using real option analysis for highly uncertain technology investments the case of wind energy technology this study examines the feasibility of using a theoretical model and empirical analysis methods to value renewable energy re investment from perspective of real option analysis roa based on use of a roa approach the re value is evaluated with respect to its ability to conform to the main sensitivity analysis of re investment as well as an empirical method devised to value re investment by using actual data the economic intuitiveness underlying the decision making process for re investment is elucidated while empirical analysis is performed to demonstrate the effectiveness of the options value embedded in current development planning in taiwan for wind energy in addition to revealing the advantages of re development when considering real option analytical results indicate that roa is a highly effective means of quantifying how investment planning uncertainty including managerial flexibility influences re development besides evaluating the value of current re investment this study demonstrates that results of the theoretical model empirical analysis and sensitivity analysis correlate well with each other restated the value of developing re increases when increasing the underlying price time to maturity risk free rate and volatility conversely the value of developing re decreases when increasing the exercise price

sentiments in svars this paper investigates the contribution of sentiments shocks to us fluctuations in a structural var setup with long medium and short run restrictions sentiments shocks are identified as shocks orthogonal to fundamentals that accounts for most of the variance of confidence we assess our identification procedure from simulation experiments and show that it performs pretty well from actual data we obtain that contrary to news shocks on total factor productivity sentiments shocks explain very little of quantities and prices sentiments shocks mostly appear as an idiosyncratic component of confidence these results are robust to various perturbations of the benchmark model

sentiments and aggregate demand fluctuations we formalize the keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations when production decisions must be made under imperfect information about demand optimal decisions based on sentiments can generate stochastic self fulfilling rational expectations equilibria in standard economies without persistent informational frictions externalities nonconvexities or strategic complementarities in production the models we consider are deliberately simple but could serve as benchmarks for more complicated equilibrium models with additional features

self fulfilling currency crises the role of interest rates abstract we develop a stylized currency crises model with heterogeneous information among investors andendogenous determination of interest rates in a noisy rational expectations equilibrium our modelcaptures three key features of interest rates the opportunity cost of attacking the currency respondsto the investors behavior the domestic interest rate may influence the central bank s preferences fora fixed exchange rate and the domestic interest rate serves as a public signal which aggregatesprivate information about fundamentals we explore the payoff and informational channels throughwhich interest rates determine devaluation outcomes and examine the implications for equilibriumselection by global games methods our main conclusion is that multiplicity is not an artifact ofcommon knowledge in particular we show that multiplicity emerges robustly either when adevaluation is triggered by the cost of high domestic interest rates as in obstfeld 1996 or when adevaluation is triggered by the central bank s loss of foreign reserves as in obstfeld 1986 providedthat the domestic asset supply is sufficiently elastic in the interest rate and shocks to the domesticbond supply are sufficiently small christian helliwigdepartment of economicsuniversity of california los angelesbox 951477los angeles ca 90095 1477arijit mukherjiuniversity of minnesotaaleh tsyvinskidepartment of economicsharvard universitylittauer centercambridge ma 02138 3001

uncertainty in the theory of renewable resource markets the natural growth rate of most renewable resource stocks is in part stochastic this paper examines the implications of such ecological uncertainty for competitive equilibrium in a market with property rights we show that stochastic fluctuations add a risk premium to the rate of return required to keep a unit of stock in situ and we examine the effects of fluctuations on resource rent examples are used to show that extraction can increase decrease or be left unchanged as the variance of the fluctuations increases depending on the extent of market self correction regulatory implications are also discussed renewable resource economics has traditionally been concerned with the study of dynamically optimal harvesting policies given a deterministic function for the natural growth of the resource stock issues have included the existence and characteristics of steady state equilibria for the optimally managed resource the need for and design of regulatory policies to prevent over exploitation and conditions under which as a social optimum or otherwise the resource will be exploited to extinction 1 much of this work has been based on the assumption of a fixed and exogenous price for the harvested resource typically resulting in bang bang solutions for the harvesting policy however some recent papers make price endogenous and thereby describe how the extraction rate and the rate of return and asset value of the resource behave in a competitive market with property rights 2

optimizing the level of renewable electric r d expenditures using real options analysis abstract one of the primary objectives of the united states federal non hydro renewable electric r d program is to promote the development of technologies that have the potential to provide consumers with stable and secure energy supplies in order to quantify the benefits provided by continued federal renewable electric r d this paper uses real option pricing techniques to estimate the value of renewable electric technologies in the face of uncertain fossil fuel prices within the real options analysis framework the current value of expected future supply from renewable electric technologies net of federal r d expenditures is estimated to be 30 6 billion of this value 86 can be attributed to past federal r d efforts and 14 can be attributed to future federal r d efforts assuming continued federal r d funding at 300 million yr in addition real options analysis shows that the value of renewable electric technologies increases as current and future r d funding levels increase this indicates that the current level of federal renewable electric r d funding is sub optimal

