the optimal taxation of fiat money in search equilibrium this paper investigates the link between welfare and the taxation of money in the context of a general equilibrium search model where decentralized trading motivates the use of fiat money since buyers with money must invest effort or search intensity to contact sellers with goods a natural trading externality arises given a sufficiently productive economy search efforts will be too low relative to social efficiency this provides a welfare improving role for policies which tax money balances the nature of this role is explored and its implications for optimal monetary policy discussed copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

endogenous fluctuations in a bounded rationality economy learning non perfect foresight equilibria abstract we study forward looking economic models assuming that agents take one step ahead expectations looking back k time periods we show that the dynamics of the economy with such an expectation function are characterized by the coexistence of perfect foresight and nonperfect foresight cycles the stability of all these periodic solutions under bounded rationality is related to the stability of the perfect foresight cycles journal of economic literature classification numbers c62 d83 d84 e31 e32

the determinants of equilibrium unemployment in britain a lot of energy is currently being expended in trying to understand what has been happening to unemployment in britain and the rest of the developed world in this paper we look at this question in the british context by trying to confront some possible explanations with the data since the data we use are quarterly over rather a short period we are setting the explanations a very hard test most explanations tend to be rather casual and the theories underpinning them ill developed thus for example the so called real wage argument is based on the idea that real wages affect labour demand and that the equilibrium real wage bears some relatively stable relationship to output per head but how stable is not clear thus whether or not we can expect a well defined stable ceteris paribus dynamic relationship between real product wages as a proportion of output per head and unemployment is equally unclear so if such a relationship does not show up in a quarterly regression model this may not be that serious for the theory nevertheless we must look for the relationship for how else are we ever to discriminate between a plethora of conflicting views the primary emphasis in this paper is on the secular factors affecting unemployment rather than the cyclical variables consequently we shall not be concerned with developing a coherent theory of cyclical fluctuations and in the empirical work we shall control for the cycle simply by making use of those exogenous or predetermined variables which other work in this field suggests are important 2 the remainder of the paper is set out as follows the next section is concerned with specifying a model which generates a definition of equilibrium unemployment the outline of this model is a pair of equations determining the flows into and out of unemployment and these are specified in section ii which looks closely at the possible variables involved section iii then deals with the results and presents some general conclusions

dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand the price quantity dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand curves is analysed we prove that chaotic dynamical behaviour can occur even if both the supply and demand curves are monotonic the introduction of adaptive expectations into the cobweb model leads to price quantity fluctuations with a smaller amplitude however at the same time the price quantity cycles may become unstable and chaotic oscillations may arise we present a geometric explanation why chaos can occur for a large class of nonlinear monotonic supply and demand curves

relative price variability and nonuniform inflationary expectations using a generalization of a rational partial information framework presented fully in cukierman and wachtel 1979 it is shown that there is a positive relationship between the variance of relative price change and the variance of inflationary expectations across markets in the economy this implication is then tested empirically using data on the variance of relative price change and on the variance of directly measured expectations the empirical evidence supports the view that there is a positive relationship between the two variances and that more than one third of this relationship is explainable in terms of the model presented

issues in controllability and the theory of economic policy abstract the paper demonstrates that the concepts of dynamic controllability are useful for the theory of economic policy by establishing four propositions first dynamic controllability is a central concept in stabilization policy second the ability to achieve a target state even if it cannot be maintained may be of economic interest third dynamic controllability is of special interest for historical models fourth the conditions for any notion of dynamic controllability are distinct from and weaker than those for tinbergen static controllability

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

against naive materialism culture consumption and the causes of inequality economie orthodoxy is narrowly materialistic in that it largely neglects the cultural significance of commodities taking as its starting point sen s work on capabilities the paper examines modern consumer theory and argues that consumption is an inherently complex activity that requires considerable knowledge and expertise and which cannot be adequately understood from an individualist point of view it is argued that interpersonal comparisons are consequently more complicated than is suggested in sen s work on capabilities and that an inquiry into the cultural aspects of consumption encourages a reappraisal of the role of preferences and sheds light on the deeper causes of inequality

sample autocorrelation learning in a capital market model adaptive agent models are supposed to result in the same limit behavior as models with perfectly rational agents in this article we show that this claim cannot by accepted in general even in a simple capital market model where the agents apply sample autocorrelation learning to perform their forecasts by applying this learning algorithm the agents use sample means the sample autocorrelation coefficient and the sample variances of prices to predict the future prices and to determine the demand for the risky asset therefore even if the agents are not perfectly rational we require that the agents forecasts are consistent with the underlying information in this article a sufficient condition for convergence is derived analytically and checked by means of simulations the price sequence as well as the sequence of parameters estimated by means of sample autocorrelation learning converge if the initial value of the price sequence is sufficiently close to the steady state equilibrium and a random variable derived from the dividend process is not too volatile to skip the price trajectory out of the attracting region therefore the market price can even diverge and the region of convergence could become very small depending on the underlying parameters thus divergence of the price sequences is not a pathological example since it possibly occurs over a wide range of parameters therefore the often claimed coincidence of adaptive agents models and ration agent models cannot be observed even in a simple capital market model author s abstract

spatial variations in the unemployment rate a case study of north west england taylor j and bradley s 1983 spatial variations in the unemployment rate a case study of north west england reg studies 17 113 124 this paper extends earlier work on the categorization of unemployment by exploring the reasons for spatial variations in cyclical unemployment and non cyclical unemployment regression analysis is used to divide total unemployment into a cyclical category and a non cyclical category in twenty eight travel to work areas in north west england during 1969 80 the spatial patterns of these two categories of unemployment are examined and an attemptis made to explain them the main conclusions are that spatial variations in the unemployment rate have been severely exacerbated by national recessions that the spatial patterns of cyclical unemployment and non cyclical unemployment are not random and that there is considerable scope for public policy in rectifying the persistent structural weaknesses in certain groups of travel to work areas in the nw region

