset markets we introduce the possibility of investing in interest bearing bonds to the widely used laboratory asset market design of smith et al 1988 treatment groups face a variable interest rate policy which depends on asset prices while control groups are subjected to a constant interest rate we observe a strong impact of our interest rate policy on liquidity in the stock market but only a small impact on bubbles however we find that announcing the possibility of reserve requirements significantly reduces bubbles

adaptive versus eductive learning theory and evidence adaptive and eductive learning are two widely used ways of modeling the process by which agents learn a rational expectation equilibrium ree in this paper we report an experiment where we exploit differences in the conditions under which adaptive and eductive learning converge to ree so as to investigate which approach provides the better description of the learning behavior of human subjects our results suggest that the path by which the system converges appears to be a mixture of both adaptive and eductive learning model predictions

using survey data to test standard propositions regarding exchange rate expectations survey data provide a measure of exchange rate expectations superior to the forward rate in that no risk premium interferes we estimate extrapolative adaptive and regressive models of expectations static or random walk expectations and bandwagon expectations are rejected current appreciation generates the expectation of future depreciation because variables other than the contemporaneous spot rate receive weight in comparing expectations to the process governing the spot rate we find statistically significant bias no variable is as ubiquitous in international financial theory and yet as elusive empirically as investors expectations regarding exchange rates in the past expectations have been modeled in an ad hoc way often by using the forward exchange rate there is however a serious problem with using the forward discount as the measure of the expected change in the exchange rate in that the two may not be equal the gap that may separate the forward discount and expected depreciation is generally interpreted as a risk premium most of the large empirical literature testing the unbiasedness of the forward exchange rate for example has found it necessary either arbitrarily to assume away the existence of the risk premium if the aim

identifying booms and busts in house prices under heterogeneous expectations we introduce heterogeneous expectations in a standard housing market model linking housing rental levels to fundamental buying prices using quarterly data we estimate the model parameters for eight different countries us uk nl jp ch es se and be we find that the data support heterogeneity in expectations with temporary endogenous switching between fundamental mean reverting and trend following chartists beliefs based on their relative performance for all countries we identify temporary house price bubbles amplified by trend extrapolation and crashes reinforced by fundamentalists the qualitative predictions of such non linear models are very different from standard linear benchmarks with important policy implications the fundamental price becomes unstable e g when the interest rate is set too low or mortgage tax deductions too high giving rise to multiple non fundamental equilibria and or global instability

a model of relative national price levels under pricing to market abstract this paper proposes an alternative to the balassa samuelson theory of how relative price levels between countries are determined the theory is a general equilibrium formulation of a model where pricing to market arises endogenously from firm decisions it differs from balassa samuelson in that it centers on the distinction between segmented national goods markets rather than the distinction between traded and nontraded goods the paper also explores how balassa samuelson might be updated by combining it together with pricing to market elements applied to the case of a monetary union the theory offers an alternative explanation for the inflation differentials observed in emu it implies that such differentials may be a natural and enduring feature of a monetary union in which markets for goods and labor are less than fully integrated

the boundaries of multinational enterprises and the theory of international trade this paper begins with a review of empirical evidence on multinational firms conceptual underpinnings of a theory are developed relying in particular on the notion of knowledge capital as a mobile joint input into geographically separated production facilities this idea is embedded in a simple two country general equilibrium model that supports multinational production in equilibrium under conditions consistent with the empirical evidence the final section examines internalization and shows why certain properties of knowledge capital also imply a preference for transferring technologies internally within the firm rather than through arm s length markets

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

the eclectic paradigm of international production a restatement and some possible extensions this article reviews some of the criticisms directed towards the eclectic paradigm of international production over the past decade and restates its main tenets the second part of the article considers a number of possible extensions of the paradigm and concludes by asserting that it remains a robust general framework for explaining and analysing not only the economic rationale of economic production but many organisational and impact issues in relation to mne activity as well

