monetary union price level convergence and inflation how close is europe to the usa abstract the pattern of price dispersion across european and us cities from 1990 to 2004 is documented there is a striking decline in dispersion for traded goods prices in europe most of which took place prior to the launch of the euro dispersion in the euro area is now quite close to that of the usa this evidence provides useful facts for future work assessing the importance of various developments in europe harmonization of tax rates convergence of incomes and labor costs liberalization of trade and factor markets and increased coherence of monetary policy

the effect of utility time varying pricing and load control strategies on residential summer peak electricity use a review abstract peak demand for electricity in north america is expected to grow challenging electrical utilities to supply this demand in a cost effective reliable manner therefore there is growing interest in strategies to reduce peak demand by eliminating electricity use or shifting it to non peak times this strategy is commonly called demand response in households common strategies are time varying pricing which charge more for energy use on peak or direct load control which allows utilities to curtail certain loads during high demand periods we reviewed recent north american studies of these strategies the data suggest that the most effective strategy is a critical peak price cpp program with enabling technology to automatically curtail loads on event days there is little evidence that this causes substantial hardship for occupants particularly if they have input into which loads are controlled and how and have an override option in such cases a peak load reduction of at least 30 is a reasonable expectation it might be possible to attain such load reductions without enabling technology by focusing on household types more likely to respond and providing them with excellent support a simple time of use tou program can only expect to realise on peak reductions of 5

a class of monotone economies in which rational expectations equilibria exist but prices do not reveal all information abstract some economies having excess demands which depend monotonically on agents information signals are examined if there are no multiple market clearing prices then these economies have strict rational expectations equilibria in which equilibrium prices alone do not transmit all information

on the electrical two part tariff the brazilian perspective this paper discusses in terms of brazil s situation the use of a nonlinear pricing approach in the application of a two part tariff to electricity distribution networks the principles that uphold charging access and usage are to optimize energy systems that are based on a generation technology mix such a pricing approach is used in brazil where the generation mix is mainly hydro generation this study shows that in a case like brazil s a two part tariff may be used as a tool for network optimization the paper presents a design for a two part tariff for a distribution system with varying consumer behavior to validate the discussion we offer a numerical example finally remarks are given concerning pricing access and usage for low voltage level consumers

analytical approximations in models of hysteresis decisions made under ongoing uncertainty and costly reversibility entail a range of the state variable where inaction is optimal which in turn produces hysteresis permanent effects of temporary shifts the range is usually defined by non linear equations that need numerical solutions in this paper a technique of analytical approximations is developed and applied to two models menu costs and investment the resulting explicit solutions help clarify why hysteresis is important even for small irreversibility in the menu cost model hysteresis is two orders of magnitude larger than under the akerlof yellen or mankiw assumptions when decisions that are costly to reverse are made under conditions of ongoing uncertainty the optimum policy usually entails a range of inertia the action should be taken only when the value of the underlying state variable becomes especially favourable and reversed only when it becomes especially unfavourable there is an intermediate range over which inaction is optimal this in turn gives rise to hysteresis starting from a value in the range of inertia if the state variable crosses the action trigger point and then returns to its original level the action will be taken but not reversed thus a temporary change will leave a permanent effect numerical solutions for models of irreversible investment show that the range of inaction is remarkably large even when the cost of reversal is small see brennan and schwartz 1985 constantinides 1986 and dixit 1989a b for examples of this unfortunately the equations tlhat determine the optimum policy are highly non linear they do not have analytical solutions therefore we lack a clearer and more general understanding of why hysteresis is numerically so important in this paper i derive analytical approximations for the solutions of more general problems of this kind when the costs of change are small the idea that small costs of change induce large amounts of inertia has been popularized in the model of akerlof and yellen 1985 mankiw 1985 and others in these models second order small costs of making price changes yield price stickiness in response to first order changes in the money supply this is a simple application of the envelope theorem but these models are static and their application to a dynamic reality must assume either permanent shocks or static expectations when there is ongoing uncertainty which is rationally expected by the decision maker the option value of the status quo enlarges the zone where inaction is optimal adding these features to the mankiw akerlof yellen may model i show that fourth order small costs of change generate first order inertia

