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

adaptive learning and equilibrium selection in experimental coordination games an arch 1 approach abstract we analyze and estimate an adaptive learning model which explicitly considers strategic uncertainty in order to provide a unified explanation of the patterns of equilibrium selection in j van huyck r battalio and r beil s 1990 amer econ rev 80 234 248 1991 quart j econ 106 885 910 experimental coordination games the leaning dynamics follow an autoregressive conditional heteroskedasticity process of order 1 arch 1 we find that arch captures the persistence in players assessments of uncertainty as they update their beliefs provides a reduced form for differences of unknown form in players beliefs without relying on any assumptions on their probabilistic structure and yields a parsimonious parametric description of the learning dynamics journal of economic literature classification numbers c92 c73 c51 c25

convergence to rational expectations in a stationary linear game this paper describes several learning processes which converge with probability one to the rational expectations bayesian nash equilibrium of a stationary linear game the learning processes include a test for convergence to equilibrium and a method for changing the parameters of the process when non convergence is indicated this self stabilization property eliminates the need to impose stability conditions on the economic environment convergence to equilibrium is proved for two types of self stabilizing learning mechanisms a centralized forecasting mechanism and a decentralized strategy adjustment process

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

eductive stability in real business cycle models we reexamine issues of coordination in the standard rbc model is the unique rational expectations equilibrium attainable by rational agents who contemplate the possibility of small deviations from equilibrium surprisingly we nd that coordination cannot be expected even with strong common knowledge assumptions rational agents anticipating small but persistent deviations are led to take actions that eventually contradict the common knowledge assumption this impossibility theorem for eductive learning is not fully overcome when adaptive learning is incorporated into the framework

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

the assessment monetary and fiscal policy in the 1980s the emphasis is on policy in the uk though many of the issues that arise e g about the links between monetary and fiscal policy or the concern over persistent deficits and debt are general being faced by other countries as well the uk s policy has however been more extreme and under the medium term financial strategy mfts more explicit than elsewhere the purpose of this assessment is not primarily prescriptive rather it is an alytical intended to lay out some of the major theoretical and empirical issues that underlie policy choice and to stimulate debate

the assessment decentralisation and the economics of local government by almost universal agreement local government in the uk and especially its finance is in a mess after the major layfield committee of inquiry in the 1970s into local government finance after numerous other reports green papers and white papers the conservative government embarked on a radical attempt at reform firstly it tightened central control on the level of local authority spending through changes to the block grant and more recently ratecapping secondly it abolished theglc and other upper tier authorities in metropolitan areas thirdly it forced through a much wider use of tendering and subcontracting for local government services and finally it launched into a wholesale reform of local government finance based on the programme outlined in the 1986 green paper this includes centralising control over non domestic rates and replacing domestic rates with a new household tax the community charge to be paid at a flat rate by all adults

stability of cycles and expectations the actual dynamics of an economy depends on how agents forecast the future at every date as a function of their information on the past while possibly learning the structure of their environment we show in the case of a one dimensional state variable that under mild conditions on expectations functions a given cycle with perfect foresight that is stable in the actual dynamics is stable in a fictitious backward perfect foresight dynamics we exhibit a restricted class of expectations functions for which the converse is true

stable near rational sunspot equilibria abstract we introduce a new class of solutions to nonlinear forward looking models called near rational sunspot equilibria nrse nrse are natural nonlinear extensions of the usual sunspot equilibria associated with the linearized version of the economy and are near rational in that agents use the optimal linear forecasting model when forming expectations generic results for existence and stability under learning are established nrse in indeterminate nonlinear models are found to be stable under learning provided that the corresponding linearized model s minimal state variable solution is e stable nrse are readily computable and our results make it possible to use the standard linear tools to search for stable nrse we illustrate our results using a canonical nonlinear new keynesian model