what does the bundesbank target abstract although its primary ultimate objective is price stability the bundesbank has drawn a distinction between its money focused strategy and the inflation targeting approach recently adopted by a number of central banks we show that holding constant the current forecast of inflation german monetary policy responds very little to changes in forecasted money growth we conclude that the bundesbank is much better described as an inflation targeter than as a money targeter an additional contribution of the paper is to apply the structural var methods of b bernanke and i mihov measuring monetary policy working paper no 5145 national bureau of economic research cambridge ma june 1995 to determine the optimal indicator of german monetary policy we find that the lombard rate has historically been a good policy indicator although the use of the call rate as an indicator cannot be statistically rejected

learning to live with loans international policy transfer and the funding of higher education ver the last twenty years of the twentieth century there was a remarkableincrease in participation in higher education he in a number of oecd andnon oecd countries for details see greenaway and haynes 2000 in the caseof the former this was partly demand driven with key factors being increasedfemale participation and increasing private rates of return to a rst degree insome countries it was also supply driven with policy initiatives to increase thenumber of universities and increase publicly funded places to support develop ment of the knowledge based economy new growth theory points to humancapital formation as a key driver of economic growth and in industrialisedeconomies higher education appears to be especially important therefore gettingthe policy environment right offers the potential for relatively high pay offs seetemple 2000 one of the key debates triggered by increased participation was how to pay forit the debate on funding he has been particularly lively in countries such asaustralia new zealand and the united kingdom since historically universityeducation was publicly provided in the sense that tuition was free at the point ofconsumption whilst it was possible to sustain such a system in an environmentof relatively low participation it could not support mass higher education withouta very serious diminution in quality that triggered two questions should the

the formation of price forecasts in experimental markets this study utilizes laboratory experimental methods to evaluate the empirical validity of 1 muthian rational expectations assumptions 2 an adaptive expectations model and 3 an extrapolative expectations model over 5 00 price forecasts from 146 participants in twelve experimental double auction m arkets with a cash reward structure are analyzed the forecasting objective is t hemean price over a sequence of trading periods governed by stationary market parameters the price forecasts are found to be inconsistent with strict muthian rational expectations and the extrapolative modelis not supported by the data however the forecasts generally support the adaptive expectations model copyright 1987 by ohio state university press

understanding the disinflations in australia canada and new zealand using evidence from smooth transition analysis abstract this paper investigates the disinflation experiences of three countries australia canada and new zealand unlike previous approaches which have sought to use institutional data to pre determine the causes speed and duration of the transitions to low inflation regimes this paper allows price data itself to determine the speed and timing of the reforms using smooth transition analysis the results show that the process of transition is related to two factors central bank independence and the general slowdown in economic activity which occurred during the early 1990s in all oecd countries other reforms to the labor market and fiscal policy were less influential

global influences on uk manufacturing prices 1970 2000 abstract we introduce the first consistent series of domestic product and related import price indices at the industry level for the uk using the data to analyse both domestic and international determinants of uk manufactured product prices foreign influences on uk prices in domestic markets are always present but domestic cost movements dominate we show that the pass through of world price tariff and exchange rate changes into product prices is partial in general and varies markedly between product categories standard tariff and exchange rate theories overstate price responses to global pricing determinants and fail to allow for variation between industrial sectors such theories can mislead when used for policy analysis and prediction

can households see into the future survey evidence from the netherlands abstract this paper presents new evidence on the expectation formation process from a dutch household survey households become too optimistic about their future income after their income has improved consistent with the overextrapolation of their experience we show that this effect of experience is persistent and that households overextrapolate income losses more than income gains furthermore older households overextrapolate more suggesting that they did not learn over time to form more accurate expectations finally we study the relationship between expectation errors and consumption we find that more overoptimistic households intend to consume more and subsequently report higher consumption even though they do not consume as much as they intended to these results suggest that overextrapolation hurts consumers and amplifies business cycles

inflation forecasts and monetary policy proposals for inflation targeting as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long run inflation target an interesting possibility is that the central bank might target current private sector forecasts of inflation either those made explicitly by professional forecasters or those implicit in asset prices we address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private sector forecasts as a guide to policy actions in a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium and that policies approximating strict inflation forecast targeting are likely to have undesirable properties we also show that economies with more general forecast based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria we conclude that although private sector forecasts may contain information useful to the central bank ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

