intertemporal labor supply and human capital accumulation we solve and estimate a dynamic model that allows agents to optimally choose their labor hours and consumption and that allows for both human capital accumulation and savings estimation results and simulation exercises indicate that the intertemporal elasticity of substitution is much higher than the conventional estimates and the downward bias comes from the omission of the human capital accumulation effect the human capital accumulation effect renders the life cycle path of the shadow wage relatively flat even though wages increase with age hence a rather flat life cycle labor supply path can be reconciled with a high intertemporal elasticity of substitution

cointegration and the us term structure abstract using the maximum likelihood analysis of cointegration developed by johansen 1988 1991 we test the cointegration implications of the expectations hypothesis of the term structure on a sample of us pure discount yields by using this approach we are able to analyze systems of more than two interest rates simultaneously as opposed to most previous studies which examine interest rates only in pairs one of the main results is that for the period 1952 1987 the cointegration implications generally seem to hold

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

a test of the rational expectations hypothesis using data from a natural experiment data on contestants choices in italian game show affari tuoi are analysed in a way that separates the effect of risk attitude preferences from that of beliefs concerning the amount of money that will be offered to contestants in future rounds this separate identification is possible by virtue of the fact that at a certain stage of the game beliefs are not relevant and risk attitude is the sole determinant of choice the rational expectations hypothesis is tested by comparing the estimated belief function with the true offer function which is estimated extraneously using data on offers actually made to contestants we find a close correspondence leading us to accept the rational expectations hypothesis the importance of belief formation is confirmed by the estimation of a mixture model which establishes that the vast majority of contestants are forward looking as opposed to myopic

testing the expectations hypothesis in the brazilian term structure of interest rates a cointegration analysis in this article the expectations hypothesis eh is tested using cointegration techniques for maturities ranging from 1 to 12 months for the brazilian market we found evidence suggesting that for the period 1995 2006 the cointegration implication generally seems to hold we also found strong evidence supporting causality from short to long rates and also in the opposite direction empirical evidence supports the expectations theory of the term structure of interest rates

decomposing learning by doing in new plants the paper examines learning by doing in the context of a production function in which the other arguments are labor human capital physical capital and vintage as a proxy for embodied technical c

organizational capital learning by doing and investment volatility this paper addresses the issue of plant level investment volatility in the context of a purely convex model where fluctuations are driven by technological shocks the aim is to assess the role of learning by doing in reproducing the well documented non smooth investment dynamics at the plant level instead of relying on typical non convexities fixed costs or indivisibilities used to account for lumpy investment behavior the concept of organizational capital is essential in the analysis and it provides the channel through which learning affects production our results indicate that learning by doing constitutes a potentially important source of investment volatility at the plant level and that one should not believe that convex models of investment necessarily deliver smooth dynamics

implicit contracts life cycle labor supply and intertemporal substitution the implicit contract model is a serious alternative to the spot market interpretation of the labor market however its usefulness has been limited because the wage is unobserved and hence it has not been possible to estimate an intertemporal frisch supply elasticity for the model using microdata in this article we show that one can estimate this elasticity from microdata within the context of the implicit contract model under relatively weak assumptions based on consumer theory we implement our approach on two micro data sets and for both obtain a reasonably precise elasticity estimate of approximately 1 0

price dispersion and incomplete learning in the long run abstract in each period a seller chooses a price and the customer for that period buys either one unit or nothing the relationship between price and purchase probability is one of two linear functions it is shown that the seller behaving optimally does not necessarily learn which function is the actual relationship since there can be a positive probability of sequences of prices converging to the price at which the two functions give the same purchase probability

a dynamic migration model with uncertainty we study a dynamic version of the harris todaro migration model where a finite population of infinitely lived bayesian agents choose consumption and migration decision rules as a function of their histories the agents do not know the production functions in the two sectors and learn about them through wage draws that they receive from the stochastic production functions the government knows the true production functions but is uninformed about the agents beliefs and the actual wage draws they observe the government maximizes its welfare function using wage subsidies in the two sectors and a migration tax we solve the agents dynamic programming problem and then use the solution to solve the government s dynamic programming problem we study the effects of government policies on the population distribution and illustrate the model by numerically solving a particular parametric example

