why should central banks avoid the use of the underlying inflation indicator abstract this paper assesses the usefulness of the commonly used underlying inflation indicator in light of the criteria proposed in marques et al evaluating core inflation indicators mimeo 2001 empirical evidence for a group of six countries strongly suggests that the use of underlying inflation as an indicator of trend inflation should be avoided

the possibility of informationally efficient markets abstract a rational expectations equilibrium with positive demand for financial information does exist under fully revealing asset price contrary to a wide held conjecture whereas a continuum of investors is inconsistent with fully revealing equilibrium finitely many investors with average portfolios demand information in equilibrium if they can adjust portfolio size in an additive signal return model more information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off under fully revealing price information market equilibria both with and without information acquisition are pareto efficient

dynamic predictor selection in a new keynesian model with heterogeneous expectations abstract this paper introduces dynamic predictor selection into a new keynesian model with heterogeneous expectations and examines its implications for monetary policy we extend branch and mcgough 2009 by incorporating endogenous time varying predictor proportions along the lines of brock and hommes 1997 we find that periodic orbits and complex dynamics may arise even if the model under rational expectations has a unique stationary solution the qualitative nature of the non linear dynamics turns on the interaction between hawkishness of the government s policy and the extrapolative behavior of non rational agents

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

side effects of nonlinear profit taxes in an evolutionary market entry model abrupt changes coexisting attractors and hysteresis problems in order to demonstrate that nonlinear tax systems may have surprising and potentially undesirable side effects we develop an evolutionary market entry model in which firms decide on the basis of past profit opportunities whether or not to enter a competitive market our main focus is on the case of a proportional tax on positive profits such a piecewise linear tax scheme induces a kink in the firms profit functions and may lead to abrupt changes in a market s dynamics coexisting attractors and hysteresis problems since these phenomena can also be observed in more general models a proper understanding of their basic mechanism may be helpful to explain the intricate behavior of many economic systems

heterogeneous expectations adaptive learning and evolutionary dynamics this paper presents a linear self referential macroeconomic model with the possibility of multiple equilibria where agents have the choice of using one of two forecasting models one of minimum state variable form and the other of sunspot form to form expectations of current and future prices endogenous predictor selection is modeled as an evolutionary game where individuals choose among the forecasting models based on relative performance some nash solutions are not relevant as they are not stable under evolutionary or adaptive learning finally it is shown that the sunspot equilibrium is fragile against temporary shocks to information costs

a note on the empirical effectiveness of formal fiscal restraints abstract an important agrument in the current debate over european monetary integration is that a monetary union requires formal fiscal restraints limiting individual member states budgetary powers to reduce the common monetary authority s risk of having to bail out insolvent member governments this note presents empirical evidence on the effectiveness of fiscal restraints on state budgets in the united states nonparametric tests reveal that fiscal restraints significantly affect the probability of fiscal choices and performance without however preventing extreme outcomes fiscal restraints induce substitution of nonrestricted for restricted debt instruments

the persistence of social strategies under increasing competitive pressure abstract in this paper we study the long run outcome if firms are repeatedly matched to play a n firm cournot oligopoly game and can select their type of business objective firms can either be profit maximizing or socially concerned also pursuing consumer welfare we use an indirect evolutionary approach to distinguish between the endogenous profit maximizing choice of the firms business objectives and their corresponding market behavior our main result is that the prospects of long run survival of firms pursuing social strategies strongly depends on the number of firms in the industry if a social strategy entails higher marginal production costs it is best suited if the number of firms in the industry is not too large in particular we demonstrate that the relation between long survival and the level of competitiveness of the industry is inverse u shaped we confirm this result by using the concept of coalition stability and further show that if a high number of firms adopt a social strategy welfare might be lower than with just profit maximizing firms

