a behavioral model of the credit cycle abstract in a behavioral variant of a new keynesian model in which individuals use simple heuristic rules to forecast future inflation and output if there are limits on the amount of debt that economic agents are allowed to bear we observe occasionally severe downturns differences in beliefs combined with borrowing constraints tend to dampen expansions but give rise to a chain reaction that exacerbates the recessions the model is an example of endogenous credit cycles with expansions severe recessions and persistent inequality in the distribution of wealth monetary policy can both stabilize the economy and cause increased average output

security of electricity supply at the generation level problem analysis abstract since the very beginning of the restructuring process back in 1982 in chile the ability of an electricity market to provide the system with the required level of security of supply has been put into question the mistrust on the ability of the market left to its own devices to provide sufficient generation availability when needed is more and more leading to the implementation of additional regulatory mechanisms this matter is undoubtedly gaining importance and it has taken a key role in the energy regulators agendas in this paper we revisit this discussion under the light of thirty years of electricity market experience we analyze the different reasons why although ideally the market is supposed to provide itself an adequate security of supply at the generation level this result is still far from being achieved in practice

managing unanchored heterogeneous expectations and liquidity traps abstract we study the possibility of almost self fulfilling waves of optimism and pessimism and self fulfilling liquidity traps in a new keynesian model with a continuum of heterogeneous expectations in particular all agents choose based on past forecasting performance expectation values out of a distribution around the targets of the central bank this framework allows us to explicitly model the anchoring of expectations as the variance of this distribution of possible expectation values we find that when the zero lower bound on the nominal interest rate is not binding adequate monetary policy can prevent waves of optimism and pessimism and exclude near unit root dynamics even when expectations are unanchored however as shocks bring the economy to a situation with a binding zero lower bound there is a danger of a long lasting self fulfilling liquidity trap that can take the form of a deflationary spiral this can be prevented if expectations are strongly enough anchored to the targets or if the inflation target is high enough

expectation shocks and learning as drivers of the business cycle psychological factors market sentiments and less than fully rational shifts in beliefs are widely believed to play a role in the economy yet they are rarely considered in macroeconomic models this paper evaluates the empirical role of expectational shocks on business cycle fluctuations the paper relaxes the rational expectations assumption to exploit survey data on expectations in the estimation of a new keynesian model which allows for learning by economic agents expectation shocks affect the formation of expectations and capture waves of optimism and pessimism that lead agents to form forecasts that deviate from those implied by their learning model the empirical results uncover a crucial role for these novel expectations shocks as a major driving force of the u s business cycle expectation shocks regarding future real activity are the main source of economic fluctuations accounting for roughly half of business cycle fluctuations

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

expectations and the stability problem for optimal monetary policies eine auf den fundamentaldaten beruhende regelbindung der geldpolitik ohne selbstverpflichtung die bei vollkommen rationalen erwartungen der privaten akteure optimal ware ist instabil wenn diese akteure de facto den ublichen regeln des adaptiven lernens folgen dieses problem lasst sich dadurch beheben dass die erwartungen privater akteure berucksichtigt und in geeigneter weise in die optimale geldpolitik einbezogen werden diese eindeutige schlusfolgerung gilt auch dann wenn sich der geldpolitische entscheidungstrager und die privaten akteure in einem simultanen lernprozess befinden unsere ergebnisse zeigen wie wichtig es ist die geldpolitik angemessen zu gestalten und dabei nicht nur die fundamentaldaten sondern auch direkt die beobachteten erwartungen privater haushalte und unternehmen zu berucksichtigen

electricity auctions in south america towards convergence of system adequacy and res e support regulatory reforms of the electricity industry in south america have always been prompted by the need of attracting enough investment to cover the fast paced demand growth in order to achieve this goal the countries in the region which in the eighties and early nineties opted for market oriented schemes have rebuilt in the last decade their regulatory frameworks around long term auctioning these new mechanisms initially implemented to attract investment in any sort of conventional generation technology so as to ensure the system adequacy are increasingly being also used to bring in non conventional renewable energy resources these schemes have been until now run in parallel but the steep learning curve of renewable energy sources for electricity res e technologies is apparently opening the door to the implementation of new tendering procedures open to all kinds of generation technologies in this article we review the auction mechanisms for new generation implemented in south america we argue that although the first impression might lead to the conclusion that conventional and res e technologies are in some cases close and even ostensibly competing in the same auctions the fact is that the full convergence is still far to happen as the rules and products applied to the different technologies differ significantly

