learning to believe in sunspots a number of authors have shown that competitive economies may possess sunspot equilibria that is rational expectations equilibria in which purely extrinsic uncertainty affects equilibrium prices and allocations 2 such results demonstrate that it does not require a lack of faith in the rationality of market participants to believe that competitive markets may be subject to purely speculative fluctuations driven solely by expectations 3 the mere existence of sunspot equilibria as solutions to a system of marketclearing conditions however might not be judged sufficient to indicate that competitive markets with rational participants could ever be subject to speculative instability the sunspot equilibria represent states of affairs in which agents act differently in the case of different realizations of the sunspot variable and it is rational for each agent to do so but it might be thought unlikely that the beliefs of all the participants in the market could ever come to be coordinated so as to bring about an equilibrium of that kind it is rational to believe that sunspots convey information about future states of affairs once the economy is in a sunspot equilibrium but why would rational agents ever begin to believe in such a thing so as to create the conditions under which the belief is rational in order to address such a question one must go beyond the mere statement of the conditions for equilibrium and discussion of what states of affairs satisfy them one must specify an explicit dynamic process according to which the beliefs of agents adjust when out of equilibrium any exercise of this kind is necessarily unsatisfactory as there is no univocal meaning for the postulate of rational behavior outside of an equilibrium it may well be the case that

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

comparative advantage and the equilibrium rate of unemployment abstract this paper develops a two country heckscher ohlin model with endogenous equilibrium involuntary unemployment to examine the question wat is the effect of free trade on the equilibrium rates of unemployment in the laborabundant and labor scarce countries it is shown that free trade leads to a decline in the equilibrium rate of unemployment in the labor abundant country but to a rise in unemployment in the labor scarce country

the term structure of euro interest rates and rational expectations abstract this paper analyzes the short end of the maturity spectrum of euro interest rates using recent monthly data the data for the euro franc and euro dm interest rates support the rational expectations hypothesis whereas those true for euro dollar interest rates do not this result is explained by the different approaches used to conduct monetary policy in the usa switzerland and west germany

a multisector model of efficiency wages the pattern of effort and wages is derived in a multisector efficiency wage model firms choose effort endogenously easily monitored or low turnover jobs have high effort and may have low wages in equilibrium empirical wage differentials from a measure of supervision are smaller than observed industry differentials that have been attributed to efficiency wage models and are closer to those predicted by the model workers can search for and avail of on the job offers if sectors grow at different rates or the unemployment rate changes the pattern of wage differentials is unaffected

a monetary business cycle model with unemployment abstract to reproduce key features of the post war u s data most monetary business cycle models must assume there are high price markups and that agents have high labour supply elasticities despite the existence of contradictory microeconomic evidence this paper eliminates the need for these assumptions by introducing imperfectly observed effort into a limited participation model the estimated model is better able to capture the sluggish price response to a monetary policy shock than the standard model and is consistent with evidence regarding the qualitative responses of the u s economy to technology shocks fiscal policy shocks and monetary policy shocks

the optimal design of interest rate target changes most central banks currently implement monetary policy by targeting a short term interest rate this paper asks what is the optimal form for such interest rate targeting given the objectives facing central banks we find the optimal rule is for the central bank to change the target rate whenever the deviation between its preferred rate and the current target rate reaches some critical level and in this case the target rate is changed by a discrete amount in the direction of its preferred rate despite the simplicity of this rule we are able to replicate a number of puzzling features of interest rate targeting observed in practice as well as explain some dynamic properties of market interest rates

coaching for survival the hazards of head coach careers in the german bundesliga this article analyses how long head coaches survive in the clubs of the first german football league bundesliga where the dismissal of a presumably weak coach is a generally adopted procedure in case of a poor sporting performance of the team we use duration models for repeated events to accommodate the correlation within individuals we find that the head coaches of successful teams and those working during the more recent bosman effect period are more likely to survive in the bundesliga moreover the head coaches of clubs with relatively high team wage bills are likely to survive for shorter periods of time

