government deficits the real interest rate and ldc debt on global crowding out abstract the paper uses a three regions model of global saving investment balance to present a global crowding out interpretation of present economic trends the model builds on data which point to a possible shortage of savings explosive growth of social expenditures structural public sector deficit in north and south changes of the age pyramid real wage rigidity in many industrial countries

wage shocks and consumption variability in mexico during the 1990s this paper presents evidence on the relationship between shocks to relative male wages and changes in household consumption in mexico during the 1990s decade which is a period characterized by high volatility apart from performing analysis of this type for mexico for the first time the paper has mainly two contributions the first is the use of alternative data sources to construct instrumental variables for wages the second is to examine differences across four consumption categories nondurable goods durable goods education and health our results for nondurable goods consumption reject the hypothesis that mexican households are able to ensure idiosyncratic risk for the comparisons across consumption categories the conclusion is that households in mexico tend to react to temporary shocks by contracting the consumption of goods that represents longer run investment in human capital which makes them more vulnerable in the future

the exponential convergence of bayesian learning in normal form games abstract this paper continues the study of bayesian learning processes for general finite player finite strategy normal form games bayesian learning was introduced in an earlier paper by the present author as an iterative mechanism by which players can learn nash equilibria the main result of the present paper is that if prior beliefs are sufficiently uniform and expectations converge to a regular nash equilibrium then the rate of convergence is exponential

adaptive versus rational expectations and the fisher effect substantial controversy remains over the causes of interest rate fluctuations this controversy frequently focuses on the role of expected inflation the theoretical determinats of the nominal rate are examined usig the is lm as model and it is shown that the augmented fisher equation is sensitive to the expectations generating mechanism the model assumes that the nominal rate ceteris paribuschanges one for one with expected inflation the total impact however may take any value from zero to one the empirical analysis sequentially estimates reduced form equations based on adaptive and rational expectations the results confirm prior findings that nominal rates do not adjust one for one with inflation the results also yield some insight on the applicability of the assumption of rational versus adaptive expectations

stock returns inflation and the phillips curve in recent years the negative relation between stock returns and inflation has been rigorously investigated studies by lintner 25 bodie 1 jaffee and mandelker 21 nelson 28 fama and schwert 11 and gultekin 17 to name but a few consistently show that stock returns are negatively associated with inflation if associated at all and conclude that the fisher hypothesis does not hold for stocks explanations for this finding are equally abundant for instance fama 10 postulates that the observed negative association is largely a spurious phenomenon a conclusion he justifies by maintaining that it is consistent with a simple money demand quantity theory world geske and roll 15 extend this line of thought by developing a more complex macro economic model that includes such items as unemployment corporate earnings and government financing following a somewhat different approach ram and spencer 32 reexamine fama s work by augmenting the fisher equation to include the phillips curve hypothesis they conclude that there is a positive association between inflation and real activity and a negative relationship between real stock returns and real activity a position that contradicts fama s findings a problem common to the above explanations is that a general equilibrium framework is not employed the purpose of this study therefore is to further develop this work by examining the relationships among real stock returns inflation and unemployment using a general equilibrium model a nonspurious negative relation of real interest and inflation is employed that is based on the levi and makin studies 23 24 it is shown that the natural rate of unemployment phenomenon which causes the phillips curve to shift also simultaneously causes the real interest rate inflation relation to shift using this framework the hypothesis that the real stock return inflation relation shifts concurrently with the phillips curve is empirically tested the hypothesis is not rejected this suggests that the usual simple regression of stock returns on inflation is misspecified so that the slope estimate is not as steep as the true one the plan of the paper is as follows the concurrency of the shift in the real interestinflation relation and the phillips curve is demonstrated in the next section in section iii the shift in the phillips curve is tested by the brown durbin and evans method 3 then using dummy variables to represent the shifting phenomenon of the phillips curve empirical

how do households cope with aggregate shocks evidence from the mexican peso crisis abstract household surveys are used to examine the micro impact of a large aggregate shock the 1995 mexican peso crisis this paper examines how the impact of the crisis differed across households and the adjustment mechanisms used by households to cope with this shock the coping strategies examined include changes in household structure fertility household labor supply child schooling and interhousehold transfers many of the mechanisms households use to adapt to idiosyncratic shocks are found not to work with an aggregate shock

the purchasing power of money and nominal interest rates a re examination while it has been known for some time that under uncertainty the original version of the fisher hypothesis is not precisely correct empirical researchers have largely ignored this fact such an omission has possibly resulted in erroneous conclusions concerning other hypotheses most notably the impact of prices on the real economy this paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates empirical tests based on both the livingston survey data and data from time series forecasting models provide support for the fisher effect and the hypothesis that only covariance risk is priced in the treasury bill market one of the basic hypotheses concerning rationality in financial markets is based on statements generally attributed to fisher 18 fisher argued that the nominal or money rate of return on an asset should compensate an investor for his or her required real rate of return and changes in the purchasing power of money for the uncertainty case fisher replaced known purchasing power changes with the expected inflation rate whereas the fisher relationship under certainty is well defined his basic theorem under uncertainty is not precise as fama 15 has argued it is changes in the purchasing power of money not the inflation rate that should concern investors under uncertainty the expected value of one is not by jensen s inequality the inverse of the expected value of the other moreover fama and farber 16 grauer and litzenberger 20 and benninga and protopapadakis 3 have shown that when investors are risk averse the fisher relationship will generally not hold even after adjustment has been made for the distinction between purchasing power changes and the inflation rate in particular these authors show that an adjustment must be made for the fact that the real rate of return on nominal bonds is random while these issues have been discussed in the theoretical literature they have largely been ignored in the empirical work on this topic given the fact that nominal rates do not seem to adjust as rapidly to price changes as fisher hypothesized numerous empirical researchers have expanded the basic fisher model in an attempt to explain this empirical anomaly these extensions include the incorporation of a inflation rate variability and the growth in real output