should generational accounts replace public budgets and deficits the author assesses the concept of generational accounts and the specific accounts constructed by alan auerbach jagadeesh gokhale and laurence kotlikoff 1991 although these accounts support the assertion of present orientation in fiscal policy they rest on numerous assumptions based on judgments that are open to question these involve the treatment of the public budget constraint the benefits from public exhaustive expenditures economic and population projections the discount rate and fiscal incidence alternative and equally reasonable assumptions could yield radically different conclusions the author concludes that the auerbach gokhale and kotlikoff accounts should not replace the annual public budget as they argue

behavioural heterogeneity under evolutionary pressure macroeconomic implications of costly optimisation a model is developed in which a continuum of agents makes interdependent output decisions in a stochastic environment characterised by strategic complementarity two groups are distinguished naive agents follow a costless adaptive expectations rule while sophisticated agents incur an optimisation cost to achieve self fulfilling expectations the paper studies the dynamics generated as the population composition evolves under pressure of differential payoffs sophisticated agents are favoured if optimisation is cheap or the stochastic environment highly variable but naive agents generally persist a higher long run share of sophisticated agents is associated with greater output variability and low output persistence several attempts have been made in the recent macroeconomic literature to explore the implications of allowing for behavioural heterogeneity among economic agents typically the standard postulates of unbounded rationality are held to apply only to a subset of the population while the remainder is assumed to behave in accordance with some alternative specification the nature of which depends on the situation being analysed akerlof and yellen

learning and adaptation s impact on market efficiency a dynamic model with learning and adaptation captures the evolution in trader beliefs and trading strategies through a process of learning and observation traders improve their understanding of the market traders also engage in a process of adaptation by switching between trading strategies based on past performance the asymptotic properties are derived analytically demonstrating that convergence to efficiency depends on the model of adaptation

searching for political business cycles in germany one reslt of the revitalised literature on political business cycles is that there are signs in german data that elections and ideology have an impact however using monthly data for the period 1950 1989 and standard methods of time series analysis we reject both the nordhaus hypothesis of opportunistic cycles and the partisan approaches by hibbs ans alesina we show that some results are sensitive to the assumption of stationarity there are signs of policy cycles in m1 it is hard though to bring this in line with the rogoff hypothesis of rational opportunistic cycles because of the german institutional setting

expectation calculation and macroeconomic dynamics the authors establish a framework wherein agents make expectation revision decisions subject to a specified calculation technology and preferences over forecast errors the technology endows agents with correctly specified economic models but the cost of expectation calculation using these models leads to gradual and incomplete adjustment to long run rational expectation equilibrium the rational expectations hypothesis emerges as a special case of the equilibrium paths obtained in the authors framework in a natural rate model of monetary policy calculation technology gives rise to long run nonneutrality and hysteresis effects and incomplete adjustment of forecast rules causes output fluctuations to be amplified copyright 1992 by american economic association

adaptive learning and distributional dynamics in an incomplete markets model abstract recent research shows that several dsge models provide a closer fit to the data under adaptive learning this paper extends this research by introducing adaptive learning in the model of krusell and smith 1998 with uninsurable idiosyncratic risks and aggregate uncertainty a first contribution of this paper establishes that the equilibrium of this framework is stable under least squares learning the second contribution consists of showing that bounded rationality enhances the ability of this model to match the distribution of income in the us learning increases significantly the gini coefficients because of the opposite effects on consumption of the capital rich and of the capital poor agent the third contribution is an empirical exercise that shows that learning can account for increases in the income gini coefficient of up to 25 in a period of 28 years overall these findings suggest that adaptive learning has important distributional repercussions in this class of models

the elusive costs and the immaterial gains of fiscal constraints we study whether fiscal restrictions affect volatilities and correlations of macrovariables and the probability of excessive debt for a sample of 48 us states fiscal constraints are characterized with a number of indicators and volatilities and correlations are computed in several ways the second moments of macroeconomic variables in states with different fiscal constraints are economically and statistically similar excessive debt and the mechanism linking budget deficit and excessive debts are independent of whether tight or loose fiscal constraints are in place creative budget accounting may account for the results