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

the evolution of engel curves and its implications for structural change theory the tendency for expenditure engel curves to flatten out at high income levels is frequently cited as evidence that major shifts in household spending patterns take place as households become more affluent empirically little has been done to examine i how pervasive this tendency is across the engel curves of different goods and services ii whether the rate at which engel curves flatten out may significantly change over time and iii how robust engel curves are in the face of changes in the income distribution of households using data from the uk family expenditure survey we find evidence that the tendency for engel curves to flatten out which we dub saturation is indeed widespread across a wide range of goods and services however a tendency for their shape to shift over time and for these shifts to co move with changes in the income distribution of households casts some doubt on whether the declining slope of engel curves can be used to predict slowdowns in the growth rate of demand for particular goods and services

entrepreneurship social mobility and income redistribution in south india development economists have been preoccupied with the problem of increasing the size of the gnp pie to the relative neglect of its distribution despite the recent disenchantment with the viewpoint that all classes share in the benefits of industrial growth empirical data on the distribution of income business opportunity and economic power are in short supply many of the studies on entrepreneurship and economic development when they are not apologetics for ruthless capitalist exploitation as paul baran suggests extol the achievements of the capitalist entrepreneur without examining class origins and monopoly advantage joseph schumpeter sees entrepreneurs irrespective of class origin as heroic figures with the dream and will to found a private kingdom to conquer adversity to achieve success for its own sake and to experience the joy of creation for gustav papanek 1967 the private entrepreneur who is frugal diligent far sighted remarkably able and willing to take political risks is in large part responsible for the success of pakistan in achieving rapid industrialization

keynes lucas and scientific progress in one of those marvelous coincidences of intellectual history robert lucas was born the year after the publication of keynes general theory for the first thirty five years of their mutual lives the two apparently coexisted in harmony but their relationship has been tumultuous ever since lucas has frequently criticized keynesian economics as poor science and it is precisely in that spirit that i want to address the debate today we all know the old joke about the professor who uses the same exam questions year after year but changes the answers that joke encapsulates all too well what has happened to macroeconomics these last fifteen years and seems to reflect poorly on economics as a science or does it on second thought the best answers to scientific questions do change as new observations are made as new experiments are run and as better theories are developed the issue is whether the answers to important questions in macroeconomics have changed for good scientific reasons or for other reasons the joke provides the framework for my talk i will pose eight exam questions and for each one i will summarize the answers given by keynes by lucas and his followers and by modern keynesians i pick only questions that are answered differently by keynesians and lucasians and that are central to contemporary macroeconomic debates the focus is on whether the keynesian or new classical answers have greater claim to being scientific each student must answer every question i are expectations rational

nonlinearity and chaos in economic models implications for policy decisions this survey paper discusses the policy implications that can be expected from the recent research on nonlinearity and chaos in economic models expected policy implications are interpreted as a driving force behind the recent proliferation of research in this area in general it appears that no new justification for policy intervention is developed in models of endogenous fluctuations although this conclusion depends in part on the definition of equilibrium when justified however policy tends to be very effective in these models copyright 1993 by royal economic society

chaotic dynamics in economic time series abstract there has recently been considerable interest in chaotic dynamics in a variety of disciplines this paper introduces and then surveys some of the associated literature and techniques applications to economic theory are discussed but the primary focus is on empirical applicability in addition to surveying the literature we also provide an example of the use of these techniques in economics we conclude by highlighting the importance of the techniques for empirical work as well as considering their context in econometric methodology

rational thinking under costly information macroeconomic implications abstract the notion of optimized rational behavior in the formation of expectations is used in this note to study the dynamics of a simple macroeconomic model in a setting where departures from stability are not possible under perfect foresight the selection of an optimal degree of rationality may lead to the generation of long term endogenous fluctuations

determinants of geographic unemployment rates a selectively pooled simultaneous model using a procedure that allows selective pooling of certain subsamples of the data this study examines the determinants of state unemployment rates in the united states by selectively pooling the data more reliable parameter estimates result than could otherwise be obtained were the data disaggregated to the state level and the specification error inherent in a complete pooling of the data is avoided the models are estimated using two stage least squares and the empirical results indicate considerable heterogeneity across areas in the ways in which unemployment rates are determined

can agents learn their way out of chaos abstract in an olg model with adaptive learning forecast errors of the agents are analyzed in regions where the resulting dynamical system behaves chaoticly agents think they are living in stochastic world it is shown that they cannot reject the hypothesis that mean and autocorrelation coefficients of their forecast errors are 0 thus they have no incentive to switch to another learning rule predictions cannot be unmasked as being wrong because of the limited statistical tools the agents possess bounded rationality these phenomena occur in the olg model even with a cobb douglas utility function

the causes of unemployment in finland 1970 82 some empirical evidence in most western countries the rate of unemployment has shown a rising trend over the last decades one of the standard explanations for this is that the natural rate of unemployment has risen in order to investigate this hypothesis a simple demand supply model of the finnish labour market was constructed and estimated it is proposed that if the development of the unemployment rates can be explained is such a traditional model framework this would suggest that changes in the natural rate are not after all the crucial reason for the increasing unemployment rates according to the results the simple model was able to account for the changes in the unemployment rate very well furthermore they seem to support a traditional keynesian view of the problem emphasizing output level and labour productivity as the main explanatory variables indirectly it can be concluded that there seem to be no clear signs of a rising natural rate of unemployment