a respecified tax adjusted fisher relation how much will a 1 increase in expected inflation increase nominal interest rates irving fisher s famous equation implies that nominal interest rates will rise in proportion to an increase in expected inflation darby and feldstein correcting the fisher equation for taxation predict a nominal interest rate increase of 1 1 t where t is the marginal tax rate i e if t 3 then a 1 increase in expected inflation should cause a 1 4 rise in interest rates empirical evidence however suggests that the rise in interest rates is much smaller than the darby feldstein prediction estimates are around 9 varying mostly between 5 and 1 15 which is much closer to fisher s original prediction it is important to know the size of the interest rate response to inflation expectations in a world in which inflation and interest rates are volatile and in which tax laws are designed to influence savings and investment through interest rates in this paper we attempt to close the gap between theorized and estimated effects of inflation by incorporating into the fisher equation two important aspects of the u s tax code historic cost depreciation and the lower tax rate on capital gains our model shows that the effect of expected inflation on interest rates is dampened by the lower benefits from depreciation deductions arid the capital gains tax our corrected fisher equation predicts a 1 12 nominal interest rate increase rather than the 1 4 increase implied by the darby feldstein model the our model closes about 56 of the gap between theory and empirical evidence the remainder could be closed by additional refinements in the model or better empirical modeling

price instability and inflation some tests based on rational expectations models abstract we test for a group of fourteen latin american countries the hypothesis that as inflation accelerates it also becomes more volatile our analysis uses time series data a less arbitrary measure of inflation volatility rational expectations models and seemingly unrelated regressions the empirical evidence supports the above hypothesis and strengthens the case against inflationary policies in latin america

unemployment assistance and transition to employment in argentina abstractin 2001 2 argentina experienced a wrenching economic crisis plan jefes implemented in may 2002 was argentina s institutional response to the increase in unemployment and poverty triggered by the crisis the program provided a safety net and appears to have protected some families against indigence despite this success the continued existence of the program which provides benefits to eligible unemployed individuals for an unlimited duration may have unappealing consequences reliance on the plan may reduce the incentive to search for work and in the long run may damage individual employability and perpetuate poverty motivated by these concerns this article examines the effect of participating in plan jefes on the probability of exiting unemployment regardless of the data set the specification and the empirical approach the article shows that plan enrollees are at least 14 percentage points less likely to transit to employment as compared to individuals who applied but did not join the

do crises catalyze creative destruction firm level evidence from indonesia using indonesian manufacturing census data 1991 2001 this paper rejects the hypothesis that the east asian crisis unequivocally improved the reallocative process the correlation between productivity and employment growth did not strengthen and the crisis induced the exit of relatively productive firms the attenuation of the relationship between productivity and survival was stronger in provinces with comparatively lower reductions in minimum wages but not due to reduced entry changing loan conditions or firms connected to the suharto regime suffering disproportionately on the bright side firms that entered during the crisis were relatively more productive which helped mitigate the reduction in aggregate productivity

rationalizable conjectural equilibrium between nash and rationalizability abstract static equilibria can be viewed as steady states of recurring play of a game such steady states in which players do not perfectly observe the actions of others need not be nash equilibria this paper suggests a static solution concept rationalizable conjectural equilibrium that corresponds to such steady states to present it the basic model of a normal form game is enriched by specifying the signals that players get about others actions the solution is a profile of actions such that each player s action is optimal given that it is common knowledge that all players maximize utility given their signals journal of economic literature classification number c72

cooperation for pennies a note one equilibria abstract it is shown that in finitely repeated smooth games e equilibria are capable of supporting full cooperation up to very near the end of the horizon with very small amounts of irrationality e furthermore behavior even near the end of the horizon is highly insensitive to the amount of irrationality assumed journal of economic literature classification numbers c73 l13

a model of the financial firm with imperfect asset and deposit elasticities abstract the paper develops an intertemporal model to estimate the production technology of financial firms such as banks price taking is testable in each separate market for assets and liabilities and competitive price taking is a nested special case such tests are applied both to outputs and inputs empirical results for a sample of banks in new york and new jersey indicate that price taking applies only in markets for labor and time deposits in markets for loans demand deposits cash and materials the price taking hypothesis is not accepted

does the federal reserve affect asset prices abstract the federal reserve is probably one of the institutions most closely monitored by investors this indicates that investors believe the actions of the fed have implications for asset prices to this date the trading activities of the fed in the financial markets have not been examined to see how the fed influences asset prices using daily data on open market operations omos and asset prices this study fills this void one finding of the paper is that omos granger cause both short and long term interest rates furthermore the sign of the relationship confirms the existence of the liquidity effect given that its trades represent a small portion of the market volume how the fed influences bond prices is a puzzle the only reasonable explanation is that the fed s trades have high information content judging by the impulse response paths the reaction of interest rates to open market operations is fast additionally it appears that monetary policy has a lasting impact on interest rates

can futures market data be used to understand the behavior of real interest rates this paper examines whether futures market data can be used to understand the behavior of real interest rates several ways of examining the data indicate that futures market data are not particularly informative about real interest rates not only does this evidence cast some doubt on results in previous research that make use of futures market data to draw inferences about real interest rates but it also indicates that future research on real interest rates may need to turn to a different line of attack understanding the behavior of real interest rates is a central issue in financial economics in previous research on this topic several approaches have been used to measure real interest rates in one approach real interest rates have been calculated by subtracting survey data on inflation expectations such as the livingston data from nominal interest rates the problem with survey based measures of real interest rates is that they are only as good as the survey measure of inflation expectations and there may be little incentive for the survey respondents to answer accurately an even more telling criticism of survey based measures often ignored in the literature is that the behavior of market expectations in driven by economic agents ai the margin who are eliminating unexploited profit opportunities market expectations are unlikely therefore to be well measured by the average expectations of survey respondents 2 because of doubts about survey based measures of real interest rates other

rationalized subjective equilibria in repeated games the purpose of this paper is to provide a new equilibrium concept of repeated games that involve incomplete information rationalized subjective equilibrium and a related framework subjective game and to analyse the relationships between players subjective images of games and the realized outcomes we demonstrate the relationships among rationalized subjective equilibria subjective equilibria and original nash equilib ria by providing several examples we also present several theorems analogous to the ordinary folk theorem and a simple application using the cournot duopoly model jel classification c70 c72

interest rate determination in a small open economy abstract this paper is an attempt to explain the behavior of ex ante real rates of interest in singapore during the period 1961 1981 this is done within a model which explicitly allows for the role of supply shocks inflation uncertainty and foreign interest rates