rational expectations may lead to complex dynamics in a muthian cobweb model with heterogeneous agents abstract starting from a muthian cobweb model we extend the profit based evolutionary setting in hommes and wagener 2010 by assuming that in addition to pessimistic optimistic and unbiased fundamentalists the market is populated by rational producers which correctly anticipate the next period price thanks to their introduction we find that differently from the framework in hommes and wagener 2010 the map governing the dynamics is no more monotonically decreasing hence if on the one hand adding rational agents enlarges the local stability region of the steady state on the other hand their consideration opens the door to complex dynamic outcomes characterized by chaotic attractors and rich multistability phenomena that we investigate along the paper

replicator dynamics in a cobweb model with rationally heterogeneous expectations abstract this paper extends the adaptively rational equilibrium dynamics of brock and hommes brock w a hommes c h 1997 a rational route to randomness econometrica 65 1059 1160 by introducing a generalized version of the replicator dynamic the replicator equilibrium dynamics red couples the price dynamics of a cobweb model with predictor selection governed by an evolutionary replicator dynamic we show that the red supports the conclusion of sethi and franke sethi r franke r 1995 behavioural heterogeneity under evolutionary pressure macroeconomic implications of costly optimisation the economic journal 105 583 600 that costly rational beliefs persist though unlike them these results obtain in the deterministic case numerical evidence shows that complex dynamics exist as in brock and hommes even though no weight is placed on strictly dominated predictors in an red steady state

fiscal policy and monetary integration in europe fiscal policy economists policy makers and the media often argue that the maastricht treaty and the stability and growth pact make it difficult for governments of emu countries to stabilize their economies with appropriate fiscal policy and to provide adequate public investment our empirical analysis offers little support to this view discretionary budget deficits have actually become more counter cyclical in emu countries after the maastricht treaty as well as in the other eu and non eu industrialized countries we study and while public investment has declined recently in emu countries a similar tendency is apparent in other countries and started well before the maastricht treaty was signed jordi gali and roberto perotti

planning to cheat eu fiscal policy in real time using real time data from europe s stability and convergence programs we explore how fiscal plans and their implementation in the eu are determined we find that 1 implemented budgetary adjustment falls systematically short of planned adjustment and this shortfall increases with the projection horizon 2 variability in the eventual fiscal outcomes is dominated by the implementation errors 3 there is a limited role for traditional political variables 4 stock flow adjustments are more important when plans are more ambitious and 5 most importantly both the ambition in fiscal plans and their implementation benefit from stronger national fiscal institutions we emphasize also the importance of credible plans for the eventual fiscal outcomes roel beetsma massimo giuliodori and peter wierts

permanent transitory decompositions and traditional measures of core inflation abstract the aim of this paper is twofold first after defining core inflation in line with the recent literature as the long run component of the rate of change of the consumer price index cpi we address the general problem of establishing a set of conditions under which given the assumption of inflation as an i 1 process it is possible to identify an indicator of trend inflation we show that some criteria recently proposed in the literature economics letters 75 2002 17 are unnecessarily restrictive second an empirical investigation for the period 1983 2001 reveals that these conditions are met in the us economy both for the traditional measure of core inflation which is obtained by subtracting food and energy components from cpi and for the weighted median of cpi proposed by monetary policy university of chicago press for nber 1994 261 these conclusions hold for a measure of core inflation based on the year on year rate of change of the core index and thus we provide some motivation for this choice