the term premium time varying interest rate volatility and central bank policy reaction abstract the solution of the mccallum policy reaction model of the term structure of interest rates including a volatility dependent term premium indicates that the performance of the expectations hypothesis of the term structure ehts in simple regression and arch in mean framework is strongly affected by policy reaction this finding is illustrated with us data for the 1973 1995 period

migration unemployment and discrimination abstract this paper uses a dynamic efficiency wage model to analyze the consequences of immigration for a small country when there is discrimination against immigrants in a dual labor market with unemployment discrimination is of the type equal pay for equal work but unequal work which is characteristic of economies with guest worker systems the model exhibits three regimes for rising immigration levels immigration is most beneficial for natives in the intermediate regime an analysis of regime switches shows that changes attributable to globalization and technical progress are consistent with growing opposition to immigration

macroeconomic adjustment and the poor analytical issues and cross country evidence the author studies the links between macroeconomic adjustment and poverty first he summarizes some of the recent evidence on poverty in the developing world second he reviews the various channels through which macroeconomic policies affect the poor third the author emphasizes the role of the labor market he develops an analytical framework that captures some of the main features of the urban labor market in developing countries and studies the effects of fiscal adjustment on wages employment and poverty fourth he presents cross country regressions linking various macroeconomic and structural variables to poverty the author finds that output growth and real exchange rate depreciations tend to lower poverty while illiteracy income inequality and macroeconomic volatility tend to increase poverty in addition the impact of growth on poverty appears to be asymmetric and to result from a significant relationship between episodes of increasing poverty and negative growth rates

competition and product survival in the uk car market the paper examines the extent to which inter and intra firm competition influenced the survival of cars in the uk market between 1971 and 1998 it is shown that while competition influenced product survival in all market segments within the uk car market the nature of that competition differed between them in the small family and large family car segments intra firm competition dominated inter firm competition in contrast in the luxury sports car segment only inter firm competition conditions resulted in product survival evidence was also found that the luxury sports car segment has grown more competitive over time and that firms marketing products in the family car segments have become considerably more successful at avoiding the effects of intra firm competition

macroeconomic sources of risk in the term structure we develop a new way of modeling time variation in term premia based on the stochastic discount factor model of asset pricing the joint distribution of excess u s bond returns of different maturity and the observable fundamental macroeconomic factors is modeled using multivariate garch with conditional covariances in the mean to capture the term premia by testing the assumption of no arbitrage we derive a specification test of our model we estimate the contribution made to the term premia at different maturities through real and nominal sources of risk from the estimated term premia we recover the term structure of interest rates and examine how it varies through time finally we examine whether the reported failures of the rational expectations hypothesis can be attributed to an omitted time varying term premium

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

do stationary risk premia explain it all evidence from the term structure abstract predictable variations in excess returns have often been attributed to the presence of time varying risk premia in this paper we use an insight based upon new techniques from time series analysis to test whether stationary risk premia can alone explain the behavior of excess returns to long bonds relative to rolling over short rates surprisingly we reject this hypothesis using u s t bill returns we then show that either permanent shocks to the risk premia and or rationally anticipated shifts in the interest rate process could produce anomalous results

dynamic determinacy and the existence of sunspot equilibria this paper relates the existence of stationary sunspot equilibria in the vicinity of a conventional stationary state to the phase diagram surrounding the latter we find that the local condition required for a unique equilibrium path returning to the stationary state following any slight disturbance of initial conditions is also sufficient to exclude stationary sunspot equilibria in the stationary state s immediate vicinity in that sense an eigenvalue condition familiar from dynamic analysis can tell us something about the possibilities of local sunspot activity as well journal of

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

adjustment of wages and equilibrium unemployment in a ricardian global economy abstract this paper develops a dynamic ricardian model of the world economy exhibiting endogenous wages and equilibrium unemployment it is shown that international trade serves to give workers an increased stake in job holding and in general equilibrium leads to higher real earnings and lower equilibrium unemployment economic shocks emanating in one country affect the trading partner s equilibrium unemployment rate by shifting the terms of trade the generality of the results are discussed along three dimensions replacing efficiency wages with bargaining in labor market introducing role for market sizes and factor proportion differences and introducing firm specific training to generate dynamics