art investment an empirical inquiry investment in art and especially in paintings by the masters is often considered to be highly profitable particularly in the united states but also in the richer european nations there is an even larger number of investors who believe that buying works of art is not only fun but also a good investment from a purely financial point of view american banks have recently strengthened this trend toward art as an investment by employing art investment counselors thus suggesting that it is a financially rewarding activity to engage in and also suggesting that superior knowledge helps to improve financial success in this market buying and selling art has in fact become an increasingly popular activity since the end of world war ii the auction houses report record turnovers and record prices are paid in increasingly rapid sequence in april 1987 van gogh s sunflowers was sold at christie s london for 39 9 million only to be surpassed in november 1987 by van gogh s irises sold by sotheby s new york for 53 9 million including the auction house s 10 percent commission this last painting had been bought by the seller s mother in 1947 for 84 000 less than 0 5 million in today s money which gives a real rate of return of about 12 percent per year these enormous prices that are paid today for some masterpieces create a widespread belief that the rate of return on such investments is in general and on average very high books devoted to the subject 40 385 27 24 12 215 et seq seem to confirm that the rate of return from investment in paintings at least during the 1950s and 1960s was far greater than the rate obtainable from comparable risky assets in financial markets that the financial profitability in the 1970s and 1980s is believed to be if anything even larger than before is confirmed by many articles in financial and investment newspapers and journals up to now only very few scientific studies of the subject exist but they also have serious limitations the most recent one by baumol 5 covers a period of over 300 years but ends in 1960 two other studies by anderson 1 and stein 42 extend up to the end of the 1960s but do not go any further all three studies are practically limited to transactions by anglo saxon auction

interest rates and the subjective probability distribution of inflation forecasts the interst rate effects of the first four moments of the subjective probability distribution of inflation forecasts from the asa nber survey are examined over the period 1968 4 1985 4 using tre asury bill yields as the nominal rate variable in the context of a re duced form fisher equation the authors find that inflation uncertain ty as measured by the average variance of the probability distributi ons of inflation forecasts to be insignificant however the average skewness and kurtosis variables which result from these probability distributions do significantly affect interest rates they interpret these effects as accounting for the level of risk or uncertainty abou t future inflation copyright 1988 by ohio state university press

learning and self confirming long run biases abstract we consider an ambiguity averse sophisticated decision maker facing a recurrent decision problem where information is generated endogenously in this context we study self confirming actions as the outcome of a process of active experimentation we provide inter alia a learning foundation for self confirming equilibrium with model uncertainty battigalli et al 2015 and we analyze the impact of changes in ambiguity attitudes on convergence to self confirming equilibria we identify conditions under which the set of self confirming equilibrium actions is invariant to changes in ambiguity attitudes and yet ambiguity aversion may affect the dynamics indeed we argue that ambiguity aversion tends to stifle experimentation increasing the likelihood that the decision maker gets stuck into suboptimal certainty traps

direct price controls as a source of instability in the interest rate inflation rate relationship abstract we hypothesize that an efficient capital market is more concerned with effective inflation rates which investors experience than official ones which econometricians observe and that direct consumer goods price controls are likely to result in disparity between the two consequently direct price controls are also likely to affect the interest measured inflation rate relationship we ropose a dummy variable approach which enables us to explore empirically the effects of such controls on the interest inflation rate relationship in the context of dwyer s 1981 model using euro rates and inflation rates of the respective countries we explore the impact of the control programmes imposed in the 1970 s by governments of the united states canada and france france

bounded rationality dynamic oligopoly and conjectural variations abstract we propose a dynamic model of n firm oligopoly that provides a logically consistent reinterpretation of conjectural variations each firm solves a dynamic optimization problem believing that the other firms will alter their future choices in proportion to its own current change these beliefs adapt in light of observed behavior we show that steady state equilibria can range from complete cooperation to predatory play and provide conditions under which the firms behavior and beliefs converge to a steady state the sufficient conditions for stability are more easily satisfied the smaller the cross effects among firms through demand or belief parameters they are also more easily satisfied in a price setting than in a quantity setting differentiated products model

the fisher hypothesis a critique of recent results and some new evidence the fisher hypothesis 5 that nominal interest rates should respond point for point to changes in the expected inflation rate while theoretically appealing has had limited success in explaining actual interest rate movements most empirical work has shown that net after tax nominal interest rates are not as sensitive to changes in expected inflation as the hypothesis suggests they should be more troublesome still are the results of two recent studies carmichael and stebbing 3 4 hereafter cs and amsler 1 turn the fisher hypothesis on its head by demonstrating that net nominal yields on financial assets do not respond at all to changes in the expected inflation rate rather the net real yield on these assets falls point for point with increases in the expected inflation rate

payoff assessments without probabilities a simple dynamic model of choice abstract we develop a model which reflects the tendency of people to simplify the decision problems they face the decision maker chooses among alternate strategies only on the basis of the payoff she assesses she would obtain from them and these assessments do not explicitly take into account her subjective judgements regarding the likelihood of alternate states of the world at each stage the decision maker chooses the strategy that she assesses to give the highest payoff she updates her assessments adaptively we show that such behavior leads to maxmin choices we also consider the decision maker who experiences shocks journal of economic literature classification numbers c7 d8

optimal cartel trigger price strategies abstract a dynamical model of industry equilibrium is described in which a cartel deters deviations from collusive output levels by threatening to produce at cournot quantities for a period of fixed duration whenever the market price falls below some trigger price in this model firms can observe only their own production level and a common market price the market demand curve is assumed to have a stochastic component so that an unexpectedly low price may signal either deviations from collusive output levels or a downward demand shock

inflation risk taxes and the demand for owner occupied housing a bstract a portfolio choice model is formulated which focuses on the possibility of inflation hedging motives in housing demand in the 1970s an asset demand equation is used to estimate the capitalization of inflation expectations into house prices through tax mortgage and hedging effects the empirical results indicate that even after accounting for tax and mortgage effects the hedging motive was significant in bidding up house prices one implication is that the tax effects of inflation may have been overstated in previous research that ignored inflation risk