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

fiscal adjustment in eu countries a balance sheet approach abstract several european union countries have recently implemented or are envisaging fiscal operations which improve budgetary figures but have no structural impact on government finances we evaluate some of these measures using a balance sheet approach in particular we examine the degree to which reductions in government debt in eu countries has been accompanied by a decumulation of government assets in the runup to maastricht we find a strong correlation between changes in government liabilities and government assets and larger declines in government assets in countries starting from higher public debt levels

monetary neutrality under evolutionary dominance of bounded rationality i introduction a key property of the dynamic relationship between money and output is that due to price stickiness monetary shocks have persistent although not permanent impacts on the real output see e g christiano eichenbaum and evans 1999 the nominal adjustment of the aggregate price level in response to a monetary shock is therefore temporarily incomplete and considerable supporting empirical evidence for price rigidity has been found in several microprice studies see e g nakamura and steinsson 2013 and klenow and malin 2011 for comprehensive discussions of these studies mankiw and reis 2002 develop a novel model of temporarily incomplete nominal adjustment based on the assumption that costly information disseminates slowly in each period a random fraction of the price setters updates itself on the state of the economy so as to compute and set the optimal price while the remaining fraction keeps setting prices based on outdated information they admit that micro foundations for price stickiness may require a better understanding of bounded rationality and that information processing is more complex than the time contingent adjustment assumed in their paper in fact as added in mankiw and reis 2011 while the cost of acquiring information may be small and may even have fallen in this information age the costs of absorbing and processing information may be rather large and actually higher today than those in the past this paper contributes to the intuition on price setting under bounded rationality by developing a model in which the share of firms that have up to date information on relative prices to establish the optimal price follows evolutionary dynamics with and without mutation and not a random dynamics a la calvo 1983 as in mankiw and reis 2002 and the related literature our aim is to devise evolutionary game theoretic dynamics to provide alternative microfoundations for a temporarily incomplete nominal adjustment following a monetary shock we investigate the behavior of the general price level in an economy in which an individual firm can either pay a cost featuring a random component to update its information set and establish the optimal price nash strategy or freely use full information from the previous period and set a one period lagged optimal price bounded rationality strategy indeed detailed empirical studies such as the investigation for the euro zone by alvarez et al 2006 have found persistent coexistence of forward looking and backward looking price setting behavior and there is also robust empirical evidence showing persistent and time varying heterogeneity both in the frequency and in the extent of information updating see e g branch 2007 coibion and gorodnichenko 2012 we then devise evolutionary game theoretic microdynamics in discrete time that by interacting with the dynamics of the macroeconomic variables affects the coevolution of the frequency distribution of information updating strategies across firms and the completeness of the nominal adjustment of the general price level to a monetary shock our model economy is composed of monopolistically competitive firms whose individual optimal price depends positively upon the prices set by others implying the existence of strategic complementarity in a given period there is a fraction of firms that set prices without perfect knowledge of the structure of relative prices and hence of the prices that other firms will be setting as they decide not to pay the information cost involved in knowing it we refer to these firms as boundedly rational firms the remaining fraction is composed of firms that decide to incur the information updating cost to obtain that perfect knowledge and we follow droste hommes and tuinstra 2002 in referring to them as nash firms as they become perfect foresight firms meanwhile the optimal price is assumed to be given as in ball and romer 1991 varying positively with the actual general price level and nominal stock of money which is publicly known

trade in financial services capital flows and the value at risk of countries in light of the recent financial crises in the emerging markets the coming into force of the financial services agreement under the gats has been considered a success while the agreement provides for little new liberalization but rather formalizes the status quo it was feared that governments could even backtrack on previous commitments in the belief that more open markets could increase the degree of susceptibility by undermining financial stability strengthening the financial system s ability to evaluate and manage risk has therefore been identified as a precondition for more ambitious liberalization efforts in the future dobson and jacquet 1998 encouragingly in some countries banks have begun to implement value at risk approaches as a tool to assess their balance sheet vulnerability as this paper argues such an approach could also play a useful role in determining the extent of market risk on the macroeconomic level with potentially important implications regarding trade in financial services capital account convertibility and international crisis management