a test of the expectations hypothesis of the term structure of interest rates for sri lanka this paper tests the expectations hypothesis of the term structure of interest rates for sri lanka the data support the hypothesis that forward and spot rates are cointegrated suggesting a stochastic trend in the structure of interest rates however the hypothesis that forward rates are unbiased predictors of future spot rates is rejected

the hump shaped behavior of inflation and a dynamic externality we propose a general equilibrium model that explains the empirical evidence of the hump shaped response of inflation to a monetary policy shock the model replaces backward looking indexation a la christiano et al 2005 nominal rigidities and the dynamic effect of a shock to monetary policy journal of political economy 113 1 1 45 with a dynamic externality into the production function of firms the model armed with sticky wages and variable capital utilization has two offsetting effects on real marginal cost over the business cycle first increasing factor prices raise real marginal cost in response to an expansionary monetary policy shock in the intermediate run second a dynamic externality reduces real marginal cost in the short run because it raises productivity in response to an increase in output following the shock overall the resulting short run decrease and intermediate run increase in marginal cost replicate the hump shaped behavior of inflation under purely forward looking price and wage phillips curves

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

a simple account of the behavior of long term interest rates recent empirical research on the term structure of interest rates has shown that the long term interest rate is well described by a distributed lag on short term interest rates but does not conform to the expectations theory of the term structure it has been suggested that the long rate overreacts to the short rate this paper presents aunified taxonomy of risk premia or deviations from the expectations theory this enables the hypothesis of overreaction to be formally stated it is shown that if anything the long rate has underreacted to the short rate however the independent movement of the long rate is primarily responsible for the failure of the expectations theory

rational expectations equilibrium an alternative approach we study a dynamic market process in which traders condition their beliefs about payoff relevant parameters on past endogenously generated market data and current exogenous data we say that a market process is informative if the beliefs of traders who receive only endogenously generated market data converge almost surely to the true parameter value our main result is that under standard regularity hypotheses the generic market process is informative we define an equilibrium as the limit points of the market process journal of economic literature classification numbers 02 1 026 c 1984 academic press inc

dynamic complementarities a quantitative analysis abstract this paper considers the importance of dynamic complementarities as an endogenous source of propagation in a dynamic stochastic economy dynamic complementarities link the stocks of human and organizational capital which are influenced by past levels of economic activity to current levels of productivity we supplement an otherwise standard dynamic business cycle model with both contemporaneous and dynamic complementarities the model is calibrated using estimates of these effects from both micro and aggregate data our quantitative analysis identifies empirically relevant dynamic complementarities as a source of propagation for both technology and taste shocks

unemployment insurance recall expectations and unemployment outcomes this paper empirically examines the importance of explicitly accounting for the layoff rehire process in the analysis of unemployment outcomes in the united states we find that the spells of individuals who initially expect to be recalled account for much more of the unemployment of unemployment insurance ui recipients than do spells actually ending in recall our results indicate that the recall and new job escape rates from unemployment have quite different time patterns and are often affected in opposite ways by explanatory variables we also find that the probability of leaving unemployment both through recalls and new job finding increases greatly around the time that ui benefits lapse over the past fifteen years many studies have empirically analyzed the determinants of individual unemployment spell durations in the united states much of this literature has used a job search framework in which the unemployed are viewed as permanently displaced workers who are unattached to jobs the possibility of recall to a former job a process not requiring search has been omitted from explicit consideration in the majority of these studies 2 an explicit treatment of the layoff rehire process is necessary for a proper understanding of the determinants of unemployment durations and of the impacts of unemployment policies in the united states for at least three reasons first temporary layoffs in which workers are often rehired by their original employers are a quantitatively quite important feature of the u s labor market 3 second expectations concerning the likelihood of recall are likely to affect the responses of employers and unemployed workers to labor market interventions such as reemployment bonuses and subsidies