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

a nested ces approach to capital energy substitution abstract this paper uses the nested constant elasticity of substitution ces production function to estimate elasticities of substitution between capital labour energy and materials over the 1971 1976 period around the initial energy crisis elasticities are estimated for each of the two digit sic industries within us manufacturing using more disaggregate four digit sic data the nested ces function makes it possible to distinguish between engineering and economic elasticities of substitution capital and energy are estimated to be slight engineering substitutes and economic complements labour energy and materials are estimated economic substitutes

real interest rates anticipated inflation and unanticipated money a multi country study a bstractin this paper we examine real interest rate behavior in canada west germany the united states and the united kingdom using a model that yields a semi reduced form equation linking the real interest rate to monetary growth shocks anticipated inflation and expected inflation variance the estimator used in our analysis accommodates regressors from other regressions ensuring that accurate inferences are obtained in all countries we find that increases in anticipated inflation initially dampen real interest rates in addition a significant and negative relationship between unanticipated money shocks and real interest across all countries is discovered inflation variance typically exhibits little explanatory power

learning from others a welfare analysis abstract this paper considers a smooth and noisy version of the statistical prediction model studied in the herding informational cascades literature and compares market and optimal learning the latter is characterized by defining a decentralized welfare benchmark as the solution to an infinite horizon team problem market behavior involves herding in the sense that agents put too little weight on their private information for any given precision of public information and yields underinvestment in the production of public information however both market and optimal learning involve slow learning examples of the model include learning by doing reaching consensus and consumer learning about quality journal of economic literature classification numbers d82 d83

three problems in learning mixed strategy nash equilibria this paper discusses three problems that can prevent the convergence of learning mechanisms to mixed strategy nash equilibria first while players expectations may converge to a mixed equilibrium the strategies played typically fail to converge second even in 2 2 games fictitious play can produce a sequence of frequency distributions in which the marginal frequencies converge to equilibrium mixed strategies but the joint frequencies violate independence third in a three player matching pennies game with a unique equilibrium it is shown that if players learn as bayesian statisticians then the equilibrium is locally unstable journal of economic literature classification numbers c72 c73 d83

imperfect monitoring and impermanent reputations we study the long run sustainability of reputations in games with imperfect public monitoring it is impossible to maintain a permanent reputation for playing a strategy that does not play an equilibrium of the game without uncertainty about types thus a player cannot indefinitely sustain a reputation for noncredible behavior in the presence of imperfect monitoring

do people play nash equilibrium lessons from evolutionary game theory evolutionary game theory provides an answer to two of the central questions in economic modeling when is it reasonable to assume that people are rational and when is it reasonable to assume that behavior is part of a nash equilibrium and if it is reasonable which equilibrium the traditional answers are not compelling and much of evolutionary modeling is motivated by the need for a better answer evolutionary game theory suggests that in a range of settings agents do eventually play a nash equilibrium moreover evolutionary modeling has shed light on the relative plausibility of different nash equilibria

rationalizable strategic behavior the notion of equilibrium proposed by nash 19 has come to play a dominant role in economic applications of noncooperative games while analyses of nash equilibria have unquestionably contributed to our understanding of economic behavior it would be unreasonably optimistic to maintain that nash solved the problem of noncooperative strategic choice there is a small literature beginning with ellsberg 6 and a much larger oral tradition which argues that nash behavior is neither a necessary consequence of rationality nor a reasonable empirical proposition in this paper i take the view that although there may be various reasons why an agent might select a nash strategy the notion of an equilibrium has little intrinsic appeal within a strategic context when an agent reaches a decision in ignorance of the strategies adopted by other players rationality consists of making a choice which is justifiable by an internally consistent system of beliefs rather than one which is optimal post hoc this point of view is not original indeed most serious justifications of the nash hypothesis embrace such an approach arguing that agents will expect the game to yield a nash outcome and consequently will choose their equilibrium strategies nevertheless when we think in terms of maximizing utility subject to expectations rather than realizations it becomes clear that the nash hypothesis far from being a consequence of rationality arises from certain restrictions on agents expectations which may or may not be plausible depending upon the game being played we are then quite naturally led to ask are there any restrictions of individuals expectations and hence choices which are required by rationality alone rather than by subjective plausibility this paper is concerned with defining justifying characterizing and refining a criterion for rational strategic choice which i label rationalizability

expectations surprises and treasury bill rates 1960 82 changes in six month bill rates over semiannual periods in the 1960s and 1970s are successfully related to expected changes and to surprises the latter include unanticipated changes in expected inflation in the growth of industrial production and base money and in inflation uncertainty estimation of the basic equation through the middle of 1983 does not suggest any change in structure moreover the equation explains 60 percent of the extraordinarily high level of real rates since late 1980 largely owing to an excess of unexpected net increases in anticipated inflation over actual increases our estimates provide some support for the expectations theory there appears to be information content in six month forward rates while this content is swamped by the impact of surprises in equations explaining rate changes in terms of forward rates alone the content is clear when proxies for the surprises are included in the equations the height and volatility of interest rates in the early 1980s spectacularly exceeded that of the past half century various researchers have attributed this to the sharp increase and decline in inflation the special characteristics of recent monetary the monetarist experiment and fiscal the structural deficit policies and mysterious or unidentified forces see clarida and friedman 1982 and makin and tanzi 1983 the present paper estimates the relationship between the six month treasury bill rate and its determinants in the 1960s and 1970s the purpose is to test various hypotheses regarding interest rate determination and to determine whether this relationship was altered markedly in the early 1980s the short term bill rate is chosen for investigation for two reasons first the yield on a short term instrument is independent of longer term expectations regarding inflation output growth and fiscal and monetary policies longerterm yields should depend heavily on such variables while reasonably accurate measures of expectations over say a six month horizon can probably be deduced are in fact available from survey data longer term expectations are both more uncertain and vary more widely across market participants second analysis of a short term bill rate allows an easy test of the expectations theory of interest rates recent studies by shiller campbell and schoenholtz 1983 and by mankiw and summers 1983 suggest that observed interest rate movements are unrelated to expected changes in rates extracted from the term structure of short term rates calling into question the validity of the expectations theory but see fama 1983 for an alternative view the six month bill rate is analyzed because it meshes best with the livingston survey data

assessing the impact of interest rates in less developed countries abstract empirical results obtained do not unambiguously support what one should expect on the basis of conventional economic theory cross country evidence on the average relationship for 64 ldcs during the period 1971 1980 between some of the macroeconomic variables such as rate of growth of real gdp real financial assets saving income and investment income ratios and rate of return on investment on the one hand and the level of the real interest rate on the other is analyzed by applying a non parametric mann whitney test it is found that there is no difference with any statistical significance between the two groups of ldcs above and below the mean real interest rate this implies that the level of the real interest rate by itself has little or no impact on the selected macroeconomic variables