using an extended lmdi model to explore techno economic drivers of energy related industrial co2 emission changes a case study for shanghai china although investment and r d activities can exert significant effects on energy related industrial co2 emissions eice related factors have not been fairly uncovered in the existing index decomposition studies this paper extends the previous logarithmic mean divisia index lmdi decomposition model by introducing three novel factors r d intensity investment intensity and r d efficiency the extended model not only considers the conventional drivers of eice but also reflects the microeconomic effects of investment and r d behaviors on eice furthermore taking shanghai as an example which is the economic center and leading co2 emitter in china we use the extended model to decompose and explain eice changes also we incorporate renewable energy sources into the proposed model to carry out an alternative decomposition analysis at shanghai s entire industrial level the results show that among conventional macroeconomic factors expanding output scale is mainly responsible for the increase in eice and industrial structure adjustment is the most significant factor in mitigating eice regardless of renewable energy sources the emission reduction effect of energy intensity focused on by the chinese government is less than the expected due to the rebound effect but the introduction of renewable energy sources intensifies its mitigating effect partly resulting from the transmission from the abating effect of industrial structure adjustment the effect of energy structure is the weakest although all the three novel factors exert significant effects on eice they are more sensitive to policy interventions than conventional factors r d intensity presents an obvious mitigating effect while investment intensity and r d efficiency display an overall promotion effect with some volatility the introduction of renewable energy sources intensifies the promotion effect of r d efficiency as a result of the green paradox effect finally we propose that co2 mitigation efforts should be made by considering both macroeconomic and microeconomic factors in order to achieve a desirable emission reduction effect

behavioral heterogeneity in u s inflation dynamics in this article we develop and estimate a behavioral model of inflation dynamics with heterogeneous firms in our stylized framework there are two groups of price setters fundamentalists and rando

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

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

real business cycle theory wisdom or whimsy abstract this paper assesses the empirical plausibility of the view that aggregate productivity stocks account for most of the variability in post world war ii us output we argue that the type of evidence forwarded by proponents of this proposition is too fragile to be believable the answer could be 70 as kydland and prescott 1989 claim but the data contain almost no evidence against either the view that the answer is really 5 or that the answer is really 200 moreover point estimates of the importance of technology shocks are extremely sensitive to small perturbations in the theory depending on the sample period investigated allowing for labor hoarding behavior in an otherwise standard rbc model reduces the ability of technology shocks to account for aggregate fluctuations by between 30 to 60

inflation targeting and liquidity traps under endogenous credibility abstract policy implications are derived for an inflation targeting central bank whose credibility is endogenous and depends on its past ability to achieve its targets this is done in a new keynesian framework with heterogeneous and boundedly rational expectations we find that the region of allowed policy parameters is strictly larger than under rational expectations however when the zero lower bound on the nominal interest rate is accounted for self fulfilling deflationary spirals can occur depending on the credibility of the central bank deflationary spirals can be prevented with a high inflation target and aggressive monetary easing

a market approach to long term security of supply the problem of ensuring that there is enough generation capacity to meet future demand has been an issue in market design since the beginning of the deregulation process although ideally the market itself should be enough to provide adequate investment incentives there are several factors that prevent this result from being achieved and some actual markets have already experienced problems related with a lack of generation capacity a regulatory framework to address this question is presented the procedure is based on an organized market where reliability contracts based on financial call options are auctioned so both their price and their allocation among the different plants are determined through competitive mechanisms this results in a stabilization of the income of the generators and provides a clear incentive for new generation investment with a minimum of regulatory intervention additionally the method represents a market compatible mechanism to hedge demand from the occurrence of high market prices