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

equilibrium models displaying endogenous fluctuations and chaos abstract this paper surveys current developments in dynamic general equilibrium theory concerned with conditions under which endogenous fluctuations are possible existing contributions are divided into two classes the larger one consists of models with a unique perfect foresight equilibrium while the second includes models where equilibrium is indeterminate and the set of equilibria involving endogenous fluctuations includes sunspots equilibria while the two classes of models involve oscillations of different natures and with different policy implications we show that both are consistent with optimizing behavior and competitive equilibrium

sectoral shifts and cyclical unemployment a substantial fraction of cyclical unemployment is better characterized as fluctuations of the frictional or natural rate than as deviations from some relatively stable natural rate shifts of employment demand between sectors of the economy necessitate continuous labor reallocation since it takes time for workers to find new jobs some unemployment is unavoidable this paper presents evidence that most of the unemployment fluctuations of the seventies unlike those in the sixties were induced by unusual structural shifts within the u s economy simple time series models of layoffs and unemployment are constructed that include a measure of structural shifts within the labor market these models are estimated and a derived natural rate series is constructed

markets as institutions versus organizations as markets disentangling some fundamental concepts abstract this paper argues that ambiguities in concepts as important as institutions markets and organizations undermine progress of research programs intending to take these components seriously into account after a short review of some current confusions section i section ii discusses recent literature to arrive at definitions that encapsulate fundamental characteristics into pure categories in section iii exceptions and qualifications are introduced so as to operationalize the concepts in the real world 1 i organizations and markets are embedded in an institutional framework and 2 ii they overlap giving birth to hybrid forms however the conclusion contends that it is essential to maintain distinct concepts in order to understand these complex arrangements

information processing and bounded rationality a survey this paper surveys recent attempts to formulate a plausible and tractable model of bounded rationality the author focuses in particular on models that view bounded rationality as stemming from limited information processing he discusses partitional models such as computability automata perceptions and optimal networks nonpartitional models and axiomatic approaches

is the business cycle characterized by deterministic chaos abstract tests are conducted on u s macroeconomic data for the presence of low dimensional deterministic chaos where deterministic chaos is defined as in grandmont s 1985 walras bowley lecture or in brock 1986 the idea is to test for evidence of endogenous instability causing the business cycle low order autoregressions are hard to reject with our methods evidence of chaos is weak but our tests may be too weak to detect it evidence of nonlinearity is present in employment 1950 i to 1983 iv unemployment 1949 i to 1982 iv monthly post war industrial production and pig iron production 1877 1937

money and price dispersion in the united states this paper reports an empirical test of a price dispersion equation using data on the u s after world war ii the equation derived elsewhere from a version of the partial informationlocalized market models relates price dispersion to the magnitude of the aggregate shocks in order to test the model a price dispersion series is computed using annual wholesale price indexes and weights for the period 1948 76 the data on money shocks are the unanticipated money growth series estimated by barro the tests also include a measure of aggregate real disturbances from the theoretical point of view the results are negative they do not detect an effect of money shocks on price dispersion but support the predicted effect of real shocks

from simplistic to complex systems in economics the applicability of complex systems theory in economics is evaluated and compared with standard approaches to economic theorising based upon constrained optimisation a complex system is defined in the economic context and differentiated from complex systems in physio chemical and biological settings it is explained why it is necessary to approach economic analysis from a network rather than a production and utility function perspective when we are dealing with complex systems it is argued that much of heterodox thought particularly in neo schumpeterian and neo austrian evolutionary economics can be placed within a complex systems perspective upon the economy the challenge is to replace prevailing simplistic theories based in constrained optimisation with simple theories derived from network representations in which value is created through the establishment of new connections between elements

two views of the geographic distribution of unemployment this paper investigates the extent to which equilibrium and disequilibrium explanations can account for unemployment rate differentials between cities it shows that shocks that disturb the steady state relationship among the unemployment rates of metropolitan areas tend to be eliminated by mobility within a single year it also shows that high unemployment areas tend to be those with attractive climates and amenities high wages and high unemployment insurance it argues that the main effect of government programs that create jobs in high unemployment areas will be to lure additional job seekers to those areas

consistent expectations equilibria and learning in a stock market abstract in this article we investigate the question whether the highly demanding informative requirements of rational expectations models are necessary to derive equilibria within capital market models in this analysis agents are only provided with publicly available information such as prices and dividends nevertheless we require that agents should behave like econometricians additionally we skip the assumption of rational expectations models that agents know the implied actual law of motion of the system by these assumptions the stock market can be considered as a hommes sorger consistent expectations model we show the existence of consistent expectations equilibria with myopic agents and independent identically distributed dividends the only cee is the rational expectations equilibrium in the simulation part we demonstrate how the steady state cee can be derived by means of sample autocorrelation learning thus we are able to derive a stock market equilibrium with less demanding requirements where this equilibrium is equal to the rational expectations equilibrium