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

inflation expectations in turkey learning to be rational turkey implemented an ambitious restructuring of the economy in the past several years including the adoption of inflation targeting along with a floating exchange rate regime inflation came down from almost triple digits to single digits between 2001 and 2005 this particular episode of the turkish economy sets a genuine case study for investigating the possible changes in the behaviour of inflation expectations upon a regime shift accordingly this study analyses inflation expectations in turkey focusing especially on the post 2001 transition phase we first conduct classical tests of unbiasedness and efficiency using aggregate survey data between august 2001 and october 2007 to get a statistical benchmark for rationality we find that classical tests reject full rationality hypothesis for all series except next month s consumer price index cpi inflation expectations then we carry out time varying parameter tvp estimates based on a kalman filter to see how the coefficients in the classical tes

learning from prices public communication and welfare we study the effect of releasing public information about productivity or monetary shocks using a micro founded macroeconomic model in which agents learn from the distribution of nominal prices while a public release has the direct beneficial effect of providing new information it also has the indirect adverse effect of reducing the informational efficiency of the price system we show that the negative indirect effect can dominate thus the public information release may increase uncertainty about the monetary shock and reduce welfare we find that the optimal communication policy is always to release either all or none of the information

knowing what others know coordination motives in information acquisition we explore how optimal information choices change the predictions of strategic models when a large number of agents play a game with strategic complementarity information choices exhibit complementarity as well if an agent wants to do what others do they want to know what others know this makes heterogeneous beliefs di cult to sustain and may generate multiple equilibria in models with substitutability agents prefer to difierentiate their information choices we use these theoretical results to examine the role of information choice in recent price setting models and to propose modeling techniques that ensure equilibrium uniqueness

as a renewable energy hydropower for sustainable development in turkey the most important renewable sources are hydropower biomass geothermal solar and wind turkey s geographical location has several advantages for extensive use of most of these renewable energy sources in recently electricity has demand increased significantly it is the fastest growing end use of energy therefore technical economic and environmental benefits of hydroelectric power make it an important contributor to the future world energy mix in the world particularly in the developing countries renewable energy resources appear to be one of the most efficient and effective solutions for sustainable energy development in turkey turkey s geographical location has several advantages for extensive use of most of the renewable energy sources this paper deals with policies to meet increasing energy and electricity demand for sustainable energy development in turkey turkey has a total gross hydropower potential of 433 gwh year but only 125 gwh year of the total hydroelectric potential of turkey can be economically used

tfp news and sentiments the international transmission of business cycles we propose a novel identification scheme for a non technology business cycle shock that we label sentiment this is a shock orthogonal to identified surprise and news tfp shocks that maximizes the short run forecast error variance of an expectational variable alternatively a gdp forecast or a consumer confidence index we then estimate the international transmission of three identified shocks surprise tfp news of future tfp and sentiment from the us to canada the us sentiment shock produces a business cycle in the us with output hours and consumption rising following a positive shock and accounts for the bulk of short run business cycle fluctuations in the us the sentiment shock also has a significant impact on canadian macro aggregates in the short run it is more important than either the surprise or the news tfp shocks in generating business cycle comovement between the us and canada accounting for up to 50 of the forecast error variance of canadian gdp and about one third of canadian hours imports and exports the news shock is responsible for some comovement at 5 10 years and surprise tfp innovations do not generate synchronization

a portfolio risk analysis on electricity supply planning abstract conventional electricity planning selects from a range of alternative technologies based on the least cost method without assessing cost related risks the current approach to determining energy generation portfolios creates a preference for fossil fuel consequently this preference results in increased exposure to recent fluctuations in fossil fuel prices particularly for countries heavily depend on imported energy this paper applies portfolio theory in conventional electricity planning with taiwan as a case study the model objective is to minimize the risk weighted present value of total generation cost both the present value of generating cost and risk variance of the generating cost are considered risk of generating cost is introduced for volatile fuel prices and uncertainty of technological change and capital cost reduction the impact of risk levels on the portfolio of power generation technologies is also examined to provide some valuable policy suggestions study results indicate that replacing fossil fuel with renewable energy helps reduce generating cost risk however due to limited renewable development potential in taiwan there is an upper bound of 15 on the maximum share of renewable energy in the generating portfolio in the meantime reevaluating the current nuclear energy policy for reduced exposure to fossil fuel price fluctuations is worthwhile

time to build option value and investment decisions a comment abstract we correct the analysis of the model of time to build in majd and pindyck 1987 journal of financial economics 18 7 27 for the omission of an essential optimality condition our analysis reveals an additional insight long times to build reduce the effects of increased project value volatility i e higher investment thresholds in comparison to standard real option models of investment under uncertainty where investment is instantaneous thus a naive npv rule can sometimes be an appropriate initial guide to investment