business cycles and the relationship between concentration and price cost margins using a newly constructed panel data base we examine changes in price cost margins in 284 manufacturing industries between 1958 and 1981 a key finding is a dramatic narrowing of the spread between the margins of concentrated and unconcentrated industries over this period we provide evidence that this narrowing is a result of the greater sensitivity of price cost margins in more concentrated industries to demand fluctuations this finding is robust to the inclusion of other industry variables and to measures of import competition the results indicate that cross sectional estimates of the concentration margins relationship are likely to be both biased and misleading

complexity and economic policy a paradigm shift or a change in perspective a review essay on david colander and roland kupers s complexity and the art of public policy in their recent book colander and kupers 2014 argue that viewing the economy as a complex adaptive system should change the way in which we make economic policy this would necessitate a paradigm shift economics has over time tried to produce a coherent model to underpin the dominant laissez faire liberal approach but we have never proved in that model that left to their own devices the participants in an economy will self organize into a satisfactory state this is an assumption complex interactive systems with direct interaction between heterogeneous agents may show no tendency to self equilibrate and will undergo endogenous crises economists should concentrate on the emergence of certain patterns colander and kupers suggest that we may be able to nudge the system into good basins of attraction a more radical view is that there are no fixed basins of attraction these change with the evolution of the system and it is illusory to believe that we can choose good basins we may be able to recognize and influence the emergence of certain states of the economy but we are far from leon walras s dream of economics as a science like astrophysics

famous first bubbles t he jargon of economics and finance contains numerous colorful expressions to denote a market determined asset price at odds with any reasonable economic explanation such words as tulip mania bubble chain letter ponzi scheme panic crash and financial crisis immediately evoke images of frenzied and probably irrational speculative activity many of these terms have emerged from specific speculative episodes which have been sufficiently frequent and important that they underpin a strong current belief among economists that key capital markets sometimes generate irrational and inefficient pricing and allocational outcomes before economists relegate a speculative event to the inexplicable or bubble category however we must exhaust all reasonable economic explanations while such explanations are often not easily generated due to the inherent complexity of economic phenomena the business of economists is to find clever fundamental market explanations for events and our methodology should always require that we search intensively for market fundamental explanations before clutching the bubble last resort thus among the reasonable or market fundamental explanations i would include the perception of an increased probability of large returns the perception might be triggered by genuine economic good news by a convincing new economic theory about payoffs or by a fraud launched by insiders acting strategically to trick investors it might also be triggered by uninformed market participants correctly inferring changes in the distribution of dividends by observing price movements generated by the trading of informed insiders while some of these perceptions might

inter industry variations in the effect of trade on industry performance this paper develops an empirical model to measure the strength of import discipline across industries allowing it to vary sys tematically with various features of industry market structure the m odel is applied to a panel of data for eighty two belgian three digit industries for the period 1973 78 and the results suggest that the parameters of the structural model are stable over time that the ext ent of discipline is endogenous and that about 70 percent of the ind ustries in the sample experience significant trade induced competitiv e discipline copyright 1988 by blackwell publishing ltd

monetary and exchange rate policies for international financial stability a proposal w v ithout a common monetary standard the remarkable integration of western european north american and the industrialized asian economies in both commodity trade and financial flows is less efficient and becoming untenable dissatisfaction with wildly fluctuating relative currency values euphemistically called floating or flexible exchange rates is a prime cause of the resurgence in protectionism in 1986 87 the overvalued yen forced japanese industrialists to close factories retire workers and write off once valuable investments in plant and equipment this parallels what their american counterparts were forced to do between 1981 and 1985 when the dollar suddenly became overvalued similarly the paring down of the british manufacturing base was precipitated when the pound unexpectedly became a strong petrocurrency in 1979 81 in agriculture japan and european countries are determined to insulate their domestic prices of farm products from unsettling international influences including volatile fluctuations in the yen dollar or mark dollar exchange rates thus unless exchange stability is first achieved the american government s attempt to broaden the general agreement on tariffs and trade to encompass agriculture and services is likely to fail but what keeps the three major industrial blocs from developing a common monetary standard to prevent exchange rate fluctuations although many people