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

the information in swedish short maturity forward rates in this paper we empirically study the relationship between implicit forward rates and corresponding interest rates in the short end of the swedish term structure the interest rates and forward ra

the term structure of euro rates some evidence in support of the expectations hypothesis abstract this paper studies 1 3 6 and 12 month euro rates for 17 countries using between 10 and 30 years of data term spreads contain information about future short term rates in all 51 regressions that we estimate moreover in 35 cases we are unable to reject the expectations hypothesis using cross sectional regressions we estimate the variance of the term premium and the correlation of the term premium and the expected change in short rates we conclude that despite evidence of a time varying term premium for many countries the expectations hypothesis is broadly compatible with the data

macroeconomic fluctuations and the allocation of time what are the fundamental driving forces of macroeconomic fluctuations in particular why do people spend more time working in booms and less in recessions these are basic questions of macroeconomics recent thinking has emphasized technology shifts preference shifts and changes in government purchases as likely driving forces it is useful to distinguish atemporal and intertemporal effects of the driving forces under standard assumptions the technology shift has no effect through atemporal channels because income and substitution effects exactly offset a straightforward decomposition of movements of employment attributes most of them to the atemporal effects of preference shifts

tests of the expectations hypothesis resolving the anomalies when the short term rate is the federal funds rate abstract the expectations hypothesis eh of the term structure plays an important role in the analysis of monetary policy where shorter term rates are assumed to be determined by the market s expectation for the overnight federal funds rate with two exceptions tests using the effective federal funds rate as the short term rate easily reject the eh these exceptions are when the eh is tested over the nonborrowed reserve targeting period and when the test is performed only using data for settlement wednesdays the last day of bank reserve maintenance period this paper argues that these exceptions are anomalous in the former case the failure to reject the eh occurs when economic analysis suggests that the market should be less able to forecast the federal funds rate in the latter case it occurs when there are sharp spikes in the funds rate that cannot improve materially the market s ability to forecast the funds rate additional analysis shows that these anomalous results are a consequence of the procedure used to test the eh

growth under uncertainty with experimentation abstract we introduce bayesian learning into a stochastic growth model and study the effect of experimentation on the optimal level of the investment decision and on the amount of information gathering when more investment produces more information experimentation can push towards a lower level of investment thus reducing information acquisition symmetrically when more investment reduces information experimentation can increase investment and again decrease information gathering these results run contrary to intuitions generated by the standard literature on experimentation

the term structure spread and future changes in long and short rates in the g7 countries abstract according to the expectations hypothesis when the spread between long and short rates widens next quarter s long rate should rise in the united states however long rates decline instead of rising this anomaly is also present in canada the uk germany and japan four of the additional six g7 countries nevertheless in contrast to the us where long rates appear to overreact to expected future developments the anomalous short run movement of long rates in these other g7 countries is caused by an additive white noise error on long rates that does not materially affect the information in their term structure

the value of information in efficient risk sharing arrangements suppose that agents share risks in competitive markets we show that better information makes everyone worse off if the economy has a representative agent that is the economy s demand for state contingent consumption equals the demand of a hypothetical agent who owns all the economy s wealth the representative agent moreover is normatively unrepresentative although each agent dislikes information the representative agent is indifferent although we emphasize pure exchange our results imply that a representative agent model might seriously misstate the welfare effects of improved information in an economy with production and risk sharing even if it performs well otherwise

learning by doing and aggregate fluctuations does the form of the accumulation technology matter abstract several authors have identified learning by doing as a mechanism capable of generating the endogenous propagation of shocks in rbc models it is shown that this endogenous propagation mechanism depends upon the dynamic structure associated with learning rather than any functional form assumptions on the accumulation technology

bayesian economist bayesian agents i an alternative approach to optimal learning we generalize the results on bayesian learning based on the martingale convergence theorem to the sequential framework we show that the variability in the sequential framework is sufficient under mild conditions to circumvent the incomplete learning results that characterize the optimal learning literature we then give an alternative approach whereby the economist is bayesian with a prior on the space of agent priors we illustrate the usefulness of our approach by applying it to two popular economic examples a monopolist who does not know the demand curve he faces and the stochastic single sector growth model with an unknown production function