monetary union with voluntary participation a monetary union is modelled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy within a fully dynamic context we show that such an arrangement may dominate a regime with independent national currencies two new results are delivered by the voluntary participation assumption first the optimal plan is shown to respond to a country s temptation to leave the union by tilting both current and future policy in its favour this yields a non linear rule according to which each country weight in policy decisions is time varying and depends on its incentive to abandon the union second we show that there might be conditions such that a break up of the union as has occurred in some historical episodes is efficient the paper thus provides a first formal analysis of the incentives behind the formation sustainability and disruption of a monetary union

optimal two part tariffs in a model of discrete choice abstract in this paper we study welfare optimal two part tariffs in a model of discrete choice the determinants of the sign and magnitude of the fixed and variable tax are analysed in terms of the nature and degree of consumer heterogeneity the price sensitivities of participation probabilities and conditional demands and the nature of distributional concerns in the absence of distributional concerns the model generalises the corrected ramsey rule for the variable tax and it shows that in the absence of collection or fixed participation costs the fixed fee may be negative the conditions that determine the sign of the participation fee turn out to have an intuitive economic interpretation finally the implications of distributional concerns for the optimal fixed and variable taxes are analysed

price stability in open economies this paper studies the conditions under which price stability is the optimal policy in a two country open economy model with imperfect competition and price stickiness special conditions on the levels of country specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied these restrictions apply to both cooperative and non cooperative settings most importantly we show that cooperative and non cooperative solutions do not coincide despite market completeness and producer currency pricing in this framework our analysis suggests a role for international policy coordination

confidence intervals for half life deviations from purchasing power parity existing point estimates of half life deviations from purchasing power parity ppp around 3 5 years suggest that the speed of convergence is extremely slow this article assesses the degree of uncertainty around these point estimates by using local to unity asymptotic theory to construct confidence intervals that are robust to high persistence in small samples the empirical evidence suggests that the lower bound of the confidence interval is between four and eight quarters for most currencies which is not inconsistent with traditional price stickiness explanations however the upper bounds are infinity for all currencies so we cannot provide conclusive evidence in favor of ppp either

electricity portfolio management optimal peak off peak allocations electricity purchasers manage a portfolio of contracts in order to purchase the expected future electricity consumption profile of a company or a pool of clients this paper proposes a mean variance framework to address the concept of structuring the portfolio and focuses on how to optimally allocate positions in peak and off peak forward contracts it is shown that the optimal allocations are based on the difference in risk premiums per unit of day ahead risk as a measure of relative costs of hedging risk in the day ahead markets the outcomes of the model are then applied to show i that it is typically not optimal to hedge a baseload consumption profile with a baseload forward contract and ii that under reasonable assumptions risk taking by the purchaser is rewarded by lower expected costs

integration of price cap and yardstick competition schemes in electrical distribution regulation the disadvantages of traditional rate of return regulation for distribution tariffs have led to he development of new regulatory schemes to stimulate efficiency in the provision of the service under what has been called benchmark regulation the paper assesses the chilean model company regulation that aims at making the private distribution monopoly compete with a reference efficient model company through a yardstick competition approach it compares it with the price cap scheme used in electricity distribution in england and wales it contributes with a proposal to integrate both schemes the proposed hybrid methodology is developed and evaluated capturing the best characteristics of both regulatory schemes mathematical models to relate operational costs with electrical variables are developed

real exchange rate behavior abstract using random simulations with artificial data with identical sample characteristics to the long sample exchange rate data employed by lothian and taylor lothian j r and taylor m p 1996 the recent float from the perspective of the past two centuries journal of political economy 104 488 509 we show that standard unit root tests have extremely low power over sample sizes corresponding to the recent float the probability of rejecting the null hypothesis when it is false is extremely low with 20 years or even 50 years of data and only reaches an acceptable level over much longer spans