expectations and bubbles in asset pricing experiments abstract we present results on expectation formation in a controlled experimental environment in each period subjects are asked to predict the next price of a risky asset the realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts in most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously these bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or positive feedback expectations of the participants we also analyze individual predictions of participants and find that participants within a group tend to coordinate on a common prediction strategy

international trade and industrial organization this survey reviews recent contributions to the interface between international trade and industrial organization import competition places a substantial limit on domestic market power in the short run competitive conditions can influence the speed and efficiency of a domestic market s adjustment to international disturbances exports effects on competition among national sellers are unclear and depend on the scope for price discrimination models of trade with monopolistic competition explain intra industry trade and also the widely observed sensitivity of firm size to market size exposure to trade also increases the technical efficiency of production diverse policy issues turn on the distinction between national and global welfare and the scope for commitment

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

on the ingredients for bubble formation informed traders and communication bubbles in asset markets have been documented in numerous experiments most experiments in which bubbles occur feature a declining fundamental value this feature has been criticized for being atypical of real financial markets here we experimentally study other ingredients for bubble formation that are common in such markets namely the existence of inside information and communication among traders we find that bubbles and mirages can occur if these additional ingredients are present in particular the mere possibility that some traders are better informed than others can create bubbles surprisingly communication turns out to be counterproductive for bubble formation

rational asset pricing bubbles this paper provides a fairly systematic study of general economic conditions under which rational asset pricing bubbles may arise in an intertemporal competitive equilibrium framework our main results are concerned with nonexistence of asset pricing bubbles in those economies these results imply that the conditions under which bubbles are possible including some well known examples of monetary equilibria are relatively fragile this paper is concerned with the conditions under which asset prices in an intertemporal competitive equilibrium are equal to the present value of the streams of future dividends to which each asset represents a claim according to a central result of the theory of finance this is very generally true in the case of economies with trading at only a finite sequence of dates as long as there are no restrictions upon transactions other than that associated with possible incom pleteness of the set of securities that are traded the result is sometimes called the fundamental theorem of asset pricing here we consider the extent to which such a result continues to be valid in the case of trading over an infinite horizon it has often been observed in the econometric literature on asset pricing bubbles that it is possible in principle for the price of a perpetuity and the dividends on that security to satisfy at all times a present value relation for one period holding returns while the security s price nonetheless does not equal the present value of the stream of dividends expected over the infinite future in such a case the price of the perpetuity is said to involve a bubble component 2 joint stochastic processes for which this component is nonzero are sometimes argued to characterize existing assets for a recent example see froot and obstfeld 1991 but such an inference depends upon aspects of the stochastic

nonspeculative bubbles in experimental asset markets lack of common knowledge of rationality vs actual irrationality we report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets in a setting in which speculation is not possible bubbles and crashes are observed the results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation but rather by behavior that itself exhibits elements of irrationality much of the trading activity that accompanies bubble formation in markets where speculation is possible is due to the fact that there is no other activity available for participants in the experiment

reserve requirements and optimal seigniorage abstract this note presents a model of optimizing agents who chose to hold deposits at financial intermediaries which are required to hold fractional reserves of fiat money when the stock of fiat money is expanded the reserve requirement functions as a tax on deposits the combination of reserve requirements and inflation results in a lower steady state utility than a direct tax on deposits the optimal monetary policy when reserves are required is to minimize reserve requirements and inflate without limit the stock of fiat money

learning to forecast the exchange rate two competing approaches this paper compares two competing approaches to model foreign exchange market participants behavior statistical learning and fitness learning these learning mechanisms are applied to a set of predictors chartist and fundamentalist rules we examine which of the learning approaches is best in terms of replicating the exchange rate dynamics within the framework of a standard asset pricing model we find that both learning methods reveal the fundamental value of the exchange rate in the equilibrium but only fitness learning creates the disconnection phenomenon and only statistical learning replicates volatility clustering none of the mechanisms is able to produce a unit root process but both of them generate non normally distributed returns