rationalizable strategic behavior and the problem of perfection this paper explores the fundamental problem of what can be inferred about the outcome of a noncooperative game from the rationality of the players and from the information they possess the answer is summarized in a solution concept called rationalizability strategy profiles that are rationalizable are not always nash equilibria conversely the information in an extensive form game often allows certain unreasonable nash equilibria to be excluded from the set of rationalizable profiles a stronger form of rationalizability is appropriate if players are known to be not merely rational but also cautious what constitutes rational behavior in a noncooperative strategic situation this paper explores the issue in the context of a wide class of finite noncooperative games in extensive form the traditional answer relies heavily upon the idea of nash equilibrium nash 17 the position developed here however is that as a criterion for judging a profile of strategies to be reasonable choices for players in a game the nash equilibrium property is neither necessary nor sufficient some nash equilibria are intuitively unreasonable and not all reasonable strategy profiles are nash equilibria the fact that a nash equilibrium can be intuitively unattractive is well known the equilibrium may be imperfect introduced into the literature by selten 20 the idea of imperfect equilibria has prompted game theorists to search for a narrower definition of equilibrium while this research some of which will be discussed here has been extremely instructive it remains inconclusive theorists often agree about what should happen in particular games but to capture this intuition in a general solution concept has proved to be very difficult if this paper is successful it should make some progress in that direction the other side of the coin has received less scrutiny can all non nash profiles really be excluded on logical grounds i believe not the standard justifications for considering only nash profiles are circular in nature or make gratuitous assumptions about players decision criteria or beliefs the following discussion of these points is extremely brief due to space constraints more detailed arguments may be found in pearce 18

household behaviour in times of political change evidence from egypt abstract using representative household survey data we study the short term effects of the 2011 egyptian uprisings on household behaviour in terms of education and health expenditure as well as savings we construct a measure of political instability by analysing the number of fatalities during political protests throughout the country difference in difference estimations show that affected households increased spending on education especially on their sons higher education the increase in education expenditure is particularly prominent in areas where households were in favour of a regime change we argue that after the fall of mubarak those households had a positive outlook towards the future with better labour market prospects and therefore invested more in their sons education at the same time households decreased spending on health and increased savings which can be interpreted as precautionary behaviour our results are robust to placebo tests excluding cairo spillovers and alternative ways of measuring political instability

poverty traps and nonlinear income dynamics with measurement error and individual heterogeneity theories of poverty traps stand in sharp contrast to the view that anybody can make it through hard work and thrift however empirical detection of poverty traps is complicated by the lack of long panels measurement error and attrition this paper shows how dynamic pseudo panel methods can overcome these difficulties allowing estimation of non linear income dynamics and testing for the presence of poverty traps the paper explicitly allows for individual heterogeneity in income dynamics to account for the possibility that particular groups of individuals may face traps even if the average individual does not these methods are used to examine the evidence for a poverty trap in labor earnings income and expenditure in mexico and are compared to panel data estimates from a short rotating panel the results do find evidence of nonlinearities in household income dynamics and demonstrate large bias in the panel data estimates nevertheless even after allowing for heterogeneity and accounting for measurement error the paper finds no evidence of the existence of a poverty trap for any group in the sample

the postwar stability of the fisher effect most research concerning the fisher relationship has concentrated on the magnitude and significance of the response of nominal interest rates to anticipated inflation recently attention has shifted to the stability of that response according to previous estimates the impact of anticipated inflation on interest rates varies substantially over time by extending a standard model to include tax and aggregate supply shock effects we are able to reduce such instability considerably our results also reveal that increased foreign demand for bonds lowers the interest rate

economies of scale household size and the demand for food household scale economies are plausibly attributed to shared household public goods that make larger households better off at the same level of per capita resources larger households should therefore have higher per capita consumption of private goods such as food provided that they do not substitute too much toward the effectively cheaper public goods the evidence shows exactly the opposite data from rich and poor countries indicate that at constant per capita total expenditure the per capita demand for food decreases with household size and that it does so most in the poorest countries where substitution should be the least

monetary policy lessons of recent inflation and disinflation by 1975 most economists agreed that the money demand function in the united states was reasonably stable and could serve as a reliable basis for the formulation of monetary policy those suspicious of monetarism were on the defensive in the light of the apparently inexorable increase of m1 velocity of about three percent per year with deviations of only a few tenths of a percent experience with rising money growth and rising inflation through 1980 only confirmed monetarist views as figure 1 shows all this had changed by 1986 with disinflation in the 1980s m1 velocity departed convincingly from its 1953 79 trend the money demand function seems to have fallen apart and is apparently not a reliable basis for monetary policy after all consequently the first major section following this introduction is devoted to the decline of velocity after 1981 and the demise of the standard money demand function some authors including i believe benjamin friedman conclude that this evidence leaves us so uncertain about the nature of money demand that policymakers cannot rely at all on any presumed money demand regularities in contrast my working hypothesis is that the money demand continues to be a stable function of relatively few variables but that the interest elasticity of money demand is substantially higher than previously thought others have sought money demand explanations in terms of regime shifts but that literature will not be discussed here events have not been kind to keynesian monetary policy positions either keynesians tend to concentrate on interest rates especially real interest rates as the best guide to the effects of monetary policy on the economy the real rate is discussed

limits to rational learning a long standing open question raised in the seminal paper of kalai and lehrer 1993 is whether or not the play of a repeated game in the rational learning model introduced there must eventually resemble the play of exact equilibria and not just the play of approximate equilibria as demonstrated there this paper shows that play may remain distant in fact mutually singular from the play of any equilibrium of the repeated game we further show that the same inaccessibility holds in bayesian games where the play of a bayesian equilibrium may continue to remain distant from the play of any equilibrium of the true game