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

a new keynesian model with heterogeneous expectations abstract within a new keynesian model we incorporate bounded rationality at the individual agent level and we determine restrictions on expectations operators sufficient to imply aggregate is and as relations of the same functional form as those under rationality this result provides dual implications the strong nature of the restrictions required to achieve aggregation serve as a caution to researchers imposing heterogeneous expectations at an aggregate level may be ill advised on the other hand accepting the necessary restrictions provides for tractable analysis of expectations heterogeneity as an example we consider a case where a fraction of agents are rational and the remainder are adaptive and find specifications that are determinate under rationality may possess multiple equilibria in case of expectations heterogeneity

a basic new keynesian dsge model with dispersed information an agent based approach abstract the aim of this paper is to bridge macro agent based models with mainstream macroeconomic models by agentifying the baseline new keynesian dsge model the model features multiple boundedly rational optimizing agents and is analyzed through numerical simulations we exploit the flexibility of agent based modeling to explore the effect of dispersed information on the learning process and on macroeconomic outcomes we find that with dispersed information monetary and fiscal policy acquire the role of public signals

differential interpretation of public signals and trade in speculative markets most models of trade in speculative markets assume that agents interpret public information identically we provide empirical evidence on the relation between the volume of trade and stock returns around public announcements and we argue that the evidence is inconsistent with this assumption we then develop a model of trade around public announcements that incorporates differential interpretations and is consistent with the observed volume return relation then we test the standard model of belief revision underlying most models of trade using stock brokerage research analysts earnings forecasts the hypthesis of identical interpretations seems inconsistent with the forecast revisions in these data

fiscal stimulus in expectations driven liquidity traps abstract i study liquidity traps in a model where agents have heterogeneous expectations and finite planning horizons backward looking agents base their expectations on past observations while forward looking agents have fully rational expectations liquidity traps that are fully or partly driven by expectations can arise due to pessimism of backward looking agents only when planning horizons are finite these liquidity traps can be of longer duration without ending up in a deflationary spiral i further find that fiscal stimulus in the form of an increase in government spending or a cut in consumption taxes can be very effective in mitigating the liquidity trap a feedback mechanism of heterogeneous expectations causes fiscal multipliers to be the largest when the majority of agents are backward looking but there also is a considerable fraction of agents that are forward looking labor tax cuts are always deflationary and are not an effective tool in a liquidity trap

evaluation of methodologies for remunerating wind power s reliability in colombia abstract colombia strives to have enough firm capacity available to meet unexpected power shortages and peak demand this is clear from mechanisms currently in place that provide monetary incentives in the order of nearly us 14 mw h to power producers that can guarantee electricity provision during scarcity periods yet wind power in colombia is not able to currently guarantee firm power because an accepted methodology to calculate its potential firm capacity does not exist in this paper we argue that developing such methodology would provide an incentive to potential investors to enter into this low carbon technology this paper analyzes three methodologies currently used in energy markets around the world to calculate firm wind energy capacity pjm nyiso and spain these methodologies are initially selected due to their ability to accommodate to the colombian energy regulations the objective of this work is to determine which of these methodologies makes most sense from an investor s perspective to ultimately shed light into developing a methodology to be used in colombia to this end the authors developed a methodology consisting on the elaboration of a wind model using the monte carlo simulation based on known wind behaviour statistics of a region with adequate wind potential in colombia the simulation gives back random generation data representing the resource s inherent variability and simulating the historical data required to evaluate the mentioned methodologies thus achieving the technology s theoretical generation data the document concludes that the evaluated methodologies are easy to implement and that these do not require historical data important for colombia where there is almost no historical wind power data it is also found that the spanish methodology provides a higher capacity value and therefore a higher return to investors the financial assessment results show that it is crucial that these types of incentives exist to make viable wind projects in colombia at us 2000 installed kw with the absence of these incentives the project s npv would be negative before and after taxes additionally it is demonstrated that wind power projects would only be viable in colombia if the price of cers is at least us 20 co2e ton furthermore it is concluded that income tax exemptions are not enough to encourage wind power development in colombia