reserves announcements and interest rates does monetary policy matter the author provides evidence on the perceived existence of strong liquidity effect the analysis is based on the response of the term structure of interest rates to the weekly federal reserve announcements of bank reserves during the post october 1979 period it is shown that unanticipated changes in the mix between borrowed and nonborrowed reserves cause expected real interest rates to change after the announcement because they provide information about a future change in the supply of money a precise model is developed and tested during subperiods of nonborrowed and borrowed reserves targeting by the fed

a multi country study of the information in the shorter maturity term structure about future inflation abstract empirical analysis of data from ten oecd countries indicates that except for france the united kingdom and germany the shorter maturity term structure does not contain a great deal of information about the future path of inflation on the other hand except for the united kingdom there is a great deal of information in the term structure of nominal interest rates at shorter maturities about the term structure of real interest rates these results are explained by differences in the relative variability of expected future inflation changes and real term structure slopes for the different countries

a value function arising in the economics of information abstract the value function for a problem in the economics of the optimal accumulation of information is calculated as a fixed point of a contraction mapping by direct numerical iteration the optimal policy function is obtained as is the function defined as the sum of current expected reward and the discounted expected value of following the optimal policy in the future the optimal policy function is shown to be sensitive to the discount factor indeed for large values of the discount factor weighting the future heavily the policy function has a break and the value function is apparently not differentiable

the expectations hypothesis of the term structure the uk interbank market using a high quality weekly data set the author provides several tests of the expectations hypothesis using the vector autoregression and cointegration methodologies for several maturities between one week and twelve months for the u k interbank market on the basis of the johansen cointegration analysis there appears to be a break in the term structure when both the six month and twelve month maturities are included as a pair the latter may be due to either the presence of liquidity constraints or market segmentation or a time varying term premium all of which would invalidate the assumptions underlying the expectations hypothesis the author provides some tentative explanations of these diverse results copyright 1996 by royal economic society

escaping volatile inflation why has inflation been so stable in developed economies since the early 1990s in this paper we answer that the united states and other countries may have escaped from a volatile inflation equilibrium our argument builds on the story proposed by tom sargent in the conquest of american inflation where the fall in inflation in the 1980s was attributed to changing government beliefs to explain the escape in inflation volatility we unwind one of sargent s simplifications and allow the government to react to some of the shocks in the economy in this case when government beliefs turned against the phillips curve in the 1980s they not only led to an escape from high inflation but also stopped government using changes in inflation to offset shocks inflation and inflation volatility therefore escaped in tandem our analysis also sheds some light on why the escape in inflation occurred at the time it did

an enlarged definition of cointegration abstract a broader definition of cointegration is presented allowing for different orders in the original process as a result different cointegration vectors may be generated from a given one however if the cointegrated process is stationary then the standard ideas and methods may still apply

persistent real exchange rates abstract three well known facts that characterize exchange rate data are a the high correlation between bilateral nominal and real exchange rates b the high degree of persistence in real exchange rate movements and c the high volatility of real exchange rates this paper attempts a joint albeit partial rationalization of these facts in an environment with no staggered contracts and where prices are preset for only one quarter there are two key innovations in the paper first we augment a standard two country open economy model with learning by doing in production at the firm level this induces monopolistically competitive firms to endogeneize the productivity effect of their price setting behavior specifically firms endogenously choose not to adjust prices by the full proportion of a positive monetary shock in order to take advantage of the productivity benefits of higher production second we introduce habits in leisure this makes the labor supply decision dynamic and adds an additional source of propagation we show that the calibrated model can quantitatively reproduce significant fractions of the aforementioned facts moreover as in the data the model also produces a positive correlation between the terms of trade and the nominal exchange rate