self confirming equilibrium rium path of play thus if a self confirming equilibrium occurs repeatedly no player ever observes play that contradicts his beliefs even though beliefs about play at off path information sets need not be correct we characterize the ways in which self confirming equilibria and nash equilibria can differ and provide conditions under which self con firming equilibria correspond to standard solution concepts nash equilibrium and its refinements describe a situation in which i each player s strategy is a best response to his beliefs about the play of his opponents and ii each player s beliefs about the opponents play are exactly correct we propose a new equilibrium concept self confirming equilibrium that weakens condition ii by requiring only that players beliefs are correct along the equilibrium path of play thus each player may have incorrect beliefs about how his opponents would play in contingencies that do not arise when play follows the equilibrium and moreover the beliefs of different players may be wrong in different ways the concept of self confirming equilibrium is motivated by the idea that noncooperative equilibria should be interpreted as the outcome of a learning process in which players revise their beliefs using their observations of previous play suppose that each time the game is played the players observe the actions chosen by their opponents but that players do not observe the actions their opponents would have played at the information sets that were not reached along the path of play then if a self confirming equilibrium occurs repeatedly no player ever observes play that contradicts his beliefs so the equilibrium is self confirming in the weak sense of not being inconsistent with the evidence by analogy with the literature on the bandit problem e g rothschild 1974 one might expect that a non nash self confirming equilibrium can be the outcome of plausible learning processes this point was made by fudenberg and

market structure and the effectiveness of monetary policy a cross industry study empirical rejections of the strong form of the new classical macroeconomics at the aggregate economy level leave open the extent to which it is the rational expectations or short run market clearin

fisher s paradox and the theory of interest irving fisher s theory of interest has proved to be a most durable and influential contribution to economic theory a central element of fisher s contribution is the fisher hypothesis that over the longer term the real rate of interest is approximately constant being determined largely by time preference with movements in the nominal interest rate reflecting movements in the rate of inflation one for one the paradox of the fisher hypothesis is that despite its wide acceptance as the cornerstone of interest rate theory most empirical evidence appears to be inconsistent with the hypothesis at least in its strictest form this empirical anomaly was noted by fisher himself who attributed it to money illusion in the fifty years following the publication of the theory of interest a considerable literature has evolved around this paradox the unifying theme of this literature is a common acceptance of the essence of fisher s hypothesis most of the energy in this literature has been devoted to explaining systematic movements in the real rate of interest and to providing reasons why the relationship between the nominal interest rate and inflation may only be approximate in

hope springs eternal learning and the stability of cooperation in short horizon repeated games abstract this paper considers learning rates in finitely repeated prisoners dilemmas if players think their opponents might be relatively cooperative e g tit for tat or grim types they will cooperate in finitely repeated prisoners dilemmas see kreps et al j econom theory 27 1982 245 however if there are actually no cooperative types players will eventually learn this and cooperation will break down this paper shows that this learning is extremely slow so it will take an extremely long time for cooperation to break down thus suppose the world is either good or bad the probability of a grim type is 0 if the world is good and zero if the world is bad successive generations pair up to play finitely repeated prisoners dilemmas players observe play in previous generations and use bayes rule to update their prior that the world is good we show that if the world is really bad then falls o 2 log 1 per generation on average thus if is small there is less cooperation if the world is good but cooperation may become more stable for a representative 19 period repeated prisoners dilemma beliefs fall one percentage point on average after a thousand generations to derive these learning rates we must refine existing results on the sensitivity of repeated games to kreps et al 1982 type perturbations specifically we show cooperation is possible in perturbed prisoners dilemmas repeated o log 1 times this improves significantly on the o 1 results in previous work the paper thus provides two new reasons why cooperation tends to be stable even in short horizon repeated games

on the characterisation of the world real interest rate this paper characterises the world real interest rate as a common trend in real interest rates in germany japan and the united states even if there is scepticism in the existence of the world real interest in theoretical terms real interest parity is based on the presumed validity of uncovered interest parity and purchasing power parity but the empirical evidence of these parity conditions is not strong and thus the presence of the world real interest rate the significance of this paper is therefore to visualise the current level of international economic integration by characterising the approximate world real interest rate as a single common trend taking full advantage of the fact that real interest rates in three large open economies have been moving together sharing a common component even if their levels are distinctively different this single common trend has desirable properties as the world real interest rate first it is a parsimonious and monotonically increasing function of the real interest rates in three large open economies that can be world price or interest rate maker in contrast with small open economies second it is moving together with national real interest rates one for one hence the deviations from the world rate are temporary because common trend represents the common driving force of national rates over the long run period third it can explain as high a proportion as possible of the variances of national rates

axiomatic characterizations of rational choice in strategic environments for more than forty years economists have wrestled with the elusive notion of rational behavior in strategic environments generating a variety of competing approaches even for simple simultaneous move games four distinct solution concepts including the notions of nash equilibria correlated equilibria rationalizability and iterated dominance currently have some standing as theories of strategic rationality here i propose four axioms for rational choice in strategic environments and use these to characterize the sets of pure strategies that players may select under each of the solution concepts mentioned above my results underscore both the similarities and differences between the four concepts

selfcon rming equilibrium and model uncertainty we propose to bring together two conceptually complementary ideas 1 selfcon rming equilibrium sce at rest points of learning dynamics in a game played recurrently agents best respond to con rmed beliefs i e beliefs consistent with the evidence they accumulated and 2 ambiguity aversion agents other things being equal prefer to bet on events with known rather than unknown probabilities and more generally distinguish objective from subjective uncertainty a behavioral trait captured by their ambiguity attitudes using as a workhorse the smooth ambiguity model of klibano marinacci and mukerji 2005 we provide a de nition of smooth sce which generalizes the traditional concept of fudenberg and levine 1993a b here called bayesian sce and admits waldean maxmin sce as a limit case we show that the set of equilibria expands as ambiguity aversion increases the intuition is simple by playing the same strategy in