modeling diverse expectations in an aggregated new keynesian model abstract we explore a new keynesian model with diverse beliefs and study the aggregation problems in the log linearized economy we show the solution of these problems depend upon the belief structure agents beliefs are described by individual state variables and satisfy three rationality axioms leading to the emergence of an aggregate state variable named mean market state of belief in equilibrium endogenous variables are functions of mean market belief and this state variable is the tool used to solve the aggregation problems diverse beliefs alter the problem faced by a central bank since the source of fluctuations is not only exogenous shocks but also market expectations due to diverse beliefs the effects of policy instruments are not monotonic and the trade off between inflation and output volatilities is complex also monetary policy can counter the effects of market belief by aggressive anti inflation policy but at the cost of increased volatility of financial markets and individual consumption

interest rate control and nonconvergence to rational expectations this paper investigates the feasibility of a monetary policy aimed at pegging the nominal rate of interest it shows that under general conditions such a policy would produce the well known cumulative process despite the fact that there exists a well behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate the cumulative process shows up as the failure of learning to converge to rational expectations specifically the paper shows first in a conventional is lm model with an expectations augmented phillips curve and then in a micro based finance constraint model that if people follow any learning rule based on experience that satisfies a weak condition then the sequence of temporary equilibria under a policy of interest pegging cannot converge the nonconvergent path that will be observed accords with the familiar cumulative process in that inflation accelerates if the market rate of interest has been pegged below the natural rate

robustly optimal monetary policy with near rational expectations the paper considers optimal monetary stabilization policy in a forward look ing model when the central bank recognizes that private sector expectations need not be precisely model consistent and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model consistency it is found that commitment continues to be important for optimal policy that the optimal long run inflation target is unaffected by the degree of potential distortion of beliefs and that optimal policy is even more history dependent than if rational expectations are assumed jel c62 d84 el 3 e31 e32 e52 an extensive literature has considered the optimal conduct of monetary policy under the assumption of rational or model consistent expectations this literature has found that it is quite important to take account of the effects of the systematic and hence predictable compo nent of monetary policy on expectations for example it is found quite generally that an optimal policy commitment differs from the policy that would be chosen through a sequential optimiza tion procedure with no advance commitment of future policy it is also found quite generally that optimal policy is history dependent a function of past conditions that no longer affect the degree to which it would be possible to achieve stabilization aims from the present time onward 1 both of these conclusions depend critically however on the idea that an advance commitment of future policy should change people s expectations at earlier dates this may lead to the fear that analyses that assume rational expectations re exaggerate the degree to which a policy authority can rely upon private sector expectations to be shaped by its policy commitments in precisely the way that it expects them to be what if the relation between what a central bank plans to do and what the public will expect to happen is not quite so predictable might both the case for advance commitment of policy and the case for history dependent policy be considerably weakened under a more skeptical view of the precision with which the public s expectations can be predicted one way of relaxing the assumption of rational expectations is to model agents as forecasting using an econometric model the coefficients of which they must estimate using data observed prior to some date sampling error will then result in forecasts that depart somewhat from pre cise consistency with the analyst s model 2 however selecting a monetary policy rule on the basis of its performance under a specific model of learning runs the risk of exaggerating the degree to which the policy analyst can predict and hence exploit the forecasting errors that result from a particular way of extrapolating from past observations one might even conclude

heterogeneous expectations in monetary dsge models this paper derives a general new keynesian framework with heterogeneous expectations by explicitly solving the micro foundations underpinning the model the resulting reduced form is analytically tractable and encompasses the representative rational agent benchmark as a special case we specify a setup in which some agents as a result of cognitive limitations make mistakes when forecasting future macroeconomic variables and update their beliefs as new information becomes available while other agents have rational expectations we then address determinacy issues related to the use of different interest rate rules and derive policy implications for a monetary authority aiming at stabilizing the economy in a dynamic feedback system in which macroeconomic variables and heterogeneous expectations co evolve over time