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

floating exchange rates and inflation in germany are external shocks really irrelevant abstract german prices and u s short term interest rates are cointegrated while short term interest rates in both countries are not therefore moving to flexible exchange rates in 1973 has not completely isolated germany from external shocks

the fragility of sunspots and bubbles abstract expectational stability e stability is used to examine the multiplicity of solutions in a range of rational expectations models of interest including muth s inventory model and an overlapping generations model in these model it is found that sunspot and other rational bubble solutions are either e unstable or weakly but not strongly e stable

change in financial intermediation in the uk the british financial system is experiencing change unprecedented in its scope and pace before the war britain s financial structure was clearly dominated by the banks other types of institution had developed over the previous century and more but their effect on financial conditions was not yet judged significant enough to be given even a passing mention in the macmillan report of 1931 for example by the time of the radcliffe report of 1959 the increasing variety of institutions had been acknowledged but the radcliffe report was still able to speak of faults in the geological sense which were difficult for borrowers to cross para 319

positive freedom markets and the welfare state the comparative merits of market and certain distinguished non market resource allocation mechanisms have continually been at the centre of debate in economics and political philosophy doubtless it will remain there for here one faces the grandest of human concerns embracing as it does issues bearing on liberty and welfare the aspirations of people their potential and re alized capabilities and the fulfillment of their needs it enables us to see individuals in a social context to ask about the possible features of a civil society the obligations that people may have to themselves to one another and to agencies then again we are able to enquire into the obli gations that agencies have to people and to one another the extent to which responsibility needs to be delegated among offices and persons the role that dispersed information may play in an swers to these and so on the debate is central to any discussion of the kind of society we ought to aspire to be members of

sufficient conditions for the existence of sunspot equilibria abstract this paper reports on conditions on agents preferences and endowments sufficient to guarantee the existence of sunspot equilibria in a simple overlapping generations model of pure exchange sunspot equilibria are those in which uncertainty extrinsic to the economy operates through expectations to yield a fulfilled expectations competitive equilibrium in which the extrinsic randomness has real effects on prices and allocations the paper also provides necessary and sufficient conditions for these equilibria to have agents trading in a fixed stock of valued fiat money the condition derived can be interpreted as requiring that intertemporal income effects appropriately dominate substitution effects

macroeconomic uncertainty and performance in the european union abstract we use a very general bivariate garch m model and monthly data on eu countries covering the 1962 2003 period to test for the impact of real output growth and nominal inflation macroeconomic uncertainty on inflation and output growth our evidence supports a number of important conclusions first in the majority of countries uncertainty regarding the output growth rate is related to the average growth rate and the effect in several countries is negative second in half of the cases there is no significant relationship between inflation uncertainty and output growth performance third inflation and output uncertainty have a mixed effect on inflation nevertheless considerable evidence for the cukierman meltzer hypothesis is obtained our conclusions are based on adopting both a structural and a reduced form bivariate garch model finally we also find statistically significant evidence of regime switching for both inflation and output growth volatility throughout the sample

unemployment in britain male unemployment in britain has risen from around 2 per cent in the 1950s to around 17 per cent in 1985 see figure 1 the figures are for male unemployment because there is no consistent series for women 1 even more remarkably unemployment has fallen in only three years out of the last twenty 1973 1978 and 1979 to account for this we need a model that explains both changes in the natural or non accelerating inflation rate of unemployment nairu and deviations from it we use a three equation supply side model centred on the labour market this has two main features the first concerns the determination of employment in the short run the labour demand function that we use cuts through the fruitless debate now raging especially in europe as to whether current unemployment is classical or keynesian according to the classical view employment is too high because real wages are too high according to the keynesian view real wages are not binding and unemployment is high because the product market does not clear with prices too high relative to nominal demand the whole debate is set in the framework of perfect competition yet in perfect competition prices are set by impersonal forces and it is not clear what could possibly stop prices clearing the market it is much more reasonable to think of prices as being set by imperfectly competitive firms existing prices being the best they can think of given the demand they face in this context firms demand for labour will depend on both the real product wage and the level of real aggregate demand this is the demand function we estimate and it conforms both to common sense and to the data however this does not imply that employment can be made to grow without limit by pumping up real demand for in the medium term when price surprises are eliminated our model determines three variables employment real wages and real demand on the basis of three equations an employment equation a price equation and a wage equation thus in the medium term there is a natural level of employment and corresponding to this a natural level of real aggregate demand the second key feature of our model concerns the medium term determination of unemployment in the medium term the planned mark up of wages over prices in wage settlements must be consistent with the mark up of prices over wage costs in employers pricing behaviour for if wage setters try to set real product wages higher than is consistent with employers pricing behaviour this generates ever increasing inflation thus the key to understanding unemployment in the medium term is the behaviour of wage setters if events occur that push them towards too high real wages then unemployment has to rise to offset these influences we shall call these influences wage pressure variables or push factors and they are clearly crucial in understanding unemployment the variables here include the social security system employment protection

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

adjustment costs learning and indeterminacy abstract i compare the adjustment cost and learning approaches to resolving indeterminacy of perfect foresight equilibrium in a continuous time model with local indeterminacy rapid learning tends to select different perfect foresight equilibria of the original model than does the inclusion of vanishing adjustment costs this difference has implications for the dynamic response of the economy to unanticipated shocks

adaptive learning and monetary exchange abstract this paper investigates three classic questions in monetary theory how can an intrinsically worthless asset such as fiat money maintain value as a medium of exchange what are the short run and long run effects of a change in the money supply what is the social cost of inflation i answer these questions using a microfounded model of monetary exchange that replaces the rational expectations assumption with an adaptive learning rule first i show that monetary exchange is a robust arrangement in the sense that agents are able to learn the stationary monetary equilibrium while the non monetary equilibrium is unstable under learning second an unanticipated monetary injection has real effects in the short run because learning the value of money takes time in the long run agents successfully learn the value of money hence money is neutral third under a constant money growth policy an increase in the growth rate of money increases output in the short run producing a short run phillips curve a ten percent increase in the money growth rate has a social cost of 0 41 percent of output per year alternatively a ten percent decrease in the money growth rate has a social benefit of 0 37 percent of output per year

explanations of unemployment economists commonly distinguish between two sorts of unemployment roughly speak ing the involuntarily unemployed workers are unwillingly out of work i e they feel that they would be better off with jobs on the other hand the voluntarily unemployed workers prefer to be out of work for any of a wide variety of reasons e g because they are searching or training for a job or because they choose leisure over work

forward discount puzzle and liquidity effects some evidence from exchange rates among the united states canada and japan this paper empirically examines whether the interaction between foreign exchange markets and monetary markets can help to resolve the forward discount puzzle following the monetary models of lucas 1990 and fuerst 1992 we define as liquidity effects the negative impact of monetary injection on nominal interest rates temporary deviations from the standard euler equation the liquidity effect identified by these models weakens the linkage between current forward rates and expected future spot rates and improves on the standard rational expectations model that predicts a one to one correspondence between the two using time series of exchange rates among the united states canada and japan this paper shows that the liquidity measure identified above has an impact on forward premiums and that once the liquidity effect is taken into consideration the unbiased prediction of the forward discount rate is recovered to some extent in a theoretically consistent manner

estimating the effects of monetary shocks an evaluation of different approaches abstract this paper compares several methods for estimating the effects of monetary innovations on key macroeconomic variables and subsequently clarifies issues related to the use of instrumental variables in the identification of structural impulse responses in particular we make explicit the property that a measure of monetary policy must satisfy in order to identify the effects of monetary shocks within our framework we find that none of the currently popular methods of identifying the effects of monetary shocks are supported by the data we also indicate how current approaches can be combined to provide unbiased estimates of the effects of monetary disturbances

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

learning large deviations and recurrent currency crises this article studies a version of obstfeld s journal of international economics 43 1997 61 77 escape clause model the model is calibrated to produce three rational expectations equilibria two of these equilibria are e stable and one is unstable dynamics are introduced by assuming that agents must learn about the government s decision rule it is assumed they do this using a stochastic approximation algorithm it turns out that as a certain parameter describing the sensitivity of beliefs to new information gets small the algorithm converges to a small noise diffusion process the dynamics of exchange rate changes are then characterized using large deviation techniques from freidlin and wentzell random perturbations of dynamical systems second edition berlin springer verlag 1998 these methods describe the sense in which the limiting distribution of exchange rate changes is approximated by a two state markov switching process where the two states correspond to the two e stable equilibria the model is calibrated to the exchange rate histories of argentina brazil and mexico currency crises in these countries resemble the predicted escape routes of the model a key feature of these escape routes is that expectations of a devaluation erupt suddenly without large contemporaneous shocks this is consistent with evidence showing that crises are often poorly anticipated by financial markets

the effect of gnp announcements on fluctuations of gnp growth abstract this paper is an empirical study of the degree in which perceptions affect the evolution of the economy we study the effects of the announcements that the government makes on gnp growth these announcements are subject to a substantial degree of noise and its accuracy improves with time a revised number is published several years after the first announcement was made public we consider that the final revision is the true value of gnp growth we show that once announcements are taken into account the true value of gnp growth at time t has no predictive power in determining growth at any future time all the predictive power lies in the announcements and not in the true level of growth actually we show that the variable that determines future growth is the unexpected part of the announcements we also show that announcements affect growth via aggregate investment

on endogenous competitive business cycles the belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks whether originating from the external environment or from policy should be modelled as a state that is stationary or perhaps growing at a constant rate seems to be deeply rooted in the mind of some economists

living in an imaginary world that looks real abstract in the paper we show using standard approaches general equilibrium modeling and the assumption of complete rationality that the macroeconomic environment is endogenous and is indeterminate specifically it is argued without resorting to sunspot type arguments that microeconomic fundamentals do not suffice to characterize the economy at the macro level in particular we show how perceptions of rational agents of the workings of the economy a shape the environment b affect the environment sufficiently to ensure that rational economic agents find the observed environment consistent with their beliefs even though it is not as a by product we illustrate that endogenous macro uncertainty can arise as an outcome if rational economic agents whose expectations are anchored on endogenous variables expect them to arise finally we show that systematic errors can persist indefinitely under rationality

communication and monetary policy recent trends toward greater central bank independence and the adoption of formal inflation targeting by several countries have served to emphasize the importance of communication policy in this paper we explore some of the economic effects of public information that arise whenever public information serves the dual role of conveying fundamental information as well as serving as a focal point for better coordination more precise public information is a double edged tool while it is very effective in influencing actions through coordination sometimes it can be too effective and coordinate actions away from fundamentals copyright 2002 oxford university press

reforming the labour market there is nothing new about government attempts to reform the labour market the primary emphasis put upon this aspect of economic policy by the two conservative gov ernments since 1979 however is perhaps unique this emphasis is in part the conse quence of a new stress on supply side economics and of a belief that many imperfections in the labour market are in fact removable by a mixture of measures de signed to alter the attitudes of both institutions and individuals and the environment in which they operate having been shocked into heightened receptiveness by the re cession actors and institutions have been regaled by a variety of measures these in clude trade union and industrial relations legislation the abolition of the fair wages resolution a review of wages councils measures on social security benefits initiatives on training and mobility incentives for individual and community enterprise and schemes to reduce the size of the effective labour force

strategic competition among the few some recent developments in the economics of industry the title of this article is intended as a signal of two things first we are concerned with industries where several but not many firms are actually or potentially in competition with each other thus our topic is competition among the few 1 or oligopoly rather than the polar extremes of textbook perfect competition and pure monopoly secondly we are interested in the strategic nature of competition between firms where the meaning of strategic can be explained as follows if the essence of a game of strategy is the dependence of each person s proper choice of action on what he expects the other to do it may be useful to define a strategic move as follows a strategic move is one that influences the other person s choice in a manner favourable to one s self by affecting the other person s expectations of how one s self will behave schelling 1960 p 150

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

unemployment getting the questions right in my opinion the form and conception of this conference exemplifies the right instinct for modern macroeconomics there is a fact a big unmistakable unsubtle fact essentially everywhere in the modern industrial capitalist world unemployment rates are much higher than they used to be two or three decades ago why is that if macroeconomics is good for anything it ought to be able to understand and explain that fact we should be able to produce a fairly convincing analytical account of the occurrence and persistence of unusually high unemployment rates you might think that to be a mere commonplace to what other sort of end would anyone organize a conference my experience however is that most high powered academic conferences are stimulated by purely technical developments or less often by ideological or political promotion rather than by the need to deal with an outstanding fact i do not blame anyone for this state of affairs we may not be blessed with many significant observations too big to be quibbled over and technical innovations do need to be thrashed out by experts anyway it is good to be faced by a brute fact that needs explanation it is what macroeconomics ought to be about i compliment the organizers also on a second aspect of the agenda the country by country organization of the papers we can all hope to learn something from cross country comparisons one of the few good ways we have to test analytical ideas is to see whether they can make sense of international differences in outcomes by appealing to international differences in institutional structure and historical environment the right place to start is within each country separately studied by someone who knows the peculiarities of its history and its data you might think that this too ought to be obvious but in fact the usual approach is just the opposite more often than not we fail to take institutional differences seriously one model is supposed to apply everywhere and always each country is just a point on a cross section regression or one among several essentially identical regressions leaving only grumblers to worry about what is exogenous and what is endogenous and whether simple parametrizations do justice to real differences in the way the economic mechanism functions in one place or another i have no way of knowing whether this organized effort will get anywhere in explaining high unemployment but it seems to be set up to give itself the best chance for better or worse probably for the better theoretical and empirical work are closely intertwined in macroeconomics scratch a macro theorist and you find a casual econometrician scratch a macro econometrician and you find a casual theorist usually you do not have to scratch very hard thus the discussion of the issues central to the conference has already hardened into certain characteristic forms there are questions already lying on the table that the individual country papers will be trying to answer i suspect that some

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

measuring the stance of fiscal policy since the balance of public revenue and expenditure varies automatically with the state of capacity utilisation it has been argued for some time that the fiscal surplus or deficit should be cyclically corrected to produce a structural balance for assessing the stance of fiscal policy it is by no means implied by most practitioners that these cyclical fluctu ations have no effect on demand quite the contrary it is simply that the structural bal ance is seen as a more accurate measure of discretionary fiscal policy

genetic algorithms and inflationary economies abstract this paper studies overlapping generations economies in which agents use genetic algorithms to learn correct decision rules the results of computer simulations show that a genetic algorithm converges to the unique monetary steady state in case of a constant money supply policy and to the low inflation stationary equilibrium in case of a constant real deficit financed through seignorage features of the genetic algorithm adaptation are compared to the performance of other learning algorithms and to the behavior observed in experiments with human subjects in the same olg environments

the assessment policy options for the uk previous issues of this review have generally considered particular problems or particular areas of policy the concern of this assessment is rather different to consider the broad range of policy options available to the united kingdom focussing on the main areas of disagreement where economic analysis should be helpful it draws where appropriate not only on the articles on microeconomic and macroeconomic policy included below but also on previous themes covered by the oxford review of economic policy the aim is to delineate the key questions which are or which should be on the policy agenda there is no doubt that the terms of the policy debate have shifted markedly in recent years some disagreements such as those between monetarists and keynesians seem much less important whilst others such as those about the nature and role of the market have sprung to prominance

what price coordination the efficiency enhancing effect of auctioning the right to play a model is proposed to explain the results of recent experiments in which subjects repeatedly played a coordination game with the right to play auctioned each period in a larger group subjects bid the market clearing price to a level recoverable only in the efficient equilibrium and then converged to that equilibrium although subjects playing the game without auctions converged to inefficient equilibria the efficiency enhancing effect of auctions is reminiscent of forward induction but is not explained by equilibrium refinements the model explains it by showing how strategic uncertainty interacts with history dependent learning dynamics to determine equilibrium selection copyright 1998 by american economic association

asset markets as an equilibrium selection mechanism coordination failure game form auctions and tacit communication abstract in this paper we explore the possibility that asset markets provide a means of tacit communication which may allow subjects to coordinate on the payoff dominant equilibrium in an underlying coordination game we find that the existence of a market price for the right to play does communicate information about the equilibrium selection problem specifically behavior never converged to the efficient outcome when subjects were endowed with the right to participate but always converged to the efficient outcome when subjects purchased the right to participate journal of economic literature classification numbers c720 g120

financial innovation and monetary control the economic conjuncture of the 1970s and 1980s was extremely disturbed with high and volatile inflation interest and exchange rates this led the monetary authorities of most western coun tries to adopt monetary targets as a financial discipline to constrain inflationary pressures but this same conjuncture also encouraged the process of financial innovation which subsequently eroded the stability of the links between certain monetary aggregates and nominal incomes which had provided the empirical basis for such targetry thus in his recent book financial in novations and the money supply podolski 1986 argues that

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