testing the expectations hypothesis in eurodeposits abstract analyzing data on euro rates for 1978 1998 we find some consistent evidence in favor of the expectations hypothesis eh of the term structure a interest rates offered on deposits in a given currency form a cointegrated system b the restrictions of the eh on the cointegrating relationships are not rejected c forward rates contain significant explanatory power on future interest rates unbiasedness being an acceptable hypothesis as a cointegrating relationship between forward rates and the appropriate future value of the corresponding short term interest rate however we also provide evidence that past rates contain information additional to that in forward rates to predict future short term rates against the rational expectations version of the eh and market efficiency

real business cycle models and the forecastable movements in output hours and consumption the authors study the movements in output consumption and hours that are forecastable from a vector autoregression and analyze how they differ from those predicted by standard real business cycle models they show that actual forecastable movements in output have a variance about one hundred times larger than those predicted by the model the authors also find that forecastable changes in the three series are strongly positively correlated with each other on the other hand for parameters whose implications are plausible in other respects the model implies that output consumption and hours should not all be expected to move in the same direction copyright 1996 by american economic association

benchmarking the expectations hypothesis of the interest rate term structure an analysis of cointegration vectors i test cointegration restrictions that are consistent with the expectations hypothesis of the term structure by employing the full information maximum likelihood methods developed by johansen yield curves appear to be the result of cointegration among interest rates the cointegration vectors that best describe the long term impact of interest rate levels on interest rate changes can often be written as linear combinations of interest rate spreads there is however difficulty in keeping short term yields in such a restricted cointegrated system with other interest rates short term speculative returns from long term bonds do not conform to the expectations hypothesis

labor hoarding and the business cycle this paper investigates the sensitivity of solow residual based measures of technology shocks to labor hoarding behavior using a structural model of labor hoarding and the identifying restriction that innovations to technology shocks are orthogonal to innovations in government consumption we estimate the fraction of the variability of the solow residual that is due to technology shocks our results support the view that a significant proportion of movements in the solow residual are artifacts of labor hoarding behavior specifically we estimate that the variance of innovations to technology is roughly 50 percent less than that implied by standard real business cycle models in addition our results suggest that existing real business cycle studies substantially overstate the extent to which technology shocks account for the variability of postwar aggregate u s output

new hope for the expectations hypothesis of the term structure of interest rates survey data on interest rate expectations permit separate testing of the two alternative hypotheses in traditional term structure tests that the expectations hypothesis fails and that expected future interest rates are ex post inefficient forecasts we find that the source of the spread s poor predictions of future interest rates varies with maturity at short maturities the expectations hypothesis fails at long maturities however changes in the yield curve reflect changes in expected future rates one for one an implication of the expectations hypothesis this result confirms earlier findings that long rates underreact to short rates but now it cannot be attributed to term premia if the attractiveness of an economic hypothesis is measured by the number of papers which statistically reject it the expectations theory of the term structure is a knockout most tests beginning with macaulay 1938 find no evidence supporting the expectations hypothesis 1 many cannot even reject statistically the alternative hypothesis that the spread between long and short rates contains no information about future interest rate changes 2 to make matters worse in u s postwar data future long rates tend to rise when short rates are above long rates since the expectations hypothesis would predict that long rates tend to fall the theory often does worse than even the naive model that future interest

robustness and u s monetary policy experimentation we study how a concern for robustness modifies a policy maker s incentive to experiment a policy maker has a prior over two submodels of inflationunemployment dynamics one submodel implies an exploitable trade off the other does not bayes law gives the policy maker an incentive to experiment the policy maker fears that both submodels and his prior probability distribution over them are misspecified we compute decision rules that are robust to misspecifications of each submodel and of the prior distribution over submodels we compare robust rules to ones that cogley colacito and sargent 2007 computed assuming that the models and the prior distribution are correctly specified we explain how the policy maker s desires to protect against misspecifications of the submodels on the one hand and misspecifications of the prior over them on the other have different effects on the decision rule

market perceptions of federal reserve policy and the weekly monetary announcements abstract in october 1979 the federal reserve altered its operating procedures emphasizing control of the growth rate of the money stock was the fed able to gain credibility in the market the paper investigates this question by examining the reactions of spot and expected future exchange rates foreign interest rates and long run domestic forward interest rates to the weekly federal reserve announcements of m l both before and after october 1979 the empirical evidence points out that the fed did gain credibility but was unable to establish full credibility the market reactions are consistent with the hypothesis that market participants attached a positive probability to the event that the fed may at some point in the future abandon its money stock targets