on the complexities of complex economic dynamics complex economic nonlinear dynamics endogenously do not converge to a point a limit cycle or an explosion their study developed out of earlier studies of cybernetic catastrophic and chaotic systems complexity analysis stresses interactions among dispersed agents without a global controller tangled hierarchies adaptive learning evolution and novelty and out of equilibrium dynamics complexity methods include interacting particle systems self organized criticality and evolutionary game theory to simulate artificial stock markets and other phenomena theoretically bounded rationality replaces rational expectations complexity theory influences empirical methods and restructures policy debates

complicated endogenous business cycles under gross substitutability abstract in this paper we investigate the global behaviour of the output equilibrium time paths in a two dimensional overlapping generations model with productive investment and capital accumulation where agents behave rationally and markets are competitive we show that equilibrium time paths can converge to complicated chaotic attractors as well as periodic attractors when the substitution effect dominates the income effect everywhere the occurrence of complicated equilibrium paths is guaranteed by homoclinic intersections of the stable and unstable manifolds of the autarkic steady state journal of economic literature classificiation number e32

unemployment rate dynamics and persistent unemployment under rational expectations this paper develops a model of unemployment rate dynamics that provides an explanation of persistent cyclical unemployment that does not involve persistent expectational errors or other nonoptimizing behavior our results are based on the interaction of search dynamics and inventory adjustments an important element in these dynamics appears to be heterogeneity in the labor force which can be characterized as consisting of a relatively small group of high turnover individuals who comprise the bulk of normal unemployment and a larger group of low turnover individuals who dominate movements in cyclical unemployment our empirical results provide support for this theory as we demonstrate that the appropriately measured probability of becoming employed during a recovery falls relative to normal because of the unusually high proportion of low turnover individuals who have lost permanent jobs as aresult recovery is much slower than is indicated by normal relationships although each individual is searching optimally this abstract was borrowed from another version of this item

genetic algorithm learning and the cobweb model this paper presents the cobweb model in which competitive firms in a market for a single good use a genetic algorithm to update their decision rules about next period production and sales the results of simulations show that the genetic algorithm converges to the rational expectations equilibrium for a wider range of parameter values than other algorithms frequently studied within the context of the cobweb model price and quantity patterns generated by the genetic algorithm are also compared to the data of experimental cobweb economies it is shown that the algorithm can capture several features of the experimental behavior of human subjects better than three other learning algorithms that are considered

look at me saving the planet the imitation of visible green behavior and its impact on the climate value action gap abstract examining the regional distribution of 15 different greenhouse gas mitigation practices mps across australia we study the tendency for consumers to imitate visible pro environmental behavior in their local region while there is a great deal of variation in the specific type of mps adopted by consumers located in the same region anova results suggest that they tend to adopt a similar number of mps as their neighbours using discrete choice modelling our results suggest that this is due to the peer adoption of certain visible mps such as using public transport or car pooling encouraging agents to adopt other types of visible mps however the character of this spillover is limited in that visible pro environmental behavior does not appear to influence the adoption of non visible mps we also find that social imitation patterns help individuals overcome the observed gap between their stated concern about climate change and their propensity to act on this concern known as the climate value action gap policy implications for designing effective green nudges are discussed

an institutional economic analysis of the decision to do it yourself in housing renovation this paper examines home renovators decision in choosing do it yourself diy or hiring contractors diy may reduce financial pressure but may lead to potential domestic discord and perils of incompetence hiring contractors may alleviate time pressures but may require more financial resource this choice is modelled as analogous to williamson s corporate strategic decision between outsourcing and internalisation in the context of vertical integration and extended via richardson s capabilities based theory with social reputation effect taken into account based on a survey of brisbane home renovators it is found that the richardson s thesis seems stronger than the williamson s when applied to housing renovation and that trust issues in respect of contractors are paramount

the nature of occupational unemployment rates in the united states hysteresis or structural this article provides new evidence on the nature of occupational differences in unemployment dynamics which is relevant for the debate between the structural or hysteresis hypotheses we develop a procedure that permits us to test for the presence of a structural break at unknown date our approach allows the investigation of a broader range of persistence than the 0 1 paradigm about the order of integration usually implemented for testing the hypothesis of hysteresis in occupational unemployment in almost all occupations we find support for both the structuralist and the hysteresis hypotheses but stress the importance of estimating the degree of persistence of seasonal shocks along with the degree of long run persistence on raw data without applying seasonal filters indeed hysteresis appears to be underestimated when data are initially adjusted using traditional seasonal filters