real options approach to renewable energy investments in mongolia developing nations are seeking alternative energy for electricity and one attractive alternative is renewable energy this research analyzes changing investment environment for renewable energy with real options approach and explores its potential in developing economies through studying the case of mongolia under coal price uncertainty to evaluate comparative attractiveness of either continuing to use coal based infrastructures or switching to renewable energy we formulate social revenue functions for the two environments assuming that renewable energy has lower external costs and coal prices follow geometric brownian motion gbm or geometric mean reverting gmr processes we find the optimal trigger coal prices for switching technologies with some scenarios in electricity price and externality characterize when renewable energy investments become attractive in contrast to conventional wisdom we identify some situations where the value of having more decision opportunities does not exceed that of a now or never decision for switching technologies and welfare losses are incurred the optimal trigger prices are higher in gbm than in gmr and our result raises the possible risks for waiting to switch energy to avoid welfare losses in mongolia the government should increase electricity prices or switch to renewable energy earlier especially when people pay more for the removal of externalities

optimal wind power deployment in europe a portfolio approach geographic diversification of wind farms can smooth out the fluctuations in wind power generation and reduce the associated system balancing and reliability costs the paper uses historical wind production data from five european countries austria denmark france germany and spain and applies the mean variance portfolio theory to identify cross country portfolios that minimise the total variance of wind production for a given level of production theoretical unconstrained portfolios show that countries spain and denmark with the best wind resource or whose size contributes to smoothing out the country output variability dominate optimal portfolios the methodology is then elaborated to derive optimal constrained portfolios taking into account national wind resource potential and transmission constraints and compare them with the projected portfolios for 2020 such constraints limit the theoretical potential efficiency gains from geographical diversification but there is still considerable room to improve performance from actual or projected portfolios these results highlight the need for more cross border interconnection capacity for greater coordination of european renewable support policies and for renewable support mechanisms and electricity market designs providing locational incentives under these conditions a mechanism for renewables credits trading could help aligning wind power portfolios with the theoretically efficient geographic dispersion 2009 elsevier ltd

estimating the output gap in a changing economy author affiliation hakan kara central bank of the republic of turkey research and monetary policy department istiklal caddesi no 10 ulus ankara 06100 turkey hakan kara tcmb gov trfethi obunc central bank of the republic of turkey research and monetary policy department istiklal caddesi no 10 ulus ankara 06100 turkey fethi ogunc tcmb gov trumit ozlale tobb university of economics and technology department of economics sobutozu caddesi no 43 sobutozu ankara 06560 turkey ozlale etu edu tr corresponding authorcabri sarikaya central bank of the republic of turkey research and monetary policy department istiklal caddesi no 10 ulus ankara 06100 turkey cagri sarikaya tcmb gov tr acknowledgment we thank levent ozbek for his valuable assistance and suggestions we are also grateful to dilara ece arzu cetinkaya and ayse tatar curl for their contributions throughout this project the views expressed are those of the authors and should not be attributed to the central bank of the republic of turkey 1 introductionthe emergence of price stability as the overriding goal of monetary policy in recent decades has led central banks to use all available information in the economy to foresee the future course of price dynamics one important variable that is closely monitored by the central banks in this context has been the output gap output in excess of its neutral or potential level a positive output gap for example is often perceived as a signal of excess demand which might require tightening to prevent the economy from overheating output gap by definition cannot be directly observed and thus has to be estimated however the information content of conventional output gap measures might be limited 1 not surprisingly studies on developing proper alternative techniques have intensified in recent years especially after the shortcomings of the hodrick prescott hp filter the most commonly used methodology were realized 2 in this context multivariate filtering techniques utilizing information from macroeconomic relationships have been proposed as alternatives 3one appropriate estimation technique in such a setting is the kalman filter which is a recursive algorithm for optimally forecasting the unobserved component given the observed variables and the imposed economic structure however existent multivariate techniques often impose strong restrictions in defining the relationships between key macroeconomic variables for example in these settings the relationships that govern the dynamics of the economy stay intact over the sample period this restriction might not hold for a constantly changing economy at least for economies experiencing massive structural changes as emerging markets do adopting different monetary policy regimes and experiencing frequent fiscal and financial restructuring periods affect the behavior of economic agents over time changing the reduced form relations between macroeconomic variables in these countries 4 therefore although standard multivariate filters address and hence improve upon the criticism regarding both the hp filter and other univariate statistical procedures there may be room for improvement if one can relax the typical restriction that system parameters stay constant over time this is the main motivation of our paper in this study we present a multivariate unobserved components model to estimate both the output gap and the time varying system parameters we use the turkish economy as a laboratory to demonstrate this technique as mentioned above the estimation of output gap by this method allows us to address changing relationships in the economy leaving room for assessing the effect of different policy regimes on the relationship between key macroeconomic variables such as inflation interest rates exchange rates and output gap

establishing the role that wind generation may have in future generation portfolios assessing the correct future mix in generation portfolios has become more difficult given the introduction of emission trading schemes the recent fuel price rises and the increasing competitiveness of wind energy this paper combines analysis of generation economics load and wind generation characteristics generation adequacy and plant utilization to gain insight into the role of wind generation in desirable generation portfolios the unique characteristics of wind generation are accounted for in the analysis and sensitivity analysis is carried out with respect to discount rates carbon taxes and various fuel price scenarios results show that for a large range of future scenarios wind generation has a significant role to play in future generation portfolios in ireland mean variance portfolio theory is applied to examine the benefits of portfolio diversification in terms of avoiding exposure to volatile fuel prices analysis shows that wind generation has a further role to play in generation portfolios in this respect