price index convergence among united states cities we study the dynamics of price indices for major u s cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate in a panel of 19 cities from 1918 to 1995 we estimate the half life of convergence to be approximately nine years the surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs differential speeds of adjustment to small and large shocks and the inclusion of nontraded goods prices in the overall price index do price indices in major u s cities share a common trend and if so how quickly do they revert to that trend following a local shock to the price index to answer this question we study the dynamics of consumer price indices for 19 major u s cities over the period from 1918 to 1995 the panel time series methods we employ are now commonly used for studying real output growth rates and levels of real exchange rates across countries we estimate that price index divergences across u s cities are temporary but surprisingly persistent with a half life of nearly nine years our research has two primary motivations first we hope to gain a better understanding of the sources of persistence in the deviations from purchasing power parity ppp found in studies of national price indices and exchange rate data second and more importantly we see the european monetary union as having many similarities to the united states and believe that studying the behavior of prices across u s cities will help us in understanding the likely nature of inflation convergence in the euro area the european central bank s stated inflation objective is a year on year change in the harmonized index of consumer prices hicp of not more than 2 but how large might we expect regional deviations from this euro area wide average to be and how long are they likely to persist the lack of data prevents us from answering this question directly using european prices under monetary union instead we look to the united states a mature common currency area of similar regional diversity size and industrial development

optimization and analysis of the profitability of tariff structures with two part tariffs abstract service providers often offer tariff structures with several two part tariffs that consist of a fixed fee and a usage price such that consumers may pick the tariff they prefer prices of tariffs have significant impacts on service providers profit because they simultaneously influence consumers tariff choices and their usage the number of tariffs also plays an important role because more tariffs segment the market better but also increase the administrative burden and require more marketing effort this article presents a mixed integer nonlinear programming optimization problem to determine profit maximizing tariffs compares several heuristic search methods in particular the gradient method stochastic search and simulated annealing to solve this problem analyses the profitability of different tariff structures and outlines the factors that drive differences in profitability across various tariff structures the results show that especially for large samples of more than 100 consumers simulated annealing performs best and deviates only 0 2 from the optimum structures with fewer two part tariffs are generally sufficient because additional two part tariffs only negligibly increase service providers profit

design of experiments applied to environmental variables analysis in electricity utilities efficiency the brazilian case abstract benchmarking plays a central role in the regulatory scene regulators set tariffs according to a performance standard and if the companies can outperform such a standard they can retain the gains observed by such outperformance efficiency performance is usually assessed by comparison or a benchmark against either other companies or the company s own historical performance this paper discusses the impact of environmental variables on the efficiency performance of electricity distribution companies indeed such variables which are argued to be unmanageable may affect the electricity utilities performance thus this paper proposes a simulation methodology based on design of experiment philosophy for statistically testing environmental variables and the interactions among them enabling regulators to build the best suited semi parametric two stage model of electricity utility benchmarking analysis to demonstrate the power of the proposed approach experimental simulations are carried out using real data published by brazil s regulator the results show that environmental variables may impact efficiency performance linearly and nonlinearly

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

price setting with menu cost for multi product firms we model the decisions of a multiproduct firm that faces a fixed menu cost once it is paid the firm can adjust the price of all its products we characterize analytically the steady state firm s decisions in terms of the structural parameters the variability of the flexible prices the curvature of the profit function the size of the menu cost and the number of products sold we provide expressions for the steady state frequency of adjustment the hazard rate of price adjustments and the size distribution of price changes all in terms of the structural parameters we study analytically the impulse response of aggregate prices and output to a monetary shock the size of the output response and its duration both increase with the number of products they more than double as the number of products goes from 1 to 10 quickly converging to the response of taylor s staggered price model