good bad or ugly on the effects of fiscal rules with creative accounting abstract do fiscal rules lead to fiscal adjustment or do they encourage the use of creative accounting this question is studied with a model in which fiscal rules are imposed on measured fiscal variables which can differ from true variables because there is a margin for creative accounting the probability of detecting creative accounting depends on its size and the transparency of the budget the model studies the effects on fiscal policy of a budget rule separating structural from cyclical effects and examines how these effects depend on the underlying fiscal distortion and on the degree of transparency of the budget

evolutionary consumers imply monopolies exit we address the question of how a monopolist should price when facing evolutionary consumers who gradually move in the direction of following their optimal strategy but may make temporary suboptimal choices we show that under a broad generalization of the most commonly used model of evolution the monopolist will set a path of prices such that all consumers eventually stop purchasing the monopolist s product

defining the government s debt and deficit although the budget deficit and the public debt feature prominently in political debate and economic research there is no agreement about how they should be measured they can b e defined for different sets of public institutions including the nested sets corresponding to central government general government and the public sector and for any definition of government there are many measures of the debt and deficit including those generated by four kinds of accounts cash financial full accrual and comprehensive which can be derived from four nested sets of assets and liabilities each debt and deficit measure says something about public finances but none tells the whol e story each is also vulnerable to manipulation and is likely to be manipulated if it is subject to a binding fiscal rule or target narrow definitions of government encourage the shifting of spending to entities outside the defined perimeter of governme nt narrow definitions of debt and deficit encourage operations involving off balance sheets assets and liabilities while broad measures are susceptible to the mismeasurement of on balance sheet assets and liabilities reviewing the literature on these is sues the paper concludes that governments should publish several measures of the debt and deficit in a form that clearly reveals their interrelationships

structural factors associated with primary fiscal balances in developing countries the study explores the conditions under which a government in a developing country is likely to run a balanced or surplus budget we contend that primary fiscal deficits are likely to persist where the economy is too saving constrained to raise private sector investment to conduct the investigation a logit model is applied to a sample of developing countries to see whether the saving constraints are associated with the fiscal stance of governments accordingly income level growth external current account balance and foreign direct investment are used as indicators of the saving constraint with the exception of economic growth positive developments in these variables turned out to be significant to the likelihood of the government adopting a surplus budget

self organization and the persistence of noise in financial markets abstract a dynamic model of financial markets with learning is demonstrated to produce a self organized system that displays critical behavior the price contains private information that traders learn to extract and employ to forecast future value since the price reflects the beliefs of the traders the learning process is self referencing as the market learns to correctly extract information from the price the market deemphasizes private information despite the convergence of the model towards the parameters producing efficiency pricing deviations remain constant due to the increased sensitivity of the price to small errors in information extraction produced by the model s own convergence

managing rational routes to randomness abstract within the seminal cobweb model of brock and hommes firms adapt their price expectations by a profit based switching behavior between free naive expectations and costly rational expectations brock and hommes demonstrate that fixed point dynamics may turn into increasingly complex dynamics as the firms intensity of choice increases we show that policy makers are able to manage such rational routes to randomness by adjusting profit taxes in particular policy makers should increase decrease profit taxes if destabilizing expectations generate higher lower profits than stabilizing expectations to alter the composition of applied expectation rules and thereby to promote market stability our results are not restricted to cobweb models a huge body of literature demonstrates that rational routes to randomness may emerge in many different markets

when is fiscal adjustment an illusion fiscal adjustment is an illusion when it lowers the budget deficit or public debt but leaves government net worth unchanged conventional measures of the budget deficit largely show the change in public sector debt ideally the measured deficit would reflect the change in public sector net worth many people consider it impractical to try to measure public sector assets my paper does not discuss what the deficit should measure but instead proposes a positive and testable theory of how governments actually behave when an outside agent forces a reduction in a government s conventional deficit and debt accumulation the government responds by lowering asset accumulation or increasing hidden liabilities since government net worth is unchanged such fiscal adjustment is an illusion using data from countries with world bank and imf fiscal adjustment programmes and case studies of emu countries compliance with the maastricht criteria i confirm my theoretical predictions fiscal adjustment in these countries was at least partly an illusion