tests of the expectations hypothesis resolving the campbell shiller paradox one of the more puzzling results in the expectations hypothesis eh testing literature is the campbell shiller paradox csp in an influential paper campbell and shiller 1991 found that the slope of the term structure almost always gives a forecast in the wrong direction for the short term change in the yield on the longer bond but gives a forecast in the right direction for long term changes in short rates this paper provides an econometric resolution to the csp specifically it shows that by their construction these tests can generate results consistent with the csp if the eh does not holdnwhatever the reason monte carlo experiments confirm that this explanation can account for campbell and shiller s paradoxical results for most pairings of short term and long term rates considered

labor market dynamics when unemployment is a worker discipline device efficiency wage models of the effort elicitation type have important implications for labor market dynamics these models have a wide array of discontinuous sunspot equilibria driven by extraneous variables in addition to well behaved equilibria characterized by continuous slowly adjusting patterns of employment many aspects of actual labor markets can be replicated by these models for example the longer run movements they predict in employment allow macroeconomic evidence for a large labor supply elasticity to be reconciled with panel data evidence for a small labor supply elasticity many testable but as yet untested predictions about labor market dynamics can also be generated this abstract was borrowed from another version of this item

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

employment fluctuations with downward wage rigidity the role of moral hazard we study the cyclical dynamics of job creation and destruction when workers effort is not perfectly observable the no shirking constraint may amplify fluctuations in hiring by making firms surplus share procyclical and may cause a burst of inefficient firing when a downturn begins but quantitatively it mainly raises the cost of motivating marginal workers in booms since firms cannot commit to keep them in recessions and thereby strongly damps the countercyclical fluctuations in the separation rate this implies a robust beveridge curve but casts doubt on ramey and watson s 1997 contractual fragility mechanism and worsens shimer s 2005a volatility puzzle

the expectations hypothesis of the term structure of interest rates open interest rate parity and central bank policy reaction abstract a rational expectations model with endogenous monetary policy reacting to the exchange rate and the term spread shows that the empirical performance of the expectations hypothesis of the term structure and the uncovered interest rate parity hypothesis improves with the strength of the policy reaction to the exchange rate and the term spread respectively

on the robustness of bubbles in linear re models the authors analyze the expectational stability e stability of the different solutions of a linear rational expectations model in which the endogenous variable depends on expectations of its current and future values formed in the past and also on its own lagged value it is shown that continuum of bubble solutions cannot be strongly e stable in contrast for certain parameter values a particular solution that would normally be identified as a bubble solution can be strongly e stable the results are applied to a macroeconomic model with real balance effects copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a model of learning and emulation with artificial adaptive agents we study adaptive learning in a sequence of overlapping generations economies in which agents live for n periods agents initially have heterogeneous beliefs and form multi step ahead forecasts using a forecast rule chosen from a vast set of candidate rules agents learn in every period by creating new forecast rules and by emulating the forecast rules of other agents computational experiments show that systems so defined can yield three qualitatively different types of long run outcomes 1 coordination on a low inflation stationary perfect foresight equilibrium 2 persistent currency collapse and 3 coordination failure within the allotted time frame

how to quickly get a job the transition from higher education to french labour market by a survival model this article analyses how long former university students stay unemployed when searching for a new job after the leaving of the french higher education cox duration models are used to account for the proportional hypothesis the main result of this article is that the worker s recruitment is based more on the choice of the faculty of initial training than the educational level attainment some policy implications are derived from our results to give some recommendations for individual job search and policy makers in education

the revival of the expectations hypothesis of the us term structure of interest rates abstract us interest rate data from 1987 to 1995 show a substantial predictive power of the spread for the short rate in line with the expectations hypothesis the estimation of a mccallum policy reaction model supports our conjecture that this striking result can be attributed to the adoption of the spread as an indicator for us monetary policy since the late eighties 1997 elsevier science s a

unemployment and the business cycle abstract this paper presents a dynamic general equilibrium model where labor effort is imperfectly observable and there is unemployment in equilibrium in contrast to shirking models in the efficiency wage literature detected shirkers are not dismissed instead they face a monetary punishment because they forgo an increase in their compensation estimated versions of the model can generate the high variation in employment and low variation of real wages observed over the business cycle and are consistent with existing qualitative evidence about the responses of the economy to fiscal policy shocks