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

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

investment timing and optimal capacity choice for small hydropower projects this paper presents a method for assessing small hydropower projects that are subject to uncertain electricity prices we present a real options based method with continuous scaling and we find that there is a unique price limit for initiating the project if the current electricity price is below this limit it is never optimal to invest but above this limit investment is made according to the function for optimal size the connection between the real option and the physical properties of a small hydropower plant is dealt with using a spreadsheet model that performs a technical simulation of the production in a plant based on all the important choices for such a plant the main results of the spreadsheet are simulated production size and the investment costs which are in turn used for finding the value of the real option and the price limit the method is illustrated on three different norwegian small hydropower projects

disagreement and biases in inflation expectations empirical work documents substantial disagreement in inflation expectations obtained from survey data furthermore the extent of such disagreement varies systematically over time in a way that reflects the level and variance of current inflation this paper oers a simple explanation for these facts based on asymmetries in the forecasters costs of over and under predicting inflation our model implies biased forecasts with positive serial correlation in forecast errors and a cross sectional dispersion that rises with the level and the variance of the inflation rate it also implies that forecast errors at dierent horizons can be predicted through the spread between the short and long term variance of inflation we find empirically that these patterns are present in inflation forecasts from the survey of professional forecasters a constant bias component not explained by asymmetric loss and rational expectations is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982

market uncertainty correlated and sunspot equilibria in imperfectly competitive economies first version received june 1988 final version accepted november 1990 eds an imperfectly competitive economy is very prone to market uncertainty including uncertainty about the liquidity or thickness of markets we show in particular that there exist stochastic equilibrium outcomes in nonstochastic market games if and only if the endowments are not pareto optimal we also provide a link between extrinsic uncertainty arising in games e g correlated equilibria and extrinsic uncertainty in market economies e g sunspot equilibria a correlated equilibria to the market game is either a sunspot equilibrium or a non sunspot equilibrium to the related securities games but the converse is not true in general

correlated equilibrium as an expression of bayesian rationality if it is common knowledge that the players in a game are bayesian utility maximizers who treat uncertainty about other players actions like any other uncertainty then the outcome is necessarily a correlated equilibrium random strategies appear as an expression of each player s uncertainty about what the others will do not as the result of willful randomization use is made of the common prior assumption according to which differences in probability assessments by different individuals are due to the different information that they have where information may be interpreted broadly to include experience upbringing and genetic makeup copyright 1987 by the econometric society

private information and sunspots in sequential asset markets we study a model where some agents have private information about risky asset returns and trade to obtain capital gains while others acquire the risky asset and hold it to maturity forming expectations of returns based on market prices we show that under such a structure in addition to fully revealing rational expectations equilibria there exists a continuum of equilibrium prices consistent with rational expectations where the asset prices are subject to sunspot shocks such sunspot shocks can generate persistent uctuations in asset prices that look like a random walk in an e cient market

testing the rationality of inflation expectations derived from survey data a structure based approach following the inspiration of muth 21 expectations are said to be rational if the subjective probability distribution of expected outcomes coincides with the objective probability distribution of actual outcomes in practical applications however it is common to employ the so called weak form version of this hypothesis which defines rationality as equality between the expected outcome and the objective mathematical expectation conditional on all data available at the time the expectation is formed thus expectations of inflation are said to be weakly rational in muth s sense if

what are uncertainty shocks abstract many modern business cycle models use uncertainty shocks to generate aggregate fluctuations however uncertainty is measured in a variety of ways our analysis shows that the measures are not the same either statistically or conceptually raising the question of whether fluctuations in them are actually generated by the same phenomenon we propose a mechanism that generates realistic micro dispersion cross sectional variance of firm level outcomes higher order uncertainty disagreement and macro uncertainty uncertainty about macro outcomes from changes in macro volatility if we want to consider uncertainty shocks as a unified phenomenon these results show what such a shock might actually entail

indeterminacy and increasing returns abstract we investigate properties of the one sector growth model with increasing returns under two organizational structures capable of reconciling the existence of aggregate increasing returns with competitive behavior by firms the first involves input externalities the second involves monopolistic competition we show for parameters in close accord with recent literature on real business cycles that the model displays an indeterminate steady state that can be exploited to generate a model of business fluctuations driven by self fulfilling beliefs in our first class of models growth is generated by exogenous increases in factor productivity in the second class the marginal product of capital is large enough for endogenous growth journal of economic literature classification numbers e00 e3 o40