tests of rational expectations in a stark setting the authors test the hypothesis that subjects forecasts in a stark experimental setting are not predictably different than the actual process generating the data the particular process that they use is a random walk forty subjects predict realizations of random walks chosen to be consistent with the actual process generating the data the authors find that they cannot predict subjects deviations from rational expectations of the process actually generating the data for about half of the subjects the authors cannot predict the forecast errors of about 90 percent of the subjects with information actually available to them coauthors are arlington w williams raymond c battalio and timothy i mason copyright 1993 by royal economic society

the theory of rational bubbles in stock prices free disposal of equity which directly rules out the existence of negative rational bubbles in stock pric es also imposes theoretical restrictions on the possible existence o f positive rational bubbles the analysis in this paper shows that a positive rational bubble can start only on the first date of trading of a stock thus the existence of a rational bubble at any date woul d imply that the stock has been overvalued relative to market fundame ntals since the first date of trading and that prior to the first da te of trading the issuer of the stock and potential stockholders who anticipated the initial pricing of the stock expected that the stock would be overvalued copyright 1988 by royal economic society

confidence and decision making in experimental asset markets abstract this paper examines how traders confidence and market confidence affect outcomes in an experimental asset market with known fundamental values in this type of market prices usually present large deviations from the fundamental value in other words bubbles are known to occur we measure beliefs by asking participants to forecast the one period ahead price as a discrete probability mass distribution we define confidence as the inverse of the dispersion of beliefs for each trader and also create a market wide measure of this to measure agreement across traders we find that confidence affects price formation and is also important in explaining the dynamics and size of the bubble moreover as traders are successful they become increasingly certain of their beliefs even if these beliefs are on non fundamental values thus increasing the likelihood of price bubbles

when speculators meet suppliers positive versus negative feedback in experimental housing markets abstract asset markets like stock markets are characterized by positive feedback through speculative demand but the supply of housing is endogenous and adds negative feedback to the housing market we design an experimental housing market and study how the strength of the negative feedback i e the price elasticity of supply affects market stability in the absence of endogenous housing supply the experimental markets exhibit large bubbles and crashes because speculators coordinate on trend following expectations when the positive feedback through speculative demand is offset by the negative feedback of elastic housing supply the market stabilizes and prices converge to fundamental value individual expectations and aggregate market outcome are well described by the heuristics switching model our results suggest that negative feedback policies may stabilize speculative asset bubbles

government finance in a common currency area abstract european integration in 1992 may require greater exchange rate coordination thatn currently exists the delors report goes as far as to recommend the eventual adoption of a single currency however the formation of a common currency area raises fears that independent fiscal policies may produce inferior outcomes this paper shows that lack of cooperation in fiscal policy leads to too little inflation too high taxes and too much government spending jel f33

coordination on bubbles in large group asset pricing experiments abstract we present a large group experiment in which participants predict the price of an asset whose realization depends on the aggregation of individual forecasts the markets consist of 21 to 32 participants a group size larger than in most experiments multiple large price bubbles occur in six out of seven markets the bubbles emerge even faster than in smaller markets individual forecast errors do not cancel out at the aggregate level but participants coordinate on a trend following prediction strategy that gives rise to large bubbles the observed price patterns can be captured by a behavioral heuristics switching model with heterogeneous expectations

futures contracting and dividend uncertainty in experimental asset markets prices in experimental asset markets tend to bubble and then crash to dividend value at the end of the asset s useful life explanations for this phenomenon are 1 that participants cannot form reliable future price expectations or 2 dividend risk aversion we report the results of experiments to test these hypotheses in one experimental series a futures market is introduced so that participants can obtain information on future share prices in another series of experiments the per period dividend is known with certainty the futures market treatment reduced the bubble the certain dividend treatment had little effect on the character of bubbles with inexperienced traders copyright 1995 by university of chicago press

determinants of investor expectations and satisfaction a study with financial professionals abstract we investigate determinants of price expectations and satisfaction levels of financial professionals and students in experiments with 150 professionals and 576 students we systematically vary price paths according to the final return positive or negative and the way in which the final return is achieved upswing followed by downswing or vice versa professionals show the most optimistic price expectations and are most satisfied if assets fall in price first and then recover in addition professionals price expectations are highest after positive returns among students qualitatively similar patterns emerge but professionals price expectations are less prone to framing effects

