three minimal market institutions with human and algorithmic agents theory and experimental evidence we define and examine the performance of three minimal strategic market games sell all buy sell and double auction in laboratory relative to the predictions of theory unlike open or partial equilibrium settings of most other experiments these closed exchange economies have limited amounts of cash to facilitate transactions and include feedback general equilibrium theory since it abstracts away from market mechanisms and has no role for money or credit makes no predictions about how the paths of convergence to the competitive equilibrium may differ across alternative mechanisms

the role of amenities in a general equilibrium model of regional migration and growth economists have been steadily refining the theoretical framework developed by sherwin rosen 25 to determine the implicit prices of amenities rosen s model was a partial equilibrium model which focused on the behavior of households as consumers jennifer roback 23 24 substantially expanded rosen s model by explicitly including the behavior of firms in a more general framework which she used to measure the value of amenities blomquist berger and hoehn 3 extended the roback model by incorporating intraregional as well as interregional differences in amenities however their basic theoretical framework is the same as that proposed by roback other works in this literature which have been based on roback s model are primarily empirical in nature for example see beeson and eberts 2 in a recent paper voith 31 modifies roback s model by incorporating local as well as regional amenities and by recognizing that the effect of an amenity on wages and rents may differ depending upon the nature 6f the community i e whether the community is residential commercial or mixed use voith also presents empirical results with mixed success

tariff preferences wto negotiations and the