do shocks to animal spirits cause output fluctuations we evaluate whether shocks to animal spirits affect real outcomes at business cycle frequencies using data on consumer confidence and region and state level coincident activity indexes in a vector autoregression var with long run restrictions we assume that animal spirits shocks do not affect the long run level of activity innovations in fundamentals explain most variation in the level of activity but animal spirits have economically significant effects at business cycle frequencies a positive innovation in animal spirits causes real activity to rise by between 0 2 and 0 6 in the medium term and animal spirits may explain up to about half of real fluctuations in the medium run

are inflation expectations rational abstract several recent papers report evidence of an apparent statistical bias in inflation expectations and interpret these findings as overturning the rational expectations hypothesis in this paper we investigate the validity of such an interpretation we present a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along several dimensions by construction model agents form rational expectations we run a standard regression on equilibrium realizations of inflation and inflation expectations over sample periods corresponding to those tests performed on actual data and find evidence of an apparent bias in inflation expectations our experiments suggest that this incorrect inference is largely the product of a small sample problem exacerbated by short run learning dynamics in response to infrequent shifts in monetary policy regimes

asymmetric impacts of international energy shocks on macroeconomic activities while limited by its scarcity of natural resources the impacts of energy price changes on taiwan s economic activities have been an important issue for social public and government authorities this study applies the multivariate threshold model to investigate the effects of various international energy price shocks on taiwan s macroeconomic activity by separating energy price changes into the so called decrease and increase regimes we can realize different impacts of energy price changes and their shocks on economic output the results confirm that there is an asymmetric threshold effect for the energy output nexus the optimal threshold levels are exactly where the oil price change is at 2 48 the natural gas price change is at 0 66 and the coal price change is at 0 25 the impulse response analysis suggests that oil price and natural gas shocks have a delayed negative impact on macroeconomic activities 2012 published by elsevier ltd

a real option analysis of investments in hydropower the case of norway abstract this paper presents a valuation study of hydropower investment opportunities in the norwegian context according to nve norwegian water resources and energy directorate the regulator there is a potential of 39 twh not yet developed generation in a normal year is approximately 120 twh by using the conceptual real option framework of dixit and pindyck 1994 investment under uncertainty princeton university press princeton nj one can estimate the value of investment opportunities to nok 11 million gwh eur 1 4 million gwh furthermore the optimal trigger price for initiating an investment based on electricity forward prices is calculated to nok 0 32 kwh eur 0 04 kwh the analysis shows consistency between real option theory and aggregate investment behaviour in norwegian hydropower

fiscal policy in an unemployment crisis this paper shows that large scal multipliers arise naturally from equilibrium unemployment dynamics in response to a shock that brings the economy into a liquidity trap an expansion in government spending increases output and causes a fall in the unemployment rate since movements in unemployment are persistent the eects of current spending linger into the future leading to an enduring rise in income as an enduring rise in income boosts private demand even a temporary increase in government spending sets in motion a virtuous employment spending spiral with a large associated multiplier this transmission mechanism contrasts with the conventional view in which scal policy may be ecacious only under a prolonged and committed rise in government spending which engineers a spiral of increasing ination

mood swings and business cycles evidence from sign restrictions this paper provides new evidence that bouts of optimism and pessimism are an important source of u s business cycles using the identification schemes based on sign restrictions we document that identified optimism and pessimism shocks account for about 30 of u s business cycle fluctuations in hours and output in addition our empirical findings are consistent with the intensive and extensive margin adjustments in the u s labor market over business cycles providing further support to optimism shocks being an important source of u s business cycles the identified optimism shocks are at least partially rational as total factor productivity is found to rise 8 12 quarters after an initial bout of optimism while this later finding is consistent with some previous findings in the news shock literature we cannot rule out that such episodes reflect self fulfilling beliefs

perceived uncertainty shocks excess optimism pessimism and learning in the business cycle abstract what are the effects of beliefs sentiment and uncertainty over the business cycle to answer this question we develop a behavioral new keynesian macroeconomic model in which we relax the assumption of rational expectations agents are instead boundedly rational they have a finite planning horizon and they learn about the economy over time moreover we allow agents to have a potentially asymmetric loss function in forecasting which creates a direct channel for expected variances to affect the economy in forming expectations agents may be subject to shifts in optimism and pessimism sentiment and their beliefs may be influenced by their perceptions about future uncertainty we estimate the behavioral model using bayesian methods and exploit a large number of subjective expectation series both point and density forecasts at different horizons from the survey of professional forecasters we find that sentiment shocks are the key source of business cycle fluctuations shifts in perceived uncertainty can also affect real activity and inflation through a confidence channel as they play an important role in belief formation overall the results shed light on the importance of behavioral forces over the business cycles and on the contribution and interaction of first moment sentiment shocks versus second moment perceived uncertainty shocks