why real interest rates were so low in the 1970 s the economic turmoil of the 1970 s resulted in record postwar increases in inflation unemployment and nominal interest rates yet it was declines that were hardest to explain the average real value of a share of common stock plummeted productivity growth evaporated real interest rates measured as the spread between nominal interest rates and the inflation rate turned negative see table 1 over the past decade an explosion has occurred in the amount of attention paid to the relationship between nominal and thus real interest rates and expected inflation rates a good deal of this effort has been directed toward empirical analysis of the fisher neutrality hypothesis that nominal rates respond one for one with expected inflation rates most empirical tests of the fisher hypothesis have been bivariate interest rates were regressed on a constant and on actual or expected inflation measures estimates of the impact of inflation on interest rates in these and even in extended models are often significantly below one are often statistically imprecise and tend to be unstable over time the middle column of table i reflects this the coefficient of inflation on nominal interest rates there drops from 0 78 to 0 59 in the latter 1970 s another branch of work on nominal interest rates has concentrated on the institutional impediments to the fisher hypothesis robert mundell and james tobin demonstrate that nominal rates change by a smaller amount than the expected inflation rate does when a real balance effect exists and money pays no interest michael darby and martin feldstein on the other hand argue that nominal rates should exhibit a greater thanunity response to expected inflation due to the nature of u s income tax laws 2 here i estimate the relation between interest rates expected inflation and real forces such estimates are required for evaluating the effects of inflation on saving investment the distribution of income and the redistribution of wealth to generate estimates of the net impact of these various factors on interest rates and to avoid the identification and simultaneity problems masked but not often remedied by instrumental variables techniques i employ only exogenous regressors to buttress the argument i examine the individual links in the chain which are summarized in the reduced form the novel aspect of the model presented in section i is its addition of aggregate supply shocks to the determination of interest rates i trace the reduction in the supply of complementary factor inputs in the 1970 s to a decline in the demand for capital and therefore in real interest rates the inclusion of this supply force along with expected inflation allows one to distinguish between two offsetting effects on interest rates the depressing effect on real rates through lower investment demand and the elevating effect on nominal rates of higher expected inflation the results in section ii not only strongly support the economic and statistical importance of supply shocks on real interest rates but also resolve some longstanding interest rate puzzles allowing for the impact of factor supply produces a significant estimated response to expected inflation for a sample that ends prior to late 1960 s the magnitude assistant professor school of business administration university of california berkeley i would like to thank george akerlof robert j gordon robert a meyer joe peek janet yellen the members of the economic analysis and policy seminar at berkeley participants at the nber conference on inflation and financial markets and anonymous referees for helpful comments data resources supplied data and computational services financial support was provided by the berkeley program in finance and nsf grant ses8109093 linda pacheco supplied able research assistance errors of omission or commission are my responsibility see william gibson david pyle john carlson and thomas cargill and robert meyer 2maurice levi and john makin derive the reducedform effect of expected inflation on nominal interest rates as a function of the structural parameters

raw materials profits and the productivity slowdown a factor price frontier framework is used to clarify the analogy of an increase decrease in raw material prices with autonomous technological regress progress factor price profiles are estimated for the manufacturing sector of the united states the united kingdom germany and japan the production model in conjunction with estimates obtained from the factor price frontier attributes much of the slowdown in manufacturing productivity to the rise in relative raw material prices part of the apparent productivity riddle may have to do with the use of double deflated national accounting measures of value added which have an inherent measurement bias

equilibrium learning in simple contests abstract the paper studies a repeated contest when contestants are uncertain about their true relative abilities when ability and effort are complements a favorable belief about one s own ability stimulates effort and increases the likelihood of success success in turn reinforces favorable beliefs we show that this implies that with positive probability players fail to learn their true relative abilities in equilibrium and one player wins the contest with high probability forever in this case the prevailing player may be the actually worse player and persistent inequality arises we discuss some features of the model when the complementarity assumption is dropped

natural disasters household welfare and resilience evidence from rural vietnam summary the study uses commune fixed effects regressions to estimate the effect of natural disasters on welfare and poverty of rural households in vietnam and subsequently examines household and community characteristics that can strengthen resilience of households to natural disasters we find that all the three disaster types considered in this study including storms floods and droughts have negative effects on household income and expenditure households in communes with higher mean expenditure and more equal expenditure distribution are more resilient to natural disasters access to micro credit internal remittances and social allowances can help households strengthen the resilience to natural disasters

more flexible use of survey data on expectations in macroeconomic models a flexible procedure is proposed whereby both the random and systematic errors in measurement of survey data on inflation expectations can be appropriately handled when these surveys are used in the estimation of macroeconomic models during the period 1952 1980 livingston s two expectations series and the src series systematically underestimated inflation expectations by nearly 25 the asa nber survey however does not exhibit such underestimation thus the use of the livingston or src data as an unbiased measure of the true expectations of inflation would result in overestimation of the fisher effect and the ex ante real interest rate

calories and poverty during a prolonged crisis abstract we study how calorie intake changes during prolonged crises by studying the calorie intake of households when exposed to short term and long term income and price shocks we use data from household surveys of mexican households during the income and price crises periods of 1994 to 1998 and 2006 to 2010 our focus is on low income mexican households those with the lowest 25 of expenditure per capita there is little effect on calorie intake following an income decline in the short run once households are exposed to reduced incomes for a longer period calorie intake falls households are able to weather short term fluctuations in income by shifting consumption to food items that are cheaper per calorie such as staple foods by consuming more foods at home instead of outside the home and by postponing expenditures on durable and semi durable goods when exposed to the income shock over a longer period of time we posit that households are not able to defer durable and semi durable purchases any more so their calorie consumption drops our results suggest that mexican households may be able to sustain calorie intake when faced with an income shock but it is less likely that they are able to do so if the income shock persists the government may want to support poor constituents when they are faced with prolonged crises

government borrowing and tax adjusted real and nominal interest rates the purpose of this paper is to test for the effect of federal government budget deficits on one year tax adjusted nominal and real interest rates in an is lm as model the results suggest that the specification of the dependent variable is a crucial issue in the debate over the linkage between deficits and interest rates the evidence shows a positive and significant effect of various measures of the federal government deficit and debt on the real tax adjusted treasury bill rate in both the levels and the first differenced equations but not on the nominal tax adjusted rate the positive and significant deficit debt coefficients are also confirmed when the first differenced equation is estimated by instrumental variables and when the equation is estimated over various time periods thus there is robust evidence of a positive linkage between federal government borrowing and the tax adjusted real but not nominal interest rates

the hidden costs of political instability evidence from kenya s 2007 election crisis abstract this paper studies the microeconomic impacts of the political crisis and civil conflict that immediately followed the december 2007 presidential election in kenya income expenditures and consumption dramatically declined for a broad segment of the rural population for the duration of the conflict to make up for the income shortfall women who supply transactional sex engaged in higher risk sex both during and after the crisis while this particular crisis was likely too short for these behavioral responses to seriously increase the risk of hiv or other stis for these women such responses could have long term repercussions for health in countries with longer or more frequent crises overall our results suggest that social unrest can be an important channel through which political instability can affect long term outcomes such as health

the unintended consequence of an export ban evidence from benin s shrimp sector summary the inability of benin to comply with eu standards led to a ban on its shrimp exports we show that the ban had a negative impact on the income of fishmongers and fishermen in the short run but also several years after it was lifted the impact persisted because exports to the eu did not revive and the local shrimp demand could not fully compensate for the loss of the eu market a small number of local actors coped with the ban by moving out of the sector but the large majority were locked in the local fishery sector