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

some problems in estimating the natural rate of unemployment from the expectations augmented phillips curve now nearly twenty years after its introduction in friedman 1968 the concept of the natural rate of unemployment is standard in macroeconomics theoretically it is fairly easy to grasp the natural rate of unemployment prevails when there is equilibrium on the labor market in the sense that price expectations are fulfilled in the same way as demand and supply the level of employment is determined by real variables only provided that price developments are fully anticipated in a competitive labor market this implies that demand equals supply consequently the only reason for unemployment in a situation with no excess supply of labor will be structural misfits on the market however an equilibrium rate of unemployment may also be the product of a nonclearing market where wages are determined by e g trade unions see greenhalgh layard oswald 1983 p ii alternatively the concept of nairu non accelerating inflation rate of unemployment is often cited this term seems to be somewhat broader than the natural rate implying a rate of unemployment compatible with a stable rate of inflation according to thirlwall 1983 there is no empirical difference between the concepts since both are estimated in the same way regardless of which term is used the equilibrium natural rate of unemployment is difficult to identify empirically nevertheless the need for such estimates is obvious most market economies have exhi

the robot the party animal and the philosopher an evolutionary perspective on deliberation and preference this paper examines the evolutionary fitness of a variety of ways of reaching decisions in early hunter gatherer societies in order to derive insights about how economists should view modern consumers it challenges conclusions reached by mainstream economists robson rayo and becker about why hunter gatherers needed sensory rewards and about the kinds of preference systems that would have conferred evolutionary fitness it argues that evolution favours those with a variety of ways of reaching decisions programmed deliberative intuitive and go with the flow and that the prospect of sensory rewards serves an evolutionary role by diverting people from thinking too much about what they are doing in situations in which deliberation might interfere with survival or reproduction the evolutionary role of a reluctance or failure to make trade offs is also considered along with the benefits of developing a relatively fixed identity rather than being all things to all men

the challenge of high unemployment it is argued that policymakers macroeconomists and microeconomists should all take high unemployment more seriously the shortcomings of existing theories of unemployment are discussed and a new definition of involuntary unemployment is proposed a model is sketched in which falling aggregate demand leads to keynesian unemployment because labor is heterogeneous and relative wages matter microeconomic theory is criticized for assuming away unemployment and in the process radically changing the answers to some basic questions in trade theory and public finance finally some speculative explanations are offered for the low unemployment now found in states like new jersey and massachusetts this abstract was borrowed from another version of this item

heterogeneous beliefs and the non linear cobweb model abstract this paper generalizes the evolutionary cobweb model with heterogeneous beliefs of brock and hommes 1997 econometrica 65 1059 1095 to the case of non linear demand and supply agents choose between a simple freely available prediction strategy such as naive expectations and a sophisticated costly prediction strategy such as rational expectations and update their beliefs according to an evolutionary fitness measure such as past realized net profits it is shown that for generic non linear monotonic demand and supply curves the evolutionary dynamics exhibits rational routes to randomness that is bifurcation routes to strange attractors occur when the traders sensitivity to differences in evolutionary fitness increases

inflation bankruptcy default premia and the stock market in this paper we explore some of the possibilities and argue that in the absence of index linked loans higher inflation implies higher liquidation rates and default premia this would also be one possible reason why higher inflation would depress share values our evidence also suggests that the modigliani and cohn 1979 valuation errors hypothesis is extremely important in order to see why higher inflation might lead to more bankruptcies consider the following example suppose that the real interest rate p is i and that a firm has borrowed iooo if there is no inflation the firm s interest payments are io now suppose that inflation p rises to io and that the nominal interest rate r is given by the formula i r i p i fi then r rises to i i i and total interest payments to i i i hence at a time when revenue has risen by only io interest payments rise elevenfold and this creates cashflow problems for the firm index linked debt would avoid this problem because the principal could be indexed and would rise to i ioo leaving the firm to only pay li i in interest

equilibrium welfare and government policy with quasi geometric discounting abstract we consider a representative agent equilibrium model where the consumer has quasi geometric discounting and cannot commit to future actions we restrict attention to a parametric class for preferences and technology and solve for time consistent competitive equilibria globally and explicitly we then characterize the welfare properties of competitive equilibria and compare them to that of a planning problem the planner is a consumer representative who without commitment but in a time consistent way maximizes his or her present value utility subject to resource constraints the competitive equilibrium results in strictly higher welfare than the planning problem whenever the discounting is not geometric journal of economic literature classification numbers e21 e61 e91

fundamentalists vs chartists learning and predictor choice dynamics abstract in a simple forward looking univariate model of price determination we investigate the evolution of expectations dynamics in the presence of two types of agents fundamentalists and chartists in particular we combine evolutionary selection among heterogeneous classes of models through predictor choice dynamics based on a logit model with adaptive learning in the form of parameters updating within each class of rules we find that for different parameterizations it can happen that fundamentalists drive chartists completely out of the market or vice versa and also that heterogeneous equilibria in which fundamentalists and chartists coexist are possible interestingly though only equilibria in which fundamentalists outperform chartists turn out to be adaptively learnable by agents

time inconsistency and the long run effects of inflation recent work by laibson 1997 identifies that individuals time discount factors evolve over time this leads to a time inconsistency problem in which savings are distorted this paper studies the long run effects of inflation in the presence of a time inconsistency problem

why women work closer to home this paper analyzes the extent to which differences in labor force status in household composition and in household roles account for sex differences in workplace residence separation modelling work trip length as the outcome of the choice of household residential and individual job locations equilibrium work trip length is estimated empirically as a function of labor market housing and household characteristics for male and female employees in seven different household categories data from the 1976 panel survey of income dynamics are used the study concludes that while sex differences in job tenure work hours and wages are in themselves sufficient to fully account for observed sex differences in workplace residence separation sex differences in household roles i e responses to spouses characteristics are of even greater importance in influencing women to work closer to home