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

social learning and monetary policy rules we analyse the effects of social learning in a monetary policy context social learning might be viewed as more descriptive of actual learning behaviour in complex market economies in our model taylor principle governs uniqueness and expectational stability of rational expectations equilibrium ree under homogeneous recursive algorithms we find that the taylor principle is not necessary for convergence to ree minimum state variable msv equilibrium under social learning sunspot equilibria exist in the indeterminate region our agents cannot co ordinate on a sunspot equilibrium in general form specification however they can co ordinate on common factor specification we contribute to the use of genetic algorithm learning in stochastic environments

the role of expectations in economic fluctuations and the efficacy of monetary policy we show diverse beliefs is an important propagation mechanism of fluctuations money non neutrality and efficacy of monetary policy since expectations affect demand our theory shows economic fluctuations are mostly driven by varying demand not supply shocks using a competitive model with flexible prices in which agents hold rational belief see kurz 1994 we show that i our economy replicates well the empirical record of fluctuations in the u s ii under monetary rules without discretion monetary policy has a strong stabilization effect and an aggressive anti inflationary policy can reduce inflation volatility to zero iii the statistical phillips curve changes substantially with policy instruments and activist policy rules render it vertical iv although prices are flexible money shocks result in less than proportional changes in inflation hence the aggregate price level appears sticky with respect to money shocks v discretion in monetary policy adds a random element to policy and increases volatility the impact of discretion on the efficacy of policy depends upon the structure of market beliefs about future discretionary decisions we study two rationalizable beliefs in one case market beliefs weaken the effect of policy and in the second beliefs bolster policy outcomes and discretion could be a desirable attribute of the policy rule since the central bank does not know any more than the private sector real social gain from discretion arise only in extraordinary cases hence the weight of the argument leads us to conclude that bank s policy should be transparent and abandon discretion except for rare and unusual circumstances vi an implication of our model suggests the current effective policy is only mildly activist and aims mostly to target inflation

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

blue chip rationality tests this paper tests the rationality of forecasts made by individuals who contribute to the blue chip consensus forecasting service and tries by means of a questionnaire on forecasting methods to establish why some forecasters appear more rational than others tests based on consensus forecasts prove unreliable as guides to the number of individuals who produce rational forecasts individual forecasts are more likely to be rational if they are based on a mainstream economic theory and incorporate a substantial element of judgment copyright 1991 by ohio state university press

managing monetary policy in a new keynesian model with many beliefs types this paper considers a standard new keynesian model with heterogeneous expectations on the future level of inflation and output a biased perception of the target pursued by the central bank may arise due to idiosyncrasies in information processing leading to heterogeneous beliefs about the target we consider an arbitrarily large number of agents beliefs and apply the concept of large type limit we find that an increase in the sensitivity of agents in selecting the optimal prediction strategy or in the spread of beliefs is crucial for the extent of the central bank to stabilize the economy when the predictors are largely dispersed around the target the taylor principle is a requisite for stability since it prevents the self fulfilling reinforcement mechanism between the realizations of the relevant macroeconomic variables and the forecasts of the agents when the set of beliefs is somehow anchored to the target stability can be achieved with weaker monetary policy

an assessment of wind power prospects in the brazilian hydrothermal system abstract despite the need to reduce greenhouse gases thermoelectric power plants were the main winners in electricity auctions held until 2009 this study evaluates the possibility of improving the prospects of increasing the clean and renewable energy mix the new official energy plan for 2030 prepared for the brazilian government by the energy research company epe 1 forecasts a relative increase in thermal generation using natural gas coal and nuclear energy in contrast to this plan this study considers wind generation as a complement to hydropower rather than fossil and nuclear energy previously the analysis of seasonal complementarities in brazil between average inflow hydraulic energy anah and average inflow wind energy anaw has been generally focused on an intra annual period however in this study an initial effort is made to analyze the multiannual complementarities of the two sources the wind technology learning curve in brazil and worldwide was investigated and the results show the potential of competitiveness of wind power compared with other sources such as nuclear power gas and coal the replacement of thermal based expansion by wind power was simulated by a comparative analysis of the net present value npv of fuel operation maintenance and capital costs including the potential learning time of both scenarios the npv results indicate that the total costs of wind generation represent 57 of the total thermal costs showing its potential attractiveness and that it facilitates the reduction of the emission of greenhouse gases taking into account the population and the stabilization of energy demand in the 2040s the possibility of meeting the energy demand of brazil through renewable and sustainable energy sources mainly hydropower and wind power is demonstrated