rational expectations informational efficiency and tests using survey data a reply even if it does not eliminate them completely the primary effect of using individual expectations data rather than cross sectional averages as a regressor is to introduce additional measurement error finally the distinction between rational expectations and full informational efficiency is more than a semantic one the failure to make this distinction seems to be the cause of substantial confusion in the literature the distinction has become increasingly important with the advent of rational expectations macroeconomic models see lucas 1973 barro 1976 which are driven by imperfections and asymmetries of information yet in which each economic agent is assumed to process rationally the information he possesses in particular empirical tests which depend upon full informational efficiency can provide little evidence on the validity of the rational expectations hypothesis as that term has come to be used in macroeconomics

central bank communication in the media and investor sentiment abstract this paper explores the relationship between central bank communication and investor sentiment we first use media coverage on fed chair s communication to quantify the degree of confidence and optimism expressed by the fed chair and call this variable the overconfidence indicator second we relate the overconfidence indicator to investor sentiment our results show that an overconfident fed chair is significantly associated with higher investor sentiment further extensions suggest that i investors are more sensitive to central bank communication during a recession and that ii they adjust rapidly their sentiment following central bank communication thus showing that there is no underreaction bias these findings provide additional insights on how central bank communication shapes investor sentiment in the context of the global financial crisis and the zero lower bound on nominal interest rates

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

renewables and climate change mitigation irreversible energy investment under uncertainty and portfolio effects abstract ongoing negotiations under the unfccc center around the possibilities for stabilization of greenhouse gases at a safe level new energy technologies are assumed to make major contributions to this goal however in the light of scientific uncertainty e g about climate sensitivity feedback effects etc market uncertainty e g fuel price volatility technological uncertainty e g availability of renewable technology socio economic uncertainty e g development of different macroeconomic factors and policy uncertainty e g about commitment to specific targets and stability of co2 prices it is difficult to assess the importance of different technologies in achieving robust long term climate risk mitigation one example currently debated in this context is biomass based energy which can be used to produce both carbon neutral electricity and at the same time offer the possibility of negative emissions by capturing carbon from biomass combustion at the conversion facility and permanently storing it in this study we analyze the impact of uncertainty on investment decision making at the plant level in a real options valuation framework and then use the ggi scenario database iiasa 2009 as a point of departure for deriving optimal technology portfolios across different socio economic scenarios for a range of stabilization targets focusing in particular on the new low emission targets using alternative risk measures

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

price dispersion private uncertainty and endogenous nominal rigidities this article shows that when agents learn from prices large private uncertainty may result from a small amount of heterogeneity as in a phelps lucas island model final producers look at the prices of their local inputs to infer aggregate conditions however market linkages between islands make the informativeness of local prices endogenous to general equilibrium relations in this context i show that a vanishingly small heterogeneity in local conditions is enough to generate an equilibrium in which prices are rigid to aggregate shocks and transmit only partial information i use this insight as a microfoundation for price rigidity in an otherwise frictionless monetary model and show that even a tiny amount of dispersion in fundamentals can lead to large non neutrality of money

the merit order effect a detailed analysis of the price effect of renewable electricity generation on spot market prices in germany the german feed in support of electricity generation from renewable energy sources has led to high growth rates of the supported technologies critics state that the costs for consumers are too high an important aspect to be considered in the discussion is the price effect created by renewable electricity generation this paper seeks to analyse the impact of privileged renewable electricity generation on the electricity market in germany the central aspect to be analysed is the impact of renewable electricity generation on spot market prices the results generated by an agent based simulation platform indicate that the financial volume of the price reduction is considerable in the short run this gives rise to a distributional effect which creates savings for the demand side by reducing generator profits in the case of the year 2006 the volume of the merit order effect exceeds the volume of the net support payments for renewable electricity generation which have to be paid by consumers

sentiment and the u s business cycle abstract psychological factors are commonly believed to play a role on cyclical economic fluctuations but they are typically omitted from state of the art macroeconomic models this paper introduces sentiment in a medium scale dsge model of the u s economy and tests the empirical contribution of sentiment shocks to business cycle fluctuations the assumption of rational expectations is relaxed the paper exploits instead observed data on expectations in the estimation the observed expectations are assumed to be formed from a near rational learning model agents are endowed with a perceived law of motion that resembles the model solution under rational expectations but they lack knowledge about the solution s reduced form coefficients they attempt to learn those coefficients over time using available time series at each point in the sample and updating their beliefs through constant gain learning in each period however they may form expectations that fall above or below those implied by the learning model these deviations capture excesses of optimism and pessimism which can be quite persistent and which are defined as sentiment in the model different sentiment shocks are identified in the empirical analysis waves of undue optimism and pessimism may refer to expected future consumption future investment or future inflationary pressures the results show that exogenous variations in sentiment are responsible for a sizable above forty percent portion of historical u s business cycle fluctuations sentiment shocks related to investment decisions which evoke keynes animal spirits play the largest role when the model is estimated imposing the rational expectations hypothesis instead the role of structural investment specific and neutral technology shocks significantly expands to capture the omitted contribution of sentiment