the market for preferences learning processes are widely held to be the mechanism by which boundedly rational agents adapt to environmental changes we argue that this same outcome might also be achieved by a different mechanism namely specialisation and the division of knowledge which we here extend to the consumer side of the economy we distinguish between high level preferences and low level preferences as nested systems of rules used to solve particular choice problems we argue that agents while sovereign in high level preferences may often find it expedient to acquire in a pseudo market the low level preferences in order to make good choices when purchasing complex commodities about which they have little or no experience a market for preferences arises when environmental complexity overwhelms learning possibilities and leads agents to make use of other people s specialised knowledge and decision rules

hysteresis in unemployment evidence from 48 u s states i introduction one central idea in macroeconomics is the equilibrium unemployment rate hypothesis 1 in many macroeconomic models which allow for some degree of price stickiness fluctuations in demand and supply may lead to deviations of the actual unemployment rate from its equilibrium value these deviations in turn trigger changes in the inflation rate there is nothing in the equilibrium unemployment rate literature which even vaguely suggests such a rate is constant indeed many studies have analyzed the factors which cause the equilibrium unemployment rate to change over time or across areas for example summers 1986 presents evidence of an increased normal u s unemployment rate since the mid 1960s and argues that this increase has in large part resulted from high and growing noncompetitive wage differentials barro 1988 addresses the issue of persistence of unemployment in various countries over a number of time periods and relates measures of persistence to variables that matter theoretically for the economy s speed of adjustment blanchard and summers 1986 1987 propose the so called hysteresis hypothesis of unemployment hysteresis is the term used to describe the long lasting influence of history on the natural rate a recession potentially has permanent effects if it changes attitudes and or characteristics of the unemployed and particularly the long term unemployed furthermore the latter may exert less pressure on the wage setting because they will become outsiders in the labor market the insiders union members or currently employed workers have much incentive to keep wages from falling 2 the hysteresis hypothesis of unemployment has important policy implications it suggests that high unemployment if left by itself may persist and continue to be a serious problem in the economy even in the long run this possibility leaves more room for active government policies to fight recessions and manage the economy the fact that the actual unemployment rate may not fluctuate around some natural rate suggests the possibility of nonstationarity in the unemployment series this relationship can be illustrated with a simple model from wyplosz 1987 or brunello 1990 consider the following phillips curve 1 mathematical expression omitted where p sub t is the current inflation rate e sub t i p sub t is the expected inflation rate of time t given information at time t 1 u sub t is the current unemployment rate mathematical expression omitted is the natural unemployment rate beta is the slope of the phillips curve and xi sub t is an error term the possibility of hysteresis arises when the natural rate is a function of past unemployment rates this can be expressed as follows 2 mathematical expression omitted where c and alpha are constants and zeta sub t is an error term substituting 2 into 1 yields 3 u sub t c alpha u sub t 1 epsilon sub t where epsilon sub t 1 beta e sub t 1 p sub t p sub t xi sub t zeta sub t hysteresis requires the parameter alpha in 3 to be equal to one 3 it implies that once disturbed the unemployment rate tends to wander around without returning to a mean value in this case the unemployment rate and also the natural rate contain a unit root in contrast when alpha is between zero and one the natural rate evolves towards its steady state level c 1 alpha and the weak version of the natural rate hypothesis holds as long as alpha is larger than zero there is persistence in unemployment rate in the sense that past unemployment affects the natural rate we however seek to test for the existence of hysteresis the extreme version of persistence finally when the parameter alpha equals zero the natural rate stays at a constant level c

a family production overlapping generations economy abstract this paper provides a theoretical analysis of an overlapping generations economy in which production decisions and input output allocations are all carried out at the family level i consider a single class of output allocation schemes and various degrees of knowledge about the production technology under complete knowledge i show that a family organizational structure in which everyone receives his marginal contribution to output invests less in physical capital than under a perfectly competitive equilibrium environment under incomplete knowledge i analyze and compare how beliefs about the input output relationship affect the physical capital accumulation dynamics and the long run standards of living

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

hysteresis and instability in the natural rate of unemployment in this paper it is pointed out that the long run phillips curve genus contains upward and downward sloping species as well as the vertical species two models are used in one the rate of inflation helps determine the natural rate of unemployment as proposed by friedman in the other the process of moving from one inflation rate to another helps shape the natural rate according to the hysteresis effect proposed by phelps in both cases the resulting models are unstable implying that a vertical long run phillips curve will not be regained if disturbed

demand dynamics with socially evolving preferences in this work we first identify a few stylized facts concerning microconsumption acts second building on them we develop a simple model of boundedly rational consumers who endogenously evolve their preferences via both innovation and social imitation third we explore some statistical properties of the demand patterns generated by the model which despite its simplicity are surprisingly in line with the empirical evidence these results we suggest bring encouraging support to microfoundations of demand theory based on cognitive and behavioral foundations more in tune with the psychological and sociological evidence based on heterogeneous agents who are much less rational and much more social than in standard theory and who collectively discover along the way what they like within a growing universe of available commodities