subjective games and equilibria applying the concepts of nash bayesian and correlated equilibria to the analysis of strategic interaction requires that players possess objective knowledge of the game and opponents strategies such knowledge is often not available the proposed notions of subjective games and of subjective nash and correlated equilibria replace essential but unavailable objective knowledge by subjective assessments when playing a subjective game repeatedly subjective optimizers converge to a subjective equilibrium we apply this approach to some well known examples including single and multi person multi arm bandit games and repeated cournot oligopoly games journal of economic literature classification numbers c73 and c83

the adjustment of the real interest rate to inflation this paper reports tests of carmichael and stebbing s 1983 inverted fisher hypothesis that it is the real rather than the nominal interest rate which adjusts to changes in the expected inflation rate unlike the earlier analysis the results presented here are based on a properly specified estimating equation derived from a short run open economy macro model the results support the inverted fisher hypothesis in the short run but indicate that there is some overshooting of the real interest rate so that after four quarters about 75 of the effect of an expected inflation change is reflected in real rates while the remainder leads to an increase in the nominal rate

international expected real interest rates new tests of the parity hypothesis and u s fiscal policy effects abstract this paper investigates the links among expected real interest rates across countries and also those between international expected real interest rates and u s fiscal policy we analyze the cross sectional mean of international ex post real interest rates as an estimator for the mean international expected real interest rate our results strongly reject the international expected real interest rate parity hypothesis reveal that u s budget deficits have no independent effects on international real rates given the impact of u s government defense spending and suggest that forces other than u s fiscal policy account for the post 1980 rise in international real rates

subjective rationality self confirming equilibrium and corporate strategy this paper presents a formal theory of subjective rationality and demonstrates its application to corporate strategy an agent is said to be subjectively rational when decisions are consistent with the available facts and where these are lacking with the agent s own subjective assessments a self confirming equilibrium arises when agents subjectively rational actions generate events that are consistent with their own expectations equilibrium strategies may be suboptimal because certain counterfactual beliefs may be erroneous and yet fail to be contradicted by events observed in equilibrium this weakening of the stronger rationality assumptions inherent in many of the more familiar equilibrium ideas appears well suited to applications in strategy in particular performance advantage may be sustained by a firm when its subjectively rational competitors persistently employ suboptimal self confirming strategies

the reaction of stock returns to anticipated and unanticipated changes in money a re examination of the evidence in the frequency domain the relationship between money and stock returns is analysed for the 1977 1985 period spectral analysis and a var vector autoregressive model are used in the analysis the preliminary results suggest a positive relationship between stock returns and money supply along a business cycles and high frequency cycles a detailed analysis however suggests the spurious character of this observed relationship the money stock returns relationship over business cycles can be explained by a contemporaneous adjustment of stock returns and anticipated money in response to business cycle anticipations the high frequency relationship on the other hand can be related to contemporaneous adjustment of stock returns and money anticipations in response to expected inflation in a framework characterized by the anticipation of the federal reserve reaction function the empirical results strongly suggest that both stock returns and money anticipations are determined in a forward looking manner incorporating the informat

the effect of federal deficits and debt on the tax adjusted short term real interest rate the stock versus flow effect of the federal debt deficit on a real interest rate is examined in a reduced form equation the evidence shows a positive and significant linkage between the federal debt and an ex post tax adjusted short term real interest rate

disappearing private reputations in long run relationships for games of public reputation with uncertainty over types and imperfect public monitoring cripps mailath and samuelson 2004 showed that an informed player facing short lived uninformed opponents cannot maintain a permanent reputation for playing a strategy that is not part of an equilibrium of the game without uncertainty over types this paper extends that result to games in which the uninformed player is long lived and has private beliefs so that the informed player s reputation is private journal of economic literature classi cation numbers c70 c78

money growth volatility and the macroeconomy this study analyzes the effects of variability in money growth on the macroeconomy for the period 1961 1 1984 4 within the context of a vector autoregressive model that contains variables typically included in a small macro model variance decompositions and historical decompositions are used to assess the impact of money growth variability the variance decompositions suggest substantial effects of money growth variability on the long term interest rate output and the price level historical decompositions for 1979 4 1984 4 suggest substantial effects of money growth variability on the interest rate and output but smaller effects on the price level are found copyright 1988 by ohio state university press

financial crisis health outcomes and aging mexico in the 1980s and 1990s abstract we study the impact of economic crisis on health in mexico there have been four wide scale economic crises in mexico in the past two decades the most recent in 1995 96 we find that mortality rates for the very young and the elderly increase or decline less rapidly in crisis years as compared with non crisis years in the 1995 96 crisis mortality rates were about 5 to 7 percent higher in the crisis years compared to the years just prior to the crisis this translates into a 0 4 percent increase in mortality for the elderly and a 0 06 percent increase in mortality for the very young we find tentative evidence that economic crises affect mortality by reducing incomes and possibly by placing a greater burden on the medical sector but not by forcing less healthy members of the population to work or by forcing primary caregivers to go to work

earnings mobility and measurement error a pseudo panel approach the degree of mobility in incomes is often seen as an important measure of the equality of opportunity in a society and of the flexibility and freedom of its labor market but estimation of mobility using panel data is biased by the presence of measurement error and non random attrition from the panel this paper shows that dynamic pseudo panel methods can be used to consistently estimate measures of absolute and conditional mobility in the presence of non classical measurement errors these methods are applied to data on earnings from a mexican quarterly rotating panel absolute mobility in earnings is found to be very low in mexico suggesting that the high level of inequality found in the cross section will persist over time however the paper finds conditional mobility to be high so that households are able to recover quickly from earnings shocks these findings suggest a role for policies which address underlying inequalities in earnings opportunities

on the equivalence of walrasian and non walrasian equilibria in contract markets the case of complete contracts this paper explores two models of an economy in which contracts are exchanged in the first model contracts are exchanged on a competitive market in which traders expectations concerning conditions that prevail within specific markets adjust until markets clear in the second model contract designers compete directly against one another by offering alternate contracts it is shown that walrasian allocations correspond with the equilibrium allocations in the model with direct competition when the number of traders is made large furthermore the expectational assumptions that drive the walrasian analysis coincide with off the equilibrium path conjectures in the problem with direct competition