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

adaptive learning endogenous uncertainty and asymmetric dynamics abstract i present a simple model where forecasting confidence affects aggregate demand it is shown that this model has similar stability properties under statistical and evolutionary learning as a model without a confidence affect from this setup i introduce expectational business cycles where output fluctuates due to learning heterogeneous forecasting models and random changes in the efficient forecasting model agents use one of two forecasting models to forecast future variables while heterogeneity is dictated via an evolutionary process increased uncertainty due to a shock to the structure of the economy may result in a sudden decrease in output as agents learn the equilibrium output slowly increases to its equilibrium value expectational business cycles tend to arrive faster last longer and are more severe as agents possess less information

limited rationality and strategic complements the implications for macroeconomics this paper considers the implications of heterogeneity in information processing abilities for macroeconomic models that exhibit strategic complements the latter is the same concept that has received much attention in the recent macro literature under the headings keynesian coordination problems and positive trading externalities we consider environments in which agents vary in terms of their ability to form expectations and ask whether it is the sophisticated agents or the naive agents who have a disproportionately large effect on macroeconomic equilibrium we find that if macroeconomic interaction exhibits strategic complementarity then it is the naive agents who have a disproportionate impact

a simple inflation indicator for the euro zone this article proposes and estimates an inflation indicator for the european monetary union emu this indicator is set up so that it is contemporarily not affected by the changes in price differentials among emu countries the results show that the monetary union index of consumer prices muicp which is the inflation measure that the european central bank ecb takes as a reference for monetary policy purposes could be understating the value of the inflation in the euro zone it is also concluded that regional peculiarities are fundamental in the evolution of prices in the different emu countries

public accounting fudges towards emu a first empirical survey and some public choice considerations this paper analyses some one off measures and other accounting tricks that eu member states have been using to qualify for emu membership moving from empirical evidence to strategic goals this investigation brings to the fore three crucial issues the weakness of the methodological rules of the european system of accounts used to assess budgetary convergence in line with the maastricht treaty the open ended definition of the required budgetary discipline the shortcomings of the excessive deficit procedure enforced through the stability pact the conclusion urges a return to a strict annual balance requirement for governments current accounts to impede strategic adjustments of budgetary positions that are in fact creative accounting operations

expectational diversity in monetary economies abstract we investigate an overlapping generations monetary economy in which expectations depend upon backward looking predictors of the future price level we use discrete choice theory to model how agents select a predictor based on its past forecast error letting the number of available predictors tend to infinity we obtain the large type limit of the system taking the large type limit dramatically reduces the number of free parameters while maintaining the expectational diversity which we argue is necessary for constructing plausible learning based models the model s dynamics are strongly influenced by the intensity of choice which measures how sensitive an agent s predictor choice is to differences in forecast errors across predictors when the intensity of choice is low the monetary steady state is stable as the intensity of choice increases and if certain parametric restrictions are met the system undergoes a hopf bifurcation in which case we document the existence of highly irregular equilibrium price paths

formation of rationally heterogeneous expectations this paper models expectation formation by taking into account that agents may produce heterogeneous expectations because of informational frictions and differing levels of a capacity to process information we show that there are two general classes of steady states within this framework those where strictly dominated forecasting rules vanish and those heterogeneous states where a positive proportion of agents uses a more costly perfect foresight we demonstrate that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly and do not exhibit identical performance in the long run

experimental evidence on inflation expectation formation using laboratory experiments within a new keynesian sticky price framework we study the process of inflation expectation formation we focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40 of subjects more than 20 of subjects are also best described by adaptive learning models where they behave like econometricians and update their model estimates every period however rather than using a single forecasting model switching between models describes their behavior better switching is more likely to occur when experimental economy is in a recession