the ubiquity of habits and rules under what circumstances is it necessary or convenient for an agent to rely on habits or rules this paper focuses on the types of decision situations giving rise to their use even optimization requires the deployment of rules and for this reason mainstream economics cannot legitimately ignore these questions the argument is that habits and rules are ubiquitous in human activity in a new taxonomy seven types of decision situations are considered classified according to the type of information problem involved neither neoclassical nor behavioral economics can provide a complete account of the bases of habits or rules in these cases copyright 1997 by oxford university press

can hysteresis explain different labour market operations between europe and the united states this paper offers an analysis of the labour market operation in europe and the united states during 1970 1985 it appears that the labour market developments in europe are more characterized by hysteresis than in the united states simulation results indicate that the unemployment rate in europe would have reached the level of that in the united states in 1985 when wage formation had been more similar

some evidence concerning macroeconomic chaos abstract an empirical assessment of a linear stochastic perspective for canadian macroeconomic time series is presented the methods used are based on the mathematics of chaos present evidence suggests that low order deterministic chaos does not provide a satisfactory characterization of the data the absence of significant nonlinear structure for the investment and unemployment series is of particular note in light of past findings with american data the degree to which the use of a time trend can impose a pseudo structure on the data is illustrated

adaptive learning and roads to chaos the case of the cobweb abstract we investigate the dynamics of the cobweb model with adaptive expectations a linear demand curve and a nonlinear s shaped increasing supply curve both stable periodic and chaotic price behaviour can occur we investigate how the dynamics of the model depend on the parameters both infinitely many period doubling and period halving bifurcations can occur when the demand curve is shifted upwards the same result holds with respect to the expectations weight factor

differences in state unemployment rates the role of labor and product market structural shifts state unemployment rates diverged dramatically in the 1980s differing unemployment rates across states are an important public policy concern because of equity concerns and the pure human consequences of higher unemployment moreover at the national level a greater dispersion in state and regional unemployment rates can increase the natural rate of unemployment and shift the phillips curve out because of an inefficient allocation of the labor force 3 38 one possible cause for the divergence in unemployment rates is national industrial restructuring u s industrial restructuring was suggested by lilien 26 as a cause for the rise in the national unemployment rate moreover national restructuring can have differential impacts across states because states can have dramatically different mixes of industries from each other one of the difficulties of national restructuring from a regional perspective is that it is difficult to avoid on the other hand if regional differences in unemployment are due to state idiosyncratic causes state and local public policy can potentially play a more active role for example the economic problems that plagued the northeast and california during the early 1990s have been typically attributed to national downsizing in the defense industries conversely economic problems in these states may have been driven by factors that are located within the state such as the collapse of their real estate markets

when panic makes you blind a chaotic route to systemic risk abstract we present an analytical model to study the role of expectation feedbacks and overlapping portfolios on systemic stability of financial systems building on corsi et al 2016 we model a set of financial institutions having value at risk capital requirements and investing in a portfolio of risky assets whose prices evolve stochastically in time and are endogenously driven by the trading decisions of financial institutions assuming that they use adaptive expectations of risk we show that the evolution of the system is described by a slow fast random dynamical system which can be studied analytically in some regimes the model shows how the risk expectations play a central role in determining the systemic stability of the financial system and how wrong risk expectations may create panic induced reduction or over optimistic expansion of balance sheets specifically when investors are myopic in estimating the risk the fixed point equilibrium of the system breaks into leverage cycles and financial variables display a bifurcation cascade eventually leading to chaos we discuss the role of financial policy and the effects of some market frictions as the cost of diversification and financial transaction taxes in determining the stability of the system in the presence of adaptive expectations of risk

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

chaotic learning equilibria chaotic temporary equilibrium trajectories under least squares learning are shown to exist in a standard version of the overlapping generations model theses trajectories show forecast errors that never vanish thus we do not find convergence to an equilibrium in which agents have perfect foresight complex trajectories can even be found in the case of savings functions which are monotonically decreasing in the expected gross rate of inflation in this case no cyclical or chaotic trajectories with perfect foresight exist thus learning alone is a source of chaotic dynamic journal of economic literature classification numbers d83 d84

unemployment volatility and regional specialization in the european union ezcurra r unemployment volatility and regional specialization in the european union regional studies this paper examines the link between unemployment volatility and the sectoral composition of economic activity in the regions of the european union over the period 1980 2004 to that end different spatial econometric techniques are used that allow the investigation of the role played in this context by spatial effects and geographical spillovers the results show that unemployment volatility is positively related to regional specialization in the european union this finding does not depend on the use in the analysis of absolute or relative specialization measures ezcurra r l instabilite du chomage et la specialisaiton regionale dans l union europeenne regional studies cet article cherche a examiner le lien entre l instabilite du chomage et la structure sectorielle de l activite economique dans les regions de l union europeenne entre 1980 et 2004 dans ce but on emploie diverses techniques econome