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

the purchasing power parity persistence paradigm abstract rogoff journal of economic literature 1996 34 647 668 describes the remarkable consensus of 3 5 year half lives of purchasing power parity deviations among studies using long horizon data these studies however focus on rejections of unit roots in real exchange rates and do not use appropriate techniques to measure persistence our half life estimates explicitly account for serial correlation sampling uncertainty and most importantly small sample bias calculating confidence intervals as well as point estimates for long horizon and post 1973 data we find that even though most of the point estimates lie within the 3 5 year range univariate methods provide virtually no information regarding the size of the half lives

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

a note on bankruptcy rules and credit constraints in temporary equilibrium in this note it is argued that bankruptcy rules and credit constraints are intrinsically related concepts bankruptcy occurs because credit is constrained by introducing the concept of a consistent credit rationing scheme it can be shown that a temporary equilibrium exists if credit rationing is consistent and if lenders have more conservative expectations with regard to the borrower s future repayment capability than the borrower

trade and revelation of information abstract we consider an economy with asymmetric information and two types of agents fully informed and uninformed uninformed agents update their information observing equilibrium prices and the equilibrium levels of other agents excess demand we show that for a generic set of economies there are rational expectations equilibria which are partially revealing on an open dense set of signals of positive lebesgue measure provided that the dimension of the signal space is sufficiently larger than the dimension of the commodity space

rethinking optimal currency areas the traditional mundellian criterion which implicitly assumes commitment to monetary policy is that countries with similar shocks should form unions without such commitment a new criterion emerges countries with dissimilar temptation shocks namely those that exacerbate time inconsistency problems should form unions critical to this new criterion is the idea that monetary policy is benevolent in that it takes into account the interests of all the countries in the union when countries have dissimilar temptation shocks benevolent unions can help overcome the time inconsistency problems that individual countries face existing unions can strictly gain by admitting new members with more severe time inconsistency problems because policy in the expanded union is less sensitive to the temptation shocks of members of the existing union

a real options perspective on the future of the euro abstract a break up of the eurozone is no longer regarded as implausible this will be a costly and irreversible decision in conditions of continuing uncertainty therefore it is amenable to analysis in the real options framework we do so by solving as an n dimensional optimal stopping problem with country specific shocks and convergence of member economies we compare a complete break up with individual country departures in calibrated solutions for a symmetric case we find a non negligible but small option value furthermore we find a new theoretical result on the non monotonicity of abandonment threshold with respect to volatility

implementation under ambiguity abstract we introduce the idea of implementation under ambiguity in particular we study maximin efficient notions for an ambiguous asymmetric information economy i e economies where agents preferences are maximin a la wald 1950 the interest on the maximin preferences lies in the fact that maximin efficient allocations are always incentive compatible de castro and yannelis 2009 a result which is false with bayesian preferences a noncooperative notion called maximin equilibrium is introduced which provides a noncooperative foundation for individually rational and maximin efficient notions specifically we show that given any arbitrary individually rational and ex ante maximin efficient allocation there is a direct revelation mechanism that yields the efficient allocation as its unique maximin equilibrium outcome thus an incentive compatible individually rational and efficient outcome can be reached by means of noncooperative behavior under ambiguity

sharing risk and ambiguity we study the market implications of ambiguity in common models we show that generic determinacy is a robust feature in general equilibrium models that allow a distinction between ambiguity and risk

the generic existence of rational expectations equilibrium in the higher dimensional case abstract the study of the generic existence of rational expectations equilibrium has concentrated on three cases according to whether the space of states of private information has dimension less than equal to or greater than the price space previous results have shown that in the first case fully revealing equilibria exist generically and in the second case there are open sets of environments with no equilibrium this paper shows that in the third case there is a residual set of environments which permits equilibria which are arbitrarily close to fully revealing