a dynamic model of shirking and unemployment private saving public debt and optimal taxation abstract this paper introduces private saving and public debt into the shirking unemployment model of shapiro and stiglitz 1984 while relaxing their exclusive focus on steady states after generalizing their no shirking constraint to accommodate asset accumulation and demonstrating that the resulting economy s equilibrium is saddle path stable we use our dynamic model to obtain significant departures from the shapiro stiglitz prescriptions for optimal policy most notably wage income should be taxed not subsidized in the long run if the labor market is sufficiently distorted furthermore interest income should be exhaustively taxed only during an initial interval of time as in chamley s 1986 full employment model

a daily view of yield spreads and short term interest rate movements daily data on short term interest rates are used to show how changes in federal reserve operating procedures have affected the term structure yield spreads were helpful in predicting short term interest rate movements during the nonborrowed reserves targeting period 1979 82 but not during the earlier federal funds targeting period since the adoption of contemporaneous reserves accounting in 1984 yield spreads have been informative about short term interest rate movements principally because of the interplay between the market determination of the overnight funds rate on reserve settlement wednesdays and the fed s apparent commitment to stabilizing the funds rate on other days copyright 1996 by ohio state university press

behavioral incentives equilibrium endemic disease and health management policy for farmed animals the article develops a dynamic capital valuation model in which farms can act with farm varying cost to increase the probability of avoiding an infectious endemic animal disease multiple endemic disease equilibria can exist and the one with the largest set of action takers is socially optimal costly capital markets are shown to be a factor in determining the extent of disease frictions such as dealing with a veterinary public health bureaucracy can enhance social welfare by encouraging precautionary biosecurity actions technical innovations can reduce social welfare and a disease indemnification scheme is also studied suggestions for empirical implementation are provided

new hope for the expectations hypothesis of the term structure of interest rates survey data on interest rate expectations permit separate testing of the two alternative hypotheses in traditional term structure tests that the expectations hypothesis fails and that expected future interest rates are ex post inefficient forecasts we find that the source of the spread s poor predictions of future interest rates varies with maturity at short maturities the expectations hypothesis fails at long maturities however changes in the yield curve reflect changes in expected future rates one for one an implication of the expectations hypothesis this result confirms earlier findings that long rates underreact to short rates but now it cannot be attributed to term premia if the attractiveness of an economic hypothesis is measured by the number of papers which statistically reject it the expectations theory of the term structure is a knockout most tests beginning with macaulay 1938 find no evidence supporting the expectations hypothesis 1 many cannot even reject statistically the alternative hypothesis that the spread between long and short rates contains no information about future interest rate changes 2 to make matters worse in u s postwar data future long rates tend to rise when short rates are above long rates since the expectations hypothesis would predict that long rates tend to fall the theory often does worse than even the naive model that future interest

business cycles with worker moral hazard we consider an economy with unemployment where firms pay efficiency wages due to effort enforcement problems and face output prices that vary cyclically between a high and a low level ph and pl we show that for a range of pl ph 1 employment and the wage will be cylically rigid and that this range is greater the shorter h periods are for lower pl ph employment will vary procyclically but then also the wage and more so the more employment varies this implies a limited role for efficiency wage theory in explaining employment variations over the business cycle but a greater role for explaining productivity fluctuations according to okun s law

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

hardening the budget constraint the experience of the post socialist countries abstract the study surveys the typical manifestations of the softness of the budget constraint such as state subsidies soft taxation non performing loans the accumulation of trade arrears between firms and the build up of wage arrears in the various post socialist countries it was widely maintained at the outset of the post socialist transition that the holy trinity of liberalization privatization and stabilization would suffice to produce an efficient market economy since then it has become clear that hardening the budget constraint needs to be given equal priority with these unless this occurs the effects of privatization will fall short of expectations as they have in russia

a framework for analyzing the political support for active labor market policy abstract we develop a general equilibrium analysis of the impact of active labor market policy on unemployment wages and the welfare of the employed this framework is used to assess the political support in favour of such policies and to relate it to the working of such policies and other parameters characterizing the economic environment the main finding is that if the employed have little exposure to unemployment and if the demand for unskilled labour is inelastic then there may be political support for policies which actually raise the equilibrium level of total unemployment

nominal wage price rigidity as a rational expectations equilibrium most recent studies of macroeconomic behavior fall into one of two categories the first often called the equilibrium business cycle approach stems from the fundamental contribution of robert e lucas 1972 and related work by thomas sargent and neil wallace 1975 and many others these studies espouse the view that a positive correlation between output and the stock of paper assets can arise if households are unable to identify the source and therefore the permanence of price movements employment and output responses in this view are driven by the intertemporal substitution effect especially the substitution of current leisure for future consumption since cyclical fluctuations in employment are large relative to the corresponding real wage movements substantial wage elasticity of labor supply is required to validate these models the equilibrium approach to business cycles implies certain restrictions on the conduct of monetary policy in particular rational expectations undermine the ability of the monetary authority to influence economic activity in a systematic manner see sargent wallace for an example sticky wages and prices are the cornerstone of an alternative description of macroeconomic behavior rooted vaguely in keynes and more firmly in the dual decision hypothesis of robert clower 1984 this approach studies equilibria with quantity rationing see edmond malinvaud 1977 the rationing story lacks a precise specification of the source of price stickiness offering very little guidance about the eventual causes of price change considerable efforts were made in the 1970 s to fill this lacuna in keynesian macroeconomics beginning with work by martin n baily 1974 and others the implicit contracts literature focused on the incomplete insurability of human capital unable to find insurance against fluctuations in labor income elsewhere workers demand insurance from those best placed to observe labor income their own employers both wage inflexibility and layoffs then can be viewed as an outcome of a joint insurance employment relationship between workers and firms see azariadis 1975 critics like george akerlof and hajime miyazaki 1980 soon discovered that the original contracting models could not produce layoffs without prohibiting severance pay or otherwise limiting the terms of the contract others pointed out that these models were determinedly microeconomic offering few insights into the stickiness of nominal wages or the effectiveness of stabilization policy two quite distinct lines of research developed out of the original implicit contract ideas one focuses on asymmetric information and implementability see the qje 1983 symposium for original work and the review article by oliver hart 1983 as a means of driving a wedge between the ex post marginal rates of substitution of the contractants under some technical assumptions the outcome is involuntary underemployment or unemployment we are most concerned here with the other line of research which sought to fit labor or tdiscussants guillermo calvo columbia university jo anna gray washington state university

uncovered interest parity and policy behavior new evidence abstract mccallum j monet econ 33 1994 105 132 introduces policy behavior to resolve previous empirical rejections of the uncovered interest parity uip theory in this note we reexamine his policy behavior argument first we extend the data set used by mccallum to include the recent 8 years and contrary to the analysis provided by mccallum we make a thorough econometric analysis of his uip specification it is shown that in most cases his theory is supported by the data as well as it passes conventional econometric tests we then take a closer look at his policy behavioral relationship but unfortunately it turns out that this specification is inconsistent with the uip specification suggested by mccallum

the survival of new plants start up conditions and post entry evolution abstract this paper examines the longevity of entrants we find size to be an important determinant of the chances of survival this being particularly relevant to de novo entrants as compared with entry by established firms current size is also found to be a better predictor of failure than initial size moreover our findings indicate that after controlling for size differences past growth matters for survival suggesting a partial adjustment process for firm size in the post entry period finally new plants are more likely to live longer if they enter growing industries or industries with little entry activity

are non fundamental equilibria learnable in models of monetary policy abstract recent models of monetary policy can have indeterminacy of equilibria which is often viewed as a difficulty of these models we consider the significance of indeterminacy using the learning approach to expectations formation we employ expectational stability as a selection criterion for different equilibria and derive the expectational stability and instability conditions for forward looking multivariate models both without and with lags the results are applied to several monetary policies

real business cycles and the animal spirits hypothesis abstract we calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy these fluctuations are due to the self fulfilling beliefs of investors which we call animal spirits we compare the impulse response functions predicted by our model and by two other more standard models with a four variable vector autoregression on u s data our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data journal of economic literature classification numbers e00 e3 e32