unemployment labor relations and unit labor costs in his seminal 1943 paper on the political business cycle michal kalecki 1971 argued that industrial leaders feared full employment because the economic insecurity created by unemployment was necessary to keep wages low and maintain work intensity and discipline on the shop floor on the basis of this reasoning kalecki concluded that governments would not use demand management policies to achieve permanent full employment in terms of current macroeconomic debates kalecki had sketched the outlines of a theory of the neutral or natural rate of unemployment based on the importance of disciplinary unemployment as a regulator of unit labor costs kalecki s pessimism about the prospects for full employment was premised in part on a view of firms in which the threat of dismissal was the central motivational device used by employers and employees had only a tenuous connection to employers this assumption may have been appropriate when analyzing labor markets in the united states during the 1930 s since that time however the spread of unions implicit employment contracts and large bureaucratically organized enterprises has resulted in a modern u s labor market in which many workers enjoy long job tenure and in which many firms do not appear to rely on dismissal threats as their primary motivational strategy see david gordon richard edwards and michael reich 1982 sanford jacoby 1983 and my forthcoming paper from this perspective it is reasonable to ask whether the presence of long term employment relations alters the regulatory role played by unemployment this paper examines the effect that unemployment and long term employment relations exert on the determination of unit labor costs the central empirical findings can be briefly summarized first as suggested by kalecki movements towards full employment increase the rate of growth of wages and reduce the rate of growth of labor productivity second where long term employment relations are prevalent the effect of unemployment on both wage and labor productivity growth is diminished

unemployment disequilibrium and the short run phillips curve an econometric approach the paper specifies a disequilibrium model for the aggregate labour market consisting of demand and supply functions for labour an adjustment equation for wages as well as for prices a transactions equation and finally an equation that relates measured unemployment to vacancies and to excess demand the model has a more sophisticated treatment of dynamics than earlier disequilibrium models the parameter estimates and the goodness of fit are satisfactory and the model s implications for the behaviour of several important variables are sensible in particular excess demand estimates computed in various ways are reasonable

on the consistency of backward looking expectations the case of the cobweb in dynamic models of economic fluctuations backward looking expectations with systematic forecasting errors are inconsistent with rational behaviour in non linear dynamic models exhibiting seemingly unpredictable chaotic fluctuations however simple habitual rule of thumb backward looking expectation rules may yield non zero but nevertheless non systematic forecasting errors in a chaotic model expectational forecasting errors may have zero autocorrelations at all lags even for rational agents patterns in these forecasting errors may be very difficult to detect especially in the presence of small noise backward looking expectations are then not necessarily inconsistent with rational behaviour we investigate whether simple expectation schemes such as naive or adaptive expectations can be consistent with rational behaviour in the simplest of all non linear dynamic economic models the non linear cobweb model

imperfect foresight and chaos an example of a self fulfilling mistake abstract we consider an overlapping generations economy with a single production sector and a government first we assume that the households have imperfect foresight in the sense that they cannot distinguish between the trajectories of a deterministic chaotic system and a stochastic process it is shown that mistaking a deterministic chaotic system for a stochastic one is a self fulfilling mistake because the possibility of making this mistake arises only when it is made the unique perfect foresight equilibrium is proved to exhibit simple dynamics for most parameter values finally we show that when agents apply simple econometric models to build their expectations the resulting dynamics resemble the chaotic dynamics of the imperfect foresight equilibrium under certain parameter constellations while they are close to the simple dynamics of the perfect foresight equilibrium for other parameter values

carl s nonlinear cobweb abstract this essay surveys some of my work on expectations learning and bounded rationality within the classical cobweb model following early inspiring ideas from carl chiarella in particular i focus on the role of nonlinear dynamics learning and heterogeneity within the cobweb framework and how price fluctuations in the cobweb theory fit with observations of individual and aggregate behaviour from laboratory experiments with human subjects

subjective temporary equilibrium abstract this paper introduces within the framework of a simple example the notion of a subjective temporary equilibrium the underlying relation linking forecasts to equilibrium values of the state variable is linear however agents perceive a non linear law that governs the rate of adjustment between successive periods and forecast using linear approximations to the non linear law of motion this is shown to generate a non linear law of motion for the state variable with the feature that the agent s model describes correctly the period wise evolution of the economy the resulting non linear law of motion is referred to as a subjective temporary equilibrium as its specification is determined largely by the subjective beliefs of the agents regarding the dynamics of the system in a subjective equilibrium agents forecasts are generated by taking linear approximations to a correctly specified law of motion and the forecasts may accordingly be interpreted as being boundedly rational in a first order sense there exist specifications that admit the possibility of cyclical behaviour

costly predation and the distribution of competence an evolutionary game model shows how an equilibrium distribution of competence may evolve when members of a population prey on one another but when predatory competence is costly to acquire under one interpretation the competence distribution is an endogenously determined distribution of bounded rationality an example shows how tricksters and suckers might coexist in the long run the analysis leads to a curious result about a mixed equilibrium for a symmetric zero sum game an increase in the costs of one or more competence levels has exactly zero effect on the fraction of the population at those levels

cobweb dynamics under bounded rationality this paper discusses recent work on expectation formation in the familiar cobweb hog cycle model a convenient feature of the model is the fact that it has a unique rational expectations equilibrium ree attention will be focused on whether this unique ree can be learned under bounded rationality with agents using simple habitual rule of thumb forecasting rules or whether other approximate rational expectations equilibria can arise where forecasts are although not perfect approximately correct in particular the possibility of chaotic equilibria under bounded rationality will be discussed both the homogeneous agent case and the heterogeneous case with evolutionary competition between different forecasting rules will be discussed recent experimental work on expectations formation in the cobweb economy suggests excess volatility and endogenous possibly chaotic price fluctuations driven by the interaction of competing boundedly rational agents