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

learning hypothesis testing and rational expectations equilibrium abstract foster and young 2003 provide a model of learning by hypothesis testing that spends almost all of the time approximating nash equilibria of a repeated game here i extend this learning model to a macroeconomic setting where agents decisions are informed by hypotheses they hold regarding the economy they periodically test these hypotheses against observed data and replace them if they fail under certain conditions agents who learn in this way spend a large fraction of the time approximating rational expectations equilibria

the existence of fully rational expectations approximate equilibria with noisy price observations abstract nonrevealing fully rational expectations approximate equilibria exist in microeconomic pure exchange economies in which uninformed agents have suitably dispersed noisy price observations such traders maximize a state dependent expected utility conditional on the price vector they observe the distributions of noisy price observations and the correct equilibrium relationship between states of the world and prices in equilibrium aggregate excess demand is small with high probability in every state of the world and its expectation is also small this magnitude diminishes as the noisy price observations become more accurate equilibria are obtained by applying a fixed point argument to state dependent excess demand functions which are smooth because of the noisy price observations

electricity tariff design for transition economies application to the libyan power system this paper presents a general electricity tariff design methodology especially applicable for transition economies these countries are trying to modernize their power systems from a centralized environment with normally a public vertically integrated electric company to a liberalized framework unbundling electricity companies and eventually starting a privatization process two issues arise as crucial to achieving a successful transition i ensuring cost recovery for all future unbundled activities generation transmission distribution and retailing and ii sending the right price signals to electricity customers avoiding cross subsidies between customer categories the design of electricity tariffs plays a pivotal role in achieving both objectives this paper proposes a new tariff design methodology that complying with these two aforementioned criteria requires a low amount of information regarding system data and customer load profiles this is important since typically volume and quality of data are poor in those countries the presented methodology is applied to computing tariffs for the libyan power system in 2006 using real data

generic existence of completely revealing equilibria for economies with uncertainty when prices convey information conditions which imply the existence of strict rational expectations equilibria for most static pure exchange economies where prices convey information about the state of the world are analyzed information is aggregated and transmitted by prices because agents have different initial information and maximize the conditional expectation of state dependent utility functions major results state that if with probability one agents characteristics do not vary too much as the state of the world varies then generically there exist equilibrium price functions which reveal all initial information more precisely if the support of the image measure is contained in a compact c1 manifold satisfying some technical conditions which is of sufficiently low dimension relative to the number of commodities then existence of completely revealing equilibria is generic any economy satisfying these assumptions can be approximated by a sequence of economies which also obey these assumptions and have completely revealing equilibrium price functions slight perturbations do not destroy the existence property

optimal monetary and fiscal policy in a currency union we lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union the monetary authority sets a common interest rate for the union whereas fiscal policy is implemented at the country level through the choice of government spending in the presence of country specific shocks and nominal rigidities the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank whereas fiscal policy has a country specific stabilization role one beyond the efficient provision of public goods

endogenous borrowing constraints with incomplete markets this article develops ways to endogenize the borrowing constraints used in a class of computable incomplete markets models we allow the constraints to depend on an investor s characteristics such as time preference risk aversion and income streams the proposed constraint can be interpreted as a borrowing limit within which an investor has no incentive to default using a numerical algorithm we find that for an array of structural parameters the endogenous borrowing constraints can be much less stringent than the ad hoc borrowing constraints adopted by the existing studies

on endogenous formation of price expectations abstract we study a two period exchange economy with complete financial markets and endogenous borrowing constraints contrary to perfect foresight paradigm we assume that agents are heterogeneous in their ability to forecast future prices we introduce a new equilibrium concept called informationally constrained equilibrium where the formation of price expectations is endogenous and reflects the revelation of information from observing bounds on liabilities designed to ensure solvency at any contingency we prove that under standard assumptions an equilibrium always exists and we characterize the degree of information revealed by the endogenous debt limits

bankruptcies in temporary equilibrium forward markets with and without institutional restrictions sufficient conditions are found for the existence of an orderly sequence of temporary equilibria in economies with incomplete forward markets without exogenous limits on short sales in the absence of institutionally imposed trade restrictions equilibrium exists under the assumption of overlapping expectations in the institutional model a clearinghouse imposes rules of trade interpreted as margin requirements to reduce the likelihood of bankruptcies under this rule equilibrium exists without overlapping expectations and subsequent bankruptcies are less likely