endogenous fluctuations under evolutionary pressure in cournot competition abstract an evolutionary game theoretic model of cournot competition is investigated individuals choose from a finite set of different behavioral rules each rule specifies the quantity to be produced in the current period as a function of past quantities using more sophisticated rules may require extra information costs based upon realized payoffs the fractions of the population choosing a certain behavioral rule are updated according to the replicator equation with noise the long run behavior of the evolutionary system consisting of the population dynamics coupled with the quantity dynamics of the cournot game may be complicated and endogenous fluctuations may arise we consider a typical example where firms can choose between two rules the nash rule and the best reply rule we show that a homoclinic tangency between the stable and unstable manifold of the equilibrium occurs as evolutionary pressure increases implying bifurcation routes to complicated dynamics and strange attractors

what do deficits tell us about debt empirical evidence on creative accounting with fiscal rules in the eu fiscal rules such as the excessive deficit procedure and the stability and growth pact sgp aim at constraining government behavior milesi ferretti 2003 develops a model in which governments circumvent such rules by reverting to creative accounting the amount of this depends on the reputation cost for the government and the economic cost of sticking to the rule we provide empirical evidence of creative accounting in the european union we find that the sgp rules have induced governments to use stock flow adjustments a form of creative accounting to hide deficits the tendency to substitute stock flow adjustments for budget deficits is especially strong for the cyclical component of the deficit as in times of recession the cost of reducing the deficit is particularly large

market efficiency and learning in an endogenously unstable environment abstract an informationally inefficiency market is produced without an exogenous source of noise in the price fundamental traders acquire private information directly through research regression traders employ a learning process to extract the private fundamental information from the public price the relative popularity between these two strategies evolves based on performance the model converges towards adoption of regression analysis to the point of creating instability endogenously producing a noisy price the lack of a revealing price in the coupled learning and population processes reflects the grossman and stiglitz amer econ rev 70 3 1980 393 impossibility of informationally efficient markets

the ricardian approach to budget deficits persistent budget deficits have increased economists interest in theories and evidence about fiscal policy this paper develops the ricardian approach and contrasts it with standard models the discussion considers from major theoretical objections to ricardian equivalence finite lifetimes imperfect capital markets uncertainty about future taxes and incomes and the distorting effects of taxation the paper then considers empirical evidence on interest rates consumption and saving and current account deficits the conclusion is that the ricardian approach is a useful first order approximation and that this approach will probably become the benchmark model for assessing fiscal policy this abstract was borrowed from another version of this item

defining the government s debt and deficit defining the government s debt and deficit although the budget deficit and the public debt feature prominently in political debate and economic research there is no agreement about how they should be measured they can be defined for different sets of public institutions including the nested sets corresponding to central government general government and the public sector and for any definition of government there are many measures of the debt and deficit including those generated by four kinds of accounts cash financial full accrual and comprehensive which can be derived from four nested sets of assets and liabilities each debt and deficit measure says something about public finances but none tells the whole story each is also vulnerable to manipulation and is likely to be manipulated if it is subject to a binding fiscal rule or target narrow definitions of government encourage the shifting of spending to entities outside the defined perimeter of government narrow definitions of debt and deficit encourage operations involving off balance sheets assets and liabilities while broad measures are susceptible to the mismeasurement of on balance sheet assets and liabilities reviewing the literature on these issues the paper concludes that governments should publish several measures of the debt and deficit in a form that clearly reveals their interrelationships

local convergence properties of a cobweb model with rationally heterogeneous expectations abstract this paper gives local stability conditions for convergence of the price dynamics in a cobweb model with rationally heterogeneous expectations generalizing the example of brock and hommes 1997 when agents choose between rational naive and adaptive beliefs the steady state may be locally asymptotically stable if the adaptive predictor places enough weight on past prices and is costless if adaptive expectations are sufficiently more costly than naive expectations the steady state will be an unstable saddle point our results imply that adding a choice can stabilize a system which is unstable under the brock and hommes model these results illustrate how the critical parameter that governs stability is dependent on the array of available predictors