a time varying model of rational learning abstract this paper presents an analysis of the stability of the rational expectations equilibrium for a version of the cobweb model under time varying learning it is shown that for appropriate values of a stability parameter the agents can learn how to form rational expectations forecasts using kalman filtering estimation techniques

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

stability of functional rational expectations equilibria abstract in this paper we examine a representative agent forecasting prices in a first order self referential overlapping generations model we first consider intermediate stage learning where agents update the forecasting rule every m periods we show that in theory and simulations the learning rule does not converge to the rational expectations equilibrium ree we next consider two stage learning where agents learn the functional mapping between the current forecast function and the previous forecast function we show that in theory and simulations the two stage learning rule converges to the ree journal of economic literature classifications numbers c62 c63 d83

can learning affect exchange rate behavior the case of the dollar in the early 1980 s this paper demonstrates that a change in parameters of the money market that is not immediately understood will affect the behavior of exchange rate forecast errors while the market is learning the analysis is applied to the behavior of u s dollar german mark forecast errors during the early 1980 s when the market appeared to systematically underpredict the strength of the dollar consistent with this observation empirical estimates of implied forecast errors based upon bayesian learning suggest that forecast errors would have been on average negative during the period as the market came to realize the increase in u s money demand

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

beliefs equilibria in an overlapping generations model we consider a standard two generations version of the overlapping generations model agents predict inflation rates on the basis of a perceived law of motion which is estimated by running a linear regression on past inflation rates we introduce the notion of beliefs equilibrium at such an equilibrium i the perceived law of motion is such that it fits the time series of inflation rates best and ii this time series of actual inflation rates is generated when agents use that perceived law of motion we show that beliefs might converge although inflation rates keep on fluctuating these fluctuations are consistent with the limit belief

oligopoly game price makers meet price takers abstract the paper studies an oligopoly game where firms can choose between price taking and price making strategies on a mixed market price takers are always better off than price makers though the profits of both types decline in the number of price takers we investigate and confront two possibilities of firms decisions about their types forward looking equilibrium reasoning and backward looking individual learning we find that the cournot outcome is the only equilibrium prediction and it is learnable if firms are sufficiently sensitive to profit differences however with a larger number of firms a unilateral deviation from cournot behavior becomes profitable under learning this incentive creates a space for permanent oscillations over different markets with a positive but low number of price takers

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

redistribution of funds for teaching and research among universities the case of north rhine westphalia abstract this paper reports on a real application of a performance and success based system for redistribution of funds for teaching and research among universities in north rhine westphalia after a precise description of the decision situation we show how goal programming and distance minimization were applied in order to find a solution on the basis of real data some comments on the results and the quality of the redistribution process conclude the paper

on the initialization of adaptive learning in macroeconomic models abstract we review and evaluate methods previously adopted in the applied literature of adaptive learning in order to initialize agents beliefs previous methods are classified into three broad classes equilibrium related training sample based and estimation based we conduct several simulations comparing the accuracy of the initial estimates provided by these methods and how they affect the accuracy of other estimated model parameters we find evidence against their joint estimation with standard moment conditions as the accuracy of estimated initials tends to deteriorate with the sample size spillover effects also deteriorate the accuracy of the estimates of the model s structural parameters we show how this problem can be attenuated by penalizing the variance of estimation errors even so the joint estimation of learning initials with other model parameters is still subject to severe distortions in small samples we find that equilibrium related and training sample based initials are less prone to these issues we also demonstrate the empirical relevance of our results by estimating a new keynesian phillips curve with learning where we find that our estimation approach provides robustness to the initialization of learning that allows us to conclude that under adaptive learning the degree of price stickiness is lower compared to inferences under rational expectations

monetary union and the assignment problem proposals for the creation of an independent central bank in a european monetary union do not always take into account the interactions between monetary and fiscal policy this analysis describes a system of two similar economies forming either a joint fiscal and monetary union or a simple monetary union policy authorities aim to achieve target values for inflation and the budget balance if the monetary and fiscal authorities pursue their targets independently of each other there is a risk that unstable interactions will be set up the results indicate a hazard of the separation of monetary and fiscal management

learning in expectation formation with applications to cattle and beef exports the paper briefly considers problems associated with rational expectations and formulates a more general model which allows for situations where economic agents do not immediately arrive at a fully rational solution it incorporates a learning mechanism whereby agents can provisionally adopt hypothetically derived expectations as a basis for comparison with the actual outturns utilizing the resultant past expectational errors as indicators of the likelihood of prospective future outcomes agents make explicit allowance a rational solution thus in situations where complete information is not freely available rationality would be approximated over time by means of a dynamic learning process which is founded on a firm empirical approach this essential empiricism requires that the problem be examined on the basis of direct observation of applied situations therefore the method is implemented and analysed with reference to irish foreign trade in fat cattle carcase and processed beef simultaneous equati

how could the south respond to secular stagnation in the north developed countries face the risk of a sustained lack of aggregate demand i e secular stagnation demand oriented growth models emphasizing the balance of payments constraint raise concerns about attendant adverse growth impacts on developing countries from reduced export growth these concerns are well founded albeit less serious than the simplest version of these models would imply relaxing their assumptions and emphasizing cumulative causation forces from domestic demand growth and relative price effects indicates how changed policies can maintain rapid growth while reducing the import content of demand crucial is investment that reduces gaps between the composition of domestic production and domestic demand and emphasizes sectors with cumulative causation effects combined with incomes policy and capital account management drawing down excessive foreign exchange reserves and obtaining concessionary loans from development banks can finance required capital goods imports enhanced south south integration may be an important complement for small countries

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

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

equilibrium selection observability and backward stable solutions abstract the robustness of stability under learning to observability of exogenous shocks is examined regardless of observability assumptions the minimal state variable solution is robustly stable under learning provided the expectational feedback is not both positive and large while the nonfundamental solution is never robustly stable overlapping generations and new keynesian models are considered and concerns raised in cochrane 2011 2017 are addressed

the economics of career concerns part i comparing information structures many incentives in organizations arise not through explicit formal incentive contracts but rather implicitly through career concerns this paper models career concerns through agents trying to manipulate the market assessment of their future productivity the information flow from current actions to market assessment is therefore crucial in determining the nature of these incentives improved information may either increase or reduce incentives the impact of information provides a major distinction between the explicit and implicit incentives model the paper derives general results on comparisons of information structures which serve as counterparts to the standard results on information structures in the principal agent model sufficient statistic impact of a blackwell garbling comparison of inclusive information structures 1999 the review of economic studies limited

introduction to the stability of rational expectations equilibrium abstract this paper surveys the literature which examines the stability of the expectations that agents are assumed to have in a rational expectations equilibrium ree this issue is more complex than the usual statistical estimation problem because the relationship between observable variables and payoff relevant variables is endogenous one approach taken in the literature yields convergence to a ree but requires agents to have extensive knowledge about the structure and dynamics of the model that prevails while they learn a second approach does not assume that agents have correctly specified likelihood functions and finds that ree may not be stable

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

demand and defective growth patterns the role of the tradable and non tradable sectors in an open economy developing countries in the post war period provide a wide range of case studies on successful and unsuccessful or defective growth patterns there are two classes of defective growth patterns the first class fail to generate strong growth at their start a country isolated by policy from the global economy may grow very slowly but high growth is unattainable without the enabling features of the global economy inbound technology transfer and sizeable external demand the second class of defec

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

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

ordinary least squares learning and nonlinearities in macroeconomics the paper reviews the literature on adaptive learning in macroeconomic settings where the formation of expectations is particularly relevant special attention will be given to simple two period overlapping generations models with a unique fixed point perfect foresight equilibrium in this kind of scenario eventual long term periodic and a periodic cycles are exclusively the result of the process of learning the outcome that high rates of money growth have a potentially destabilizing effect generating periodic fluctuations and chaos is emphasized the persistence of systematic forecast errors in a scenario where agents are supposed to act rationally is relevant in this context and it will be thoroughly discussed resorting to the notions of self fulfilling mistakes consistent expectations equilibria and beliefs equilibria

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

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

e stability vis a vis determinacy in regime switching models abstract this paper examines e stability determinacy and indeterminacy in a general class of regime switching models with lagged endogenous variables using determinacy conditions from cho 2016 2020 our first result extends mccallum 2007 to models with time varying parameters the unique mean square stable equilibrium is e stable if agents have current information and one period ahead decision rules further we address the existence of e stable non fundamental equilibria and find that iteratively e stable equilibria of indeterminate switching models can exist finally we show that indeterminate new keynesian models with persistent recurring interest rate peg regimes admit iteratively e stable equilibria in special cases the iterative e stability condition coincides with the long run taylor principle

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

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

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

liquidity traps and expectation dynamics fiscal stimulus or fiscal austerity we examine global dynamics under infinite horizon learning in new keynesian models where the interest rate rule is subject to the zero lower bound as in evans guse and honkapohja 2008 the intended steady state is locally but not globally stable unstable deflationary paths emerge after large pessimistic shocks to expectations for large expectation shocks that push interest rates to the zero bound a temporary fiscal stimulus or a policy of fiscal austerity appropriately tailored in magnitude and duration will insulate the economy from deflation traps however fiscal switching rules that automatically kick in without discretionary fine tuning can be equally effective

macroeconomics and a bit more reality macroeconomics in its widest sense is a topic which is too diverse to be usefully discussed in a single article i will therefore take a very narrow view of what might be included under this general title and focus my attention on my own main area of interest the development and use of large macro econometric models this is an area which has a long tradition and literature stemming form the pioneering work of tinbergen i937 and the cowles commission klein i950 an extensive survey of the development of modelling may be found in bodkin klein and marwah i99i macroeconometric modelling grew rapidly in importance during the late i950s and the i960s going on to achieve a very influential role inmacroeconomic policy making during the i970s its failure to deliver the detailed economic control which it had seemed to promise then led to a barrage of attacks ranging from disillusion and sceptiscism on the part of policy makers to detailed and well argued acadeinic criticism of the basic methodology of the approach perhaps the most powerful and influential of these academic arguments came from sims i980 in his article macroeconomics and reality sims argued on three quite separate grounds against the basic process of model identification which lies at the heart of the cowles commission methodology firstly that economic theory gives rise to identification restrictions which are typically more complex than those traditionally applied in macroeconometric models in particular he said that theory normally implies complex cross equation restrictions which require system estimation and which cannot be imposed on a single equation basis secondly that traditional identification conditions are often met simply because of the presence of dynamics in the models sims argued that this identification is spurious and technically invalid as purely dynamic terms cannot help in structural identification in the conventional sense finally he said that the importance of expectations effects and the interaction of policy regimes and agents expectations make identification very difficult sims argued that any one of these problems would form a challenging but feasible research agenda but that doing all of these at once would be a programme which is so challenging as to be impossible in the short run he then proposed a methodology based on vector auto regressive var models

money as a medium of exchange in an economy with artificially intelligent agents abstract we study the exchange economies of kiyotaki and wright 1989 in which agents must use a commodity or fiat money as a medium of exchange if trade is to occur our agents are artificially intelligent and are modeled as using classifier systems to make decisions in the assignment of credit within the classifier systems we introduce some innovations designed to study sequential decision problems in a multi agent environment for most economies that we have simulated trading and consumption patterns converge to a stationary nash equilibrium even if agents start with random rules in economies with multiple equilibria the only equilibrium that emerges in our simulations is the one in which goods with low storage costs play the role of medium of exchange i e the fundamental equilibrium of kiyotaki and wright

trade as the engine of growth in developing countries revisited economic growth in developed countries since the mid 1970s the only way to keep the engine of ldc growth beating at a satisfactory rate so the argument goes is to turn to an alternative source of fuel this lewis argues lies in trade among the developing countries which he asserts can take up the slack left by mdcs more developed countries as mdcs slow down 1980 p 560 pessimism about demand for ldc exports in developed countries markets is a recurrent theme in the development literature also familiar is the approach taken by lewis to dismiss past successes of ldcs in world trade by declaring the alleged engine of past growth to be no longer operating satisfactorily the intellectual foundations of the import substitution strategy laid in the 1950s by prebisch myrdal and most importantly nurkse rested on similar grounds arguing that the demand for periphery countries exports in the 20th century is far weaker than it was in the 19th century trade was dismissed as an engine of growth a function nurkse alleged it had served in the 19th century the solution prescribed in the 1950s was to look inward in effect to scrap the trade engine altogether lewis remedy coming two decades later when most importsubstitution possibilities in many ldcs have been all but exhausted retains the trade engine but seeks an alternative source of fuel to drive it the classic critique by irving kravis 1970 of nurkse s thesis of trade as a faltering engine of growth showed that export expansion did not serve in the nineteenth century to differentiate successful from unsuccessful countries p 850 this followed from two findings first that successful 19th century countries showed few signs of export dominated growth second that unsuccessful periphery countries enjoyed export expansion in the second half of the 19th century of the same order of magnitude as the temperate regions of recent settlement this led kravis to conclude that a more warranted metaphor

learning and convergence to a full information equilibrium are not equivalent support from the spanish ministry of education through grants dgicyt pb90 0132 and pb93 0679 is gratefully acknowledged further support for jun from the cirit generalitat de catalunya is also acknowledged

inflation determination with taylor rules is new keynesian analysis critically flawed abstract cochrane 2007 has strongly questioned the basic economic logic of current monetary policy analysis arguing that new keynesian nk models imply rational expectations paths with explosive inflation that do not imply explosions in real variables relevant for transversality conditions consequently the usual logic does not rule out solutions with explosive inflation that result does not however justify negative conclusions about nk analysis for a different criterion is logically satisfactory it is that to be plausible a re solution must satisfy the property of least squares learnability adoption of this criterion serves to justify in principle the bulk of current mainstream analysis

teaching versus research a multi tasking approach to multi department universities we study the possible implications of incentive schemes as a tool to promote efficiency in the management of universities in this paper we show that by designing internal financial rules which create yardstick competition for research funds a multi department university may induce better teaching quality and research as compared to the performance of independent departments

liquidity traps learning and stagnation we examine global economic dynamics under learning in a new keynesian model in which the interest rate rule is subject to the zero lower bound under normal monetary and fiscal policy the intended steady state is locally but not globally stable large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output to avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation in contrast policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals

exploring the robustness of the balance of payments constrained growth idea in a multiple good framework this paper derives the balance of payments constrained growth bpcg model as a special case of a three good framework that incorporates exportables importables and non tradables the conditions under which the canonical form of the bpcg rate can be derived are made explicit and the assumptions scrutinized it is shown that the presence of nontradables substitutability between exportables and importables and incomplete specialization in expenditure generally dampen the externallyconstrained growth rate these ndings help explain why empirical estimates tend to overestimate the bpcg rate overall our ndings underscore the observation that tests of the bpcg hypothesis are as much a test of the internal structure of the economy under consideration

changing beliefs and systematic rational forecast errors with evidence from foreign exchange this paper addresses a new interpretation to the appearance in the early 1980s of systematic errors in forecasting the dollar exchange rate following a change in the process of a fundamental variable market participants revise their beliefs about the process using bayes rule since the market does not immediately recognize the change forecast errors are on average wrong during a period when the market is rationally learning for conservative parameter values the learning behavior of the dollar exchange rate in the early 1980s appears consistent with about half of the dollar s underprediction implied by the forward market copyright 1989 by american economic association

learning and the monetary policy strategy of the european central bank abstract this paper examines the welfare implications of alternative inflation targeting proposals for the monetary policy of the european central bank we assume that policy makers have to learn the laws of motion of inflation in an economy characterized by stickiness in domestic price setting behavior and subjected to recurring shocks to productivity exports and foreign price we find that a switch from an asymmetric inflation targeting strategy to an symmetric makes little difference in welfare payoffs but it comes at a cost of much higher interest rate variability we also find that there are practically no welfare gains from switching from an inflation targeting strategy based on the harmonized index of consumer prices hicp to a strategy based on the domestic price component of the hicp

least squares learning and the stability of equilibria with externalities this paper studies the stability of competitive equilibria in a model of aggregate employment when the representative agent uses a least squares forecasting procedure it is shown that the pareto inferior low employment steady state is always unstable under least squares learning even if it is stable under perfect foresight the high employment steady state is stable under learning if and only if it is saddle point stable under perfect foresight this weakens multiple equilibrium theories of coordination failure that purport to explain persistently high unemployment the pareto superior high employment steady state will be the focal point of individual forecasting

optimal incentives for income generation in universities the rule of thumb for the compton tax abstract in this paper we propose a novel framework to model one of the key links between universities and industry the undertaking of applied research we postulate that a basic objective of universities is to undertake fundamental research and that they receive public funding to do so nevertheless faced with tight budget constraints universities may have incentives to allow their staff to devote some of their time to income generating activities such as applied research or consultancy this opens up two channels by which universities can ease their budget constraint i by allowing academics to supplement their income universities may be able to hold down academic salaries ii universities can effectively tax the income that academics raise through applied research or consultancy for example through the imposition of overhead charges by easing their budget constraint universities may be able to take on sufficient extra staff to more than offset the time that existing staff are spending on non fundamental research and thus increase the amount of fundamental research that they can achieve with a given public budget we develop a model of this link between universities and firms and use it to determine the optimal tax that universities should impose on applied research income the compton tax used at mit in the 1930s is an early example of the use of this instrument

the economics of career concerns part ii application to missions and accountability of government agencies the paper uses a simple multitask career concern model in order to analyse the incentives of government agencies officials incentives are impaired by the agency pursuing multiple missions a lack of focus is even more problematic in the case of fuzzy missions that is when outsiders are uncertain about the exact nature of the missions actually pursued by the agency consequently agencies pursuing multiple missions receive less autonomy the paper further shows that professionalization creates a sense of mission for the agency and that the specialization of officials raises their incentives last the paper compares its predictions with the stylized facts on government bureaucracies 1999 the review of economic studies limited

learning through short run macroeconomic forecasts in a micro to macro model abstract firms in the swedish micro to macro model moses learn about their environment through internal adaptive expectations and through short run external forecasts produced by statistical bureaus the statistical bureaus apply different macroeconomic models that they estimate on data generated by moses firms are learning about their degree of trust in the forecasts of statistical bureaus using bayesian rules in our experiments with learning through external forecasts firms are either forced to use only one source of macroeconomic information or allowed to choose between them with these experiments we can simulate a more or less centrally controlled economy experiments demonstrate that the more of variety of sources of information allowed the better macroeconomic performance

the perils of taylor rules abstract since john taylor s 1993 carnegie rochester conf ser publ policy39 195 214 seminal paper a large literature has argued that active interest rate feedback rules that is rules that respond to increases in inflation with a more than one for one increase in the nominal interest rate are stabilizing in this paper we argue that once the zero bound on nominal interest rates is taken into account active interest rate feedback rules can easily lead to unexpected consequences specifically we show that even if the steady state at which monetary policy is active is locally the unique equilibrium typically there exist an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge to a liquidity trap that is a steady state in which the nominal interest rate is near zero and inflation is possibly negative journal of economic literature classification numbers e52 e31 e63

reallocation of corporate resources and managerial incentives in internal capital markets abstract diversified firms often trade at a discount with respect to their focused counterparts the literature has tried to explain the apparent misallocation of resources with lobbying activities or power struggles we show that diversification can destroy value even when resources are efficiently allocated ex post when managers derive utility from the funds under their purview moving funds across divisions may diminish their incentives the ex ante reduction in managerial incentives can more than offset the increase in firm value due to the ex post efficient reallocation of funds this effect is robust to the introduction of monetary incentives moreover we show that asymmetries in size and growth prospects increase the diversification discount

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

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

inflation targeting learning and q volatility in small open economies this paper examines the welfare implications of managing asset price with consumer price inflation targeting by monetary authorities who have to learn the laws of motion for both inflation rates the central bank can reduce the volatility of consumption as well as improve welfare more effectively if it adopts state contingent taylor rules aimed at inflation and q growth targets in this learning environment however under perfect model certainty pure inflation targeting dominates combined consumer and asset price inflation targeting

inferring changes in expectation behavior over time an application of nonlinear time varying parameters estimation this article develops a new method for inferring the structure of agents expectations from macroeconomic time series two versions of a somewhat stylized macroeconomic model are examined expectations of money growth are a central driving variable assumed to be formed as a time varying weighted average of alternative money growth models the weights are estimated as time varying parameters jointly with the structural parameters for the model using a nonlinear time varying parameters method developed for the article the results allow us to infer how agents may have revised their beliefs about competing money growth models including federal open market committee announcements over the sample

learning with misspecification in an artificial currency market abstract agents evolve their forecast rules over time via a modified genetic algorithm in a simple artificial currency market these forecast rules can be nonlinearly misspecified when the misspecification is suppressed learning tends to be complete when it is not suppressed learning can generate persistent exchange rate dynamics

forecasting dynamics and convergence to market fundamentals evidence from experimental asset markets abstract subjects trade shares of a fictitious asset in a computerized double auction market and submit one period ahead forecasts of the mean contract price on average the predictions of the rational expectations hypothesis are not supported and forecasts tend to be both biased and inconsistent with the specification of the process which would generate prices in a rational expectations equilibrium nevertheless an empirical analysis of agents forecasting dynamics indicates that learning does occur and that agents forecasts evolve in a direction consistent with a rational expectations equilibrium

learning and model validation this paper studies adaptive learning with multiple models an agent operating in a self referential environment is aware of potential model misspecification and tries to detect it in real time using an econometric specification test if the current model passes the test it is used to construct an optimal policy if it fails the test a new model is selected as the rate of coefficient updating decreases one model becomes dominant and is used almost always dominant models can be characterized using the tools of large deviations theory the analysis is used to address two questions posed by sargent s phillips curve model

a simple recursive forecasting model abstract we compare the performance of alternative recursive forecasting models a simple constant gain algorithm used widely in the learning literature both forecasts well out of sample and also provides the best fit to the survey of professional forecasters

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

publish or teach analysis of the professor s optimal career path abstract this paper analyzes how faculty members dynamically allocate their efforts between improving their research and teaching skills taking into account the organizational structures and incentives implemented by academic institutions the model builds on the assumption that organizational structures have an impact on the nature of spillover effects between teaching and research competencies we analyze the dynamic equilibrium under unilateral and bilateral spillovers using the no spillover case as a benchmark the bilateral spillover case is the most appealing as it achieves the highest overall performance however the nature of the equilibrium and the career paths can be quite different depending on the parameters of the problem such as the obsolescence of competencies or the strength of the spillover effect this finding provides interesting insights on what could be the most productive configuration of a higher education institution

different missions and commitment power in r d organizations theory and evidence on industry university alliances this paper proposes a theory for why firms conduct some research activities in house but outsource other projects to independent partners and for why firms retain different degrees of control over collaborative research projects the focus is on the determinants of a company s choice to outsource research projects to academic organizations because of the different institutional missions of academic organizations outsourcing a project to a university allows a firm to commit not to terminate or alter a scientifically valuable project before it is complete this commitment is potentially valuable for the firm in an environment where scientific value and economic value may not coincide and scientific workers are responsive to the incentives defined by their community of peers an economic model that formalizes these arguments is developed empirical hypotheses are then formulated about the kind of research activities firms will outsource to universities and activities on which they will exert stronger control evidence from a sample of industry university research agreements as well as from other large sample and case studies shows patterns consistent with the predictions of the model

learning to live in a liquidity trap abstract the taylor rule in combination with the zero lower bound on nominal rates has been shown to create an unintended liquidity trap equilibrium the relevance of this equilibrium has been challenged on the basis that it is not stable under least square learning in this paper we show that the liquidity trap equilibrium is stable under social learning the learning mechanism we employ includes three realistic elements mutation crossover and tournaments we show that agents can learn to have pessimistic sentiments about the central bank s ability to generate price growth giving rise to a stochastically stable environment characterized by deflation and stagnation this article is part of a special issue entitled fiscal and monetary policies

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