a defense of traditional hypotheses about the term structure of interest rates expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time under the former interpretation different versions of the expectations theory of the term structure are inconsistent with one another but i show that this does not necessarily carry over to the constant risk premium interpretation of the theory i present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity furthermore i argue that differences among expectations theories are secondorder effects of bond yield variability i develop an approximate linearized framework for analysis of the term structure in which these differences disappear and i test its accuracy in practice using data from the crsp government bond tapes in a well known article in this journal cox ingersoll and ross cir 4 reexamine and find wanting certain hypotheses about the term structure of interest rates a striking feature of cir s re examination is that it is entirely theoretical cir show that different versions of the pure expectations theory of the term structure which traditionally were regarded as equivalent are in fact inconsistent with one another when interest rates are random furthermore in a fairly general continuous time arbitrage pricing framework when interest rates are random all versions of the theory except one are incompatible with equilibrium at first sight cir s results appear to be devastating to traditional empirical work on the term structure they suggest that researchers must specify arbitrage pricing models with a small number of state variables before proceeding to empirical work such models must restrict not only the deterministic components

is rising rts a figment of poor data abstract while using detailed firm level data from the private business sector this study identifies two empirical puzzles i returns to scale rts parameter estimates rise at higher levels of data aggregation and ii estimates from the firm level suggest decreasing returns to scale the analysis shows that although consistent with rising estimates neither entry exit nor the basu fernald returns to scale in u s production estimates and implications journal of political economy 105 249 283 aggregation bias effect drives this result rather rising and too low rts estimates seem to reflect a mixture of random errors in factor inputs at the firm level it turns out in fact that a 7 5 10 percent error in labor hours worked can explain both puzzles

explaining the failures of the term spread models of the rational expectations hypothesis of the term structure contrary to the predictions of the rational expectations hypothesis of the term structure of interest rates empirical evidence suggests that the term spread between long and short rates fails to forecast future movements of long term rates although its forecasts of future short term rates are in the correct direction in this paper the authors show that this puzzling behavior of the term spread alone can be explained by a time varying term premium that is correlated with the term spread once this is accounted for neither expression of the expectations hypothesis is against the predictions of the theory copyright 1997 by ohio state university press

what do residuals from first order conditions reveal about dge models the first order condition foc associated with labour in many dynamic general equilibrium models involves only current period variables residuals constructed from this foc are inconsistent with aggregate us data in that they are very large and highly persistent the persistence suggests that models which introduce dynamic terms in the labour foc may be more consistent with the data three such models one with learning by doing one with habit formation and one with labour adjustment costs confirm that they can reduce the persistence in the residuals making the models more consistent with the joint dynamics of consumption output and hours

learning by doing and aggregate fluctuations abstract an unresolved issue in business cycle theory is the endogenous propagation of shocks yielding allocations that exhibit the persistence displayed in the data this paper explores the quantitative implications of one propagation mechanism learning by doing whose parameters are estimated using sectoral and plant level observations in the u s which are then integrated into a stochastic growth model with technology shocks we conclude that learning by doing can be a powerful mechanism for generating endogenous persistence moreover learning by doing implies that the employment decision of the representative agent is dynamic which allows a re interpretation of taste shocks or cyclical labor utilization as endogenous labor supply shifts

the expectations hypothesis of the term structure tests on us german french and uk euro rates abstract this paper tests the expectations hypothesis of the term structure on us german french and uk euro rates three tests are examined the first is based on forward rates and the other two are based on the interest rates spread first we show that the sign puzzle highlighted by campbell and shiller campbell j y shiller r j 1991 yield spreads and interest rate movements a bird s eye view review of economic studies 58 495 514 for us data does not arise in the cases of french and uk short term rates second we propose tests for the expectations hypothesis based on error correction models with these tests the sign puzzle disappears but the country puzzle remains