wind power reliability valuation in a hydro dominated power market the colombian case abstract the design of market mechanisms that remunerates the reliability provided by a generator in a power market is a task that aims to ensure the normal operation of the system for the case of a hydro dominated system when wind power is introduced and operated under the merit order effect it is possible to assess the effect of the displacement of hydro generation due to wind generation over the system s reliability in terms of firm energy taking this into account a model that valuates the firm energy provided by wind power in a hydro dominated system is proposed this model considers the effect of wind power over the system s reservoirs and the market price of electricity and valuates the firm energy as the net savings of the system related to the increase in the firm energy of the system when wind power is introduced the results show that wind power under merit order effect increases the firm energy of the system and decreases the market price of electricity being the net savings in comparison to the corresponding hydro only system the reliability income that should be perceived by the wind power generator

testing the rationality of price forecasts new evidence from panel data this paper tests the rationality of individual price forecasts in a panel of professional forecasters here unlike in most previous studies rationality is not rejected the results here differ because 1 using individual forecasts avoids aggregation bias 2 comparison of forecasts to initial data avoids bias due to data revision 3 the professional forecasters have economic incentives to state their expectations accurately and 4 a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used copyright 1990 by american economic association

signaling in a global game coordination and policy traps this paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs while exogenous asymmetric information has been shown to select a unique equilibrium we show that the endogenous information generated by policy interventions leads to multiple equilibria the policy maker is thus trapped into a position in which self fulfilling expectations dictate not only the coordination outcome but also the optimal policy this result does not rely on the freedom to choose out of equilibrium beliefs nor on the policy being a public signal it may obtain even if the policy is observed with idiosyncratic noise

the environmental paradox in generation how south america is gradually becoming more dependent on thermal generation there has been an increasing focus on global warming emission of green house gases ghg and the problems this might create in this article we review the trend in sustainable and renewable electricity generation in south america where the generation portfolio increasingly depends on thermal generation in particular gas south america is a region that has relatively low emissions but the current development is not desirable in environmental terms we analyze the underlying reasons for this development which is related to security of supply deregulation and the cost of renewable energy we review and discuss the policies to promote renewables in the region we analyze the potential advantages and drawbacks of different types of market interventions such as direct subsidies that create potentially strong market distortions more sophisticated market interventions that might be less intrusive but not necessarily as effective as e g firm energy markets we also review market based solutions such as the clean market mechanism and its potential and the use of renewable electricity in non interconnected zones which might be one of the most economically attractive applications of renewables however without a stronger and more aggressive intervention from the governments in the region it is unlikely that the increase in thermal generation can be stopped

more than a feeling confidence uncertainty and macroeconomic fluctuations economists observers and policy makers often emphasize the role of sentiment as a potential driver of the business cycle in this paper we provide three contributions to this debate first we give an overview of the recent literature on the nexus between sentiment considering both confidence and uncertainty and economic activity second we review existing empirical measures of sentiment in particular consumer confidence stock market volatility smv and economic policy uncertainty epu on monthly data for 27 countries 1985 2016 third we identify some new stylized facts based on international evidence while different measures are surprisingly lowly correlated on average in each country they are typically highly positively correlated across countries suggesting the existence of a global factor or sizeable international spillovers of sentiment consumer confidence has the closest co movement with economic and financial variables and most of the correlations are contemporaneous or forward looking consistent with the view that economic sentiment is indeed a driver of activity

macroeconomic expectations of households and professional forecasters economists have long emphasized the importance of expectations in determining macroeconomic outcomes yet there has been almost no recent effort to model actual empirical expectations data instead m acroeconomists usually simply assume that expectations are rational this paper shows that while empirical household expectations are not rational in the usual sense expectational dynamics are well captured by a model in which households views derive from news reports of the views of professional forecasters which in turn may be rational the model s estimates imply that people only occasionally pay attention to news reports this inattention generates stickyness in aggregate expectations with important macroeconomic consequences

how capacity mechanisms drive technology choice in power generation the case of colombia abstract colombia enacted its first legal framework for promoting alternative energies in 2001 and a second framework in 2014 since the generation technology mix has not changed since 2000 there is a need to understand how regulation and market structure affect the adoption of technologies in this paper we address the question of what has been the impact of the capacity mechanisms adopted during the 2000s on technology choices for power generation in colombia our approach is to analyze the evolution of market structure and regulation we found that regulatory uncertainty and low prices drove a surge of small hydro plants during the 2000s during the 2010s the new regulatory focus on reliability of supply has resulted in increased coal fueled generation and large hydro this increased reliance on hydro power can further delay the entry of renewable technologies and the diversification of the colombian portfolio

are sunspots necessary in this paper i show the existence of stationary rational expectations equilibria in a simple two island overlapping generations model of the type first considered by lucas in which all uncertainty is endogenous the result is obtained by first constructing sunspot equilibria on each island separately and then using the equilibrium pricing equations to eliminate the sunspot variable in the resulting equilibrium each island s prices serve as the sunspot for the other island the constructed equilibrium is nontrivially stochastic

dynamic coordination and the optimal stimulus policies this article studies stimulus policies in a simple macroeconomic model featuring a dynamic coordination problem that arises from demand externalities and fixed costs of investment in times of low economic activity firms face low demand and hence have lower incentives for investing which reinforces their low demand expectations in a benchmark case with no shocks the economy might get trapped in a low output regime and a social planner would be particularly keen to incentivise investment at times of low economic activity however this result vanishes once shocks are considered

sentiments and economic activity evidence from u s states we examine whether sentiment influences aggregate demand by studying the relationship between the michigan survey expectations concerning national output growth and future economic activity at the state level we instrument for local sentiments with political outcomes positing that agents in states with a higher share of congressmen from the political party of the sitting president will be more optimistic this instrument is strong in the first stage and our results confirm a positive relationship between sentiments and future state economic activity that is robust to a battery of sensitivity tests

what do economists know an empirical study of experts expectations for more than three decades economic columnist joseph a livingston has canvassed a panel of economists twice a year eliciting their six month and twelve month forecasts for more than a dozen key variables this study analyzes whether the experts predictions are unbiased and whether complete use was made of all relevant known information unbiasedness and completeness being necessary conditions for fully rational expectations little bias was found in either the half year or full year predictions but extensive underutilization of information particularly data on monetary growth occurred to prophecy is extremely difficult especially with respect to the future chinese proverb do economists expectations regarding key price and nonprice variables utilize all known relevant information in an unbiased efficient manner this is a worthy subject for research for several reasons properties of experts predictions likely form an upper bound for those of laymen further as john muth 14 has noted the character of dynamic processes is typically very sensitive to the way expectations are influenced by the actual course of events p 316 hence we need to know precisely how events do affect expectations finally the common practice of replacing a variable s generally unobserved expectation with a proxy based on its past values will be unbiased and will not cause bias in other

the accuracy and rationality of uk inflation expectations some quantitative evidence 1987 the accuracy and rationality of uk inflation expectations some quantitative evidence applied economics vol 19 no 6 pp 819 828

correlated equilibria and sunspots we examine when sunspots uncertainty that has no influence on endowments preferences or technology can affect equilibrium in a simple two period two commodity two class economy we find that such an effect is possibly only if the signals random variables that different agents observe are imperfectly correlated neither perfectly correlated nor independent and at least one commodity is a giffen good for two special cases we characterize the set of equilibria due to sunspots we conclude by showing the intimate connection between the sunspot equilibria of our finite horizon model and those of the overlapping generations literature

what do investment managers know an empirical analysis of practitioners predictions the rationality of investment managers expectations is tested using quantified survey data the variables examined include expectations of the annual percentage chan ge in the u k fta all share and u s standard and poor s composite s tock market indices and the expected rates of u k price and wage in flation tests for the orthogonality of forecast errors to both small and large information sets known at the time of the forecast are car ried out both with and without allowance for measurement errors in t he expectations series the results decisively reject the rational ex pectations hypothesis as applied to investment managers expectations copyright 1988 by the london school of economics and political science

to aggregate pool or neither it is well known that even if all forecasters are rational unbiasedness tests using consensus forecasts are inconsistent because forecasters have private information however if all forecasters face a common realization pooled estimators are also inconsistent in contrast we show that when predictions and realizations are integrated and cointegrated microhomogeneity ensures that consensus and pooled estimators are consistent therefore contrary to claims in the literature in the absence of microhomogeneity pooling is not a solution to the aggregation problem we reject microhomogeneity for a number of forecasts from the survey of professional forecasters therefore for these variables unbiasedness can only be tested at the individual level

impact of climate policy uncertainty on the adoption of electricity generating technologies this paper presents a real options model where multiple options are evaluated simultaneously so that the effect of the individual options on each other is accounted for we apply this model to the electricity sector where we analyze three typical technologies based on fossil fuel fossil fuel with carbon capture and renewable energy respectively in this way we can analyze the transition from co2 intensive to co2 neutral electricity production in the face of rising and uncertain co2 prices in addition such a modelling approach enables us to estimate precisely the expected value of perfect information i e the willingness of investors and producers to pay for information about the correct co2 price path as can be expected the expected value of information rises with increasing co2 price uncertainty in addition the larger the price uncertainty the larger are the cumulative co2 emissions over the coming century the reason for this is that the transition to less co2 intensive technologies is increasingly postponed with rising co2 price uncertainty by testing different price processes geometric brownian motion versus jump processes with different jump frequencies we can also make useful recommendations concerning the importance of policy predictability we find that it is better to have climate change policies that are stable over a certain length of time and change abruptly than less abrupt but more frequently changing policies less frequent fluctuations reduce the expected value of information and result in smaller cumulative co2 emissions