individual expectations limited rationality and aggregate outcomes recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price we present an experiment where the fundamental price experiences large unexpected shocks markets with negative expectation feedback strategic substitutes quickly converge to the new fundamental while markets with positive expectation feedback strategic complements do not converge but show underreaction in the short run and overreaction in the long run a simple evolutionary selection model of individual learning explains these differences in aggregate outcomes

are sunspots learnable an experimental investigation in a simple macroeconomic model abstract we conduct experiments with human subjects in a model with a positive production externality in which productivity is a nondecreasing function of the average level of employment of other firms the model has three steady states and a sunspot equilibrium that fluctuates between the high and low steady states steady states are payoff ranked low values give lower profits than higher values we investigate whether subjects can learn a sunspot equilibrium we observe coordination on the extrinsic announcements in our experimental economies cases of apparent convergence to the low and high steady states are also observed

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

when panic makes you blind a chaotic route to systemic risk abstract we present an analytical model to study the role of expectation feedbacks and overlapping portfolios on systemic stability of financial systems building on corsi et al 2016 we model a set of financial institutions having value at risk capital requirements and investing in a portfolio of risky assets whose prices evolve stochastically in time and are endogenously driven by the trading decisions of financial institutions assuming that they use adaptive expectations of risk we show that the evolution of the system is described by a slow fast random dynamical system which can be studied analytically in some regimes the model shows how the risk expectations play a central role in determining the systemic stability of the financial system and how wrong risk expectations may create panic induced reduction or over optimistic expansion of balance sheets specifically when investors are myopic in estimating the risk the fixed point equilibrium of the system breaks into leverage cycles and financial variables display a bifurcation cascade eventually leading to chaos we discuss the role of financial policy and the effects of some market frictions as the cost of diversification and financial transaction taxes in determining the stability of the system in the presence of adaptive expectations of risk

does volatility matter expectations of price return and variability in an asset pricing experiment abstract we present results of an experiment on expectation formation in an asset market participants in our experiment must provide forecasts of the stock future return to computerized utility maximizing investors and are rewarded according to how well their forecasts perform in the market in the baseline treatment participants must forecast the stock return one period ahead in the volatility treatment we also elicit subjective confidence intervals of forecasts which we take as a measure of perceived volatility the realized asset price is derived from a walrasian market equilibrium equation with non linear feedback from individual forecasts our experimental markets exhibit high volatility fat tails and other properties typical of real financial data eliciting confidence intervals for predictions has the effect of reducing price fluctuations and increasing subjects coordination on a common prediction strategy

information learning and expectations in an experimental model economy the experimental learning to forecast literature finds that subjects use simple linear backward looking models when forecasting in environments with little to no inout the economic framework we study the formation of expectations in a laboratory economy of monopolistic firms and labour unions with almost complete knowledge of the model we observe simple backward looking rules but also a considerable share of model based expectations using information on the economic structure at least for some subjects expectations are informed by theory as in the previous literature we find individual prediction rules to be heterogeneous

income inequality consumption credit and credit risk in a data driven agent based model abstract the issue of income inequality occupies a prominent position in the research agenda of academic and policy circles alike especially after the crisis of 2008 due to its potential causal link with the development of credit bubbles and therefore the emergence of financial crises this paper examines the long run effect of income inequality on consumption consumer credit and non performing loans through the means of a data driven agent based model the data driven nature of the model enhances its ability to match historical series and thus makes it suitable for policy simulations tailored for specific economies the analysis indicates that higher income inequality has a detrimental impact on consumption and is associated with lower volumes of consumer credit however the ratio of non performing loans as a share of total loans seems to be independent of income inequality

the behavioral economics of currency unions economic integration and monetary policy we analyze different behavioral models of expectation formation in a multi country new keynesian currency union model our analyses yield the following robust results first economic integration is of crucial importance for the stability of the economic dynamics in a currency union second when the economic dynamics are unstable more activist monetary policy does not lead to stable economic dynamics these findings have natural counterparts in the rational expectations version of the model there economic integration is crucial for the determinacy of the equilibrium and when the equilibrium is indeterminate more activist monetary policy does not lead to a determinate equilibrium in an application to euro area data we find that the behavioral macroeconomic model outperforms its rational counterpart in terms of prediction performance