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

decision theory under ambiguity we review recent advances in the field of decision making under uncertainty or ambiguity we start with a presentation of the general approach to a decision problem under uncertainty as well as the standard bayesian treatment and issues with this treatment we present more general approaches choquet expected utility maximin expected utility smooth ambiguity and so forth that have been developed in the literature under the name of models of ambiguity sensitive preferences we draw a distinction between fully subjective models and models incorporating explicitly some information we review definitions and characterizations of ambiguity aversion in these models we mention the challenges posed by some of the models presented we end with a review of part of the experimental literature and applications of these models to economic settings

the purchasing power parity debate originally propounded by the 16th century scholars of the university of salamanca the concept of purchasing power parity ppp was revived in the interwar period in the context of the debate concerning the appropriate level at which to re establish international exchange rate parities broadly accepted as a long run equilibrium condition in the post war period it first was advocated as a short run equilibrium by many international economists in the first few years following the breakdown of the bretton woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s accordingly over the last three decades a large literature has built up that examines how much the data deviated from theory and the fruits of this research have provided a deeper understanding of how well ppp applies in both the short run and the long run since the mid 1990s larger datasets and nonlinear econometric methods in particular have improved estimation as deviations narrowed between real exchange rates and ppp so did the gap narrow between theory and data and some degree of confidence in long run ppp began to emerge again in this respect the idea of long run ppp now enjoys perhaps its strongest support in more than 30 years a distinct reversion in economic thought

asymmetric information nonadditive expected utility and the information revealed by prices an example i develop a simple example of a model in which agents have asymmetric information and preferences that are represented by a nonadditive expected utility function the a priori uninformed agent after observing the equilibrium price has conditional beliefs that remain nonadditive then even when the equilibrium price function is fully revealing i e one to one it may be worth while for an a priori uninformed agent to buy redundant private information if he is more confident in that information than in that revealed by the price system

ambiguity made precise a comparative foundation the theory of subjective expected utility has been recently extended to allow ambiguity to matter for choice we propose a notion of absolute ambiguity aversion by building on a notion of comparative ambiguity aversion we characterize it for a preference model which encompasses some of the most popular models in the literature we next build on these ideas to provide a definition of unambiguous act and event and show the characterization of the latter as an illustration we consider the classical ellsberg 3 color urn problem and find that the notions developed in the paper provide intuitive answers journal of economic literature classification number d81

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

the revelation of information and self fulfilling beliefs abstract at a rational expectations equilibrium ree individuals are assumed to know the map from states to prices this hypothesis has two components that agents agree consensus and that they have point expectations degeneracy we consider economies where agents beliefs are described by a joint distribution on states and prices and these beliefs are fulfilled at equilibrium beliefs are self fulfilling if every price in the support of the distribution is an equilibrium price the corresponding equilibria are beliefs equilibria be the further restriction that agents have the same beliefs results in common beliefs equilibria cbe we study the relationship between be cbe and ree thus isolating the role of consensus and of degeneracy in achieving rational expectations journal of economic literatureclassification numbers d51 d82

partially revealing rational expectations equilibrium in a competitive economy abstract a class of pure exchange economies is considered in which some agents are informed of private information and others are uninformed existence of a partially revealing rational expectations equilibrium ree is proved without restricting attention to particular functional forms for utility functions and probability distributions without introducing noise into the model and without departing from the standard definition of ree the equilibrium is robust in the sense that if the primitives of the economy are slightly perturbed the economy continues to have a qualitatively similar ree with somewhat stronger assumptions placed on the economy the equilibrium is also the unique measurable ree