benefits from u s monetary policy experimentation in the days of samuelson and solow and lucas a policy maker knows two models of ination unemplo yment dynamics one implies an exploitable trade o the other does not the policy maker s prior probability over the two models is part of his state vector bayes law converts the prior probability into a posterior probability at each date and gives the policy maker an incentive to experiment for two models calibrated to u s data through the early 1960s we isolate the component of government policy that is due to experimentation by comparing the outcomes from two bellman equations the rst of which experiments and learns the second of which learns but doesn t experiment we interpret the second as an anticipated utility model and study how well its outcomes approximate those from the experiment and learn bellman equation the approximation is good for our calibrations the benets from purposeful experimentation are small

the term structure of very short term rates new evidence for the expectations hypothesis abstract empirical researchers have frequently rejected the expectations hypothesis the expectations hypothesis however has seldom if ever been tested at the extreme short end of the term structure where maturities are measured in days or weeks using overnight weekly and monthly repo rates i find that term rates are almost unbiased estimates of the average overnight rate this evidence provides new support for the expectations hypothesis

optimal growth with unobservable resources and learning abstract this paper examines the problem of choosing optimal resource consumption from an imperfectly observable aggregate capital wealth or resource stock which the decision maker learns about over time learning is complicated by the fact that the planner receives information about an object the true resource stock which is a moving target under the assumption that the utility of zero consumption is we show that the optimal policy follows a completely deterministic cautious or minmax policy that assumes the worst in each period and optimizes against that when this model is compared to a model with completely observable wealth levels the following insights are obtained 1 there is over saving 2 investment and output processes are more volatile than consumption and 3 regressions underestimate the risk aversion of agents information about the wealth or stock level is only valuable if it alters the support of the agent s beliefs thus information may be statistically informative yet economically valueless if information changes the support of the agent s beliefs then the optimal solution features an endogenous resource discovery process

the expectation hypothesis in emerging financial markets the case of malaysia this article deals with the expectation hypothesis of the term structure of interest rates it is argued that the rapid progress and financial market liberalization that is occurring in emerging financial markets could provide additional evidence for testing the expectation hypothesis this article employs data from the malaysian government securities market which represents one of the examples of an emerging financial market cointegration and error correction analyses show significant empirical validity for the expectation hypothesis the long and short term interest rates are shown to be cointegrated and subject to a long run equilibrium path in addition to shedding some light on the experience of emerging financial market this article explicitly identifies the process of adjustment towards the long run equilibrium for the long run the results are in favour of the long to short version of expectation hypothesis with longer term interest rates playing a greater role as equilibrium attractor howeve

learning by doing and the value of optimal experimentation abstract recent research on learning by doing has provided the limit properties of beliefs and actions for a class of learning problems in which experimentation is an important aspect of optimal decision making however under these conditions the optimal policy cannot be derived analytically because bayesian learning about unknown parameters introduces a nonlinearity in the dynamic optimization problem this paper utilizes numerical methods to characterize the optimal policy function for a learning by doing problem that is general enough for practical economic applications the optimal policy is found to incorporate a substantial degree of experimentation under a wide range of initial beliefs about the unknown parameters dynamic simulations indicate that optimal experimentation dramatically improves the speed of learning and the stream of future payoffs furthermore these simulations reveal that a policy which separates control and estimation and does not incorporate experimentation frequently induces a long lasting bias in the control and target variables while these sequences tend to converge steadily under the optimal policy they frequently exhibit non stationary behavior when estimation and control are treated separately

a theory of learning with heterogeneous agents the authors study learning in organizations comprised of short lived agents with heterogeneous beliefs it is shown that the sequence of actions converges in probability to the set of ex post optimal actions under some identifiability conditions beliefs also converge in probability to point mass on the truth moreover while actions and posterior beliefs converge in probability they can simultaneously almost surely fail to converge the authors simulations of n kiefer s 1989 monopoly learning model suggest that if the firm is operated by a sequence of short lived managers with heterogeneous beliefs then complete learning of the demand curve obtains copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association