simultaneous equations models of the structure performance paradigm abstract this paper is concerned with determining the dimension of the simultaneous equations model surrounding the basic profits concentration relationship a very general model is considered and then simplified using a simple test for exogeneity and it is concluded that the model is nonlinear in concentration and that simultaneous interaction occurs between profits and foreign competition variables

equivalence results for optimal pass through optimal indexing to exchange rates and optimal choice of currency for export pricing firms sometimes write price lists or catalogs for their exports so they set prices for a period of time and do not adjust prices during that interval in response to changes in their environment the firm sets the price either in its own currency or the importer s currency this paper draws a simple link between the choice of currency and the pricing decision of a firm that changes prices in response to all shocks specifically if the latter firm s price has a lower variance in terms of its own currency than the importer s currency then the firm with a price list will set the price in its own currency and otherwise it will set price in the foreign currency this relationship is established by consideration of the firm with a price list as a special case of a firm that indexes its export price to the exchange rate jel f4 f1

pitfalls in testing for explosive bubbles in asset prices a number of studies e g robert j shiller 1981 olivier j blanchard and mark watson 1982 kenneth d west 1988 have argued that dividend and stock price data are not consistent with the market fundamentals hypothesis in which prices are given by the present discounted values of expected dividends these results have often been construed as evidence for the existence of bubbles or fads related arguments have been made with respect to gold bonds and foreign exchange a major problem with such arguments e g james hamilton and charles whiteman 1985 is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by the researcher behzad t diba and herschel i grossman 1984 1988b and hamilton and whiteman 1985 have recommended the alternative strategy of testing for rational bubbles by investigating the stationarity properties of asset prices and observable fundamentals 1 in essence the argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present since they would generate an explosive component to stock prices 2 using unit root tests autocorrelation patterns and cointegration tests to implement this procedure diba and grossman 1988b p 529 state that the analysis supports the conclusion that stock prices do not contain explosive rational bubbles this paper shows that the above battery of tests is in fact unable to detect an important class of rational bubbles the point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied even though they are explosive in the relevant sense simulations show that when such bubbles are present stock prices will not appear to be more explosive than dividends on the basis of these tests even though the bubbles are substantial in magnitude and volatility the presence of rational bubbles in actual stock prices thus remains an open question

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

what should central banks do what should be their macroeconomic objectives and operations before turning to the normative question of what central banks hereafter cbs should do we need to deal with the contentious issue of what cbs actually can do in the field of monetary control one might think that this should be a relatively straightforward matter of fact instead there is a yawning chasm of mutual misunderstanding which has persisted for decades between economists and those working in cbs which has bedevilled the subject virtually every monetary economist believes that the cb can control the monetary base hereafter mo and subject to errors in predicting the monetary multiplier the broader monetary aggregates as well after all mo apart from some relatively unimportant qualifications about coins from the mint represents the liabilities of the cb and the cb should be able to control its own liabilities by open market operations hence the normal assumption is that mo is controllable within a narrow margin if the central bank should fail to do so it must be because it has chosen some alternative operational guide for its open market operations e g holding interest rates constant at some level which operational rule is frequently decried as sub optimal assuming that cbs can almost perfectly control mo economists have constructed several simulated schemes of how an optimal rule for so doing might be set up mccallum i993a b provides good recent examples almost all those who have worked in a cb believe that this view is totally mistaken in particular it ignores the implications of several of the crucial institutional features of a modern commercial banking system notably the need for unchallengeable convertibility at par between currency and deposits and secondly that commercial bank reserves at the cb receive a zero or belowmarket rate of interest the first means that fluctuations in the public s demand for cash which are both strongly seasonal and somewhat unpredictable must be accommodated the second means that commercial banks will not willingly hold free reserves at the end of each day assuming for this purpose that a stated reserve ratio has to be held on each day rather than averaged over say a couple of weeks beyond that needed to meet late fluctuations in the demand for cash after the money market has closed or become thin only if interest rates fall to the very low levels of the i930s and or risks of interest rate variability or late in the day cash runs increase would commercial banks increase their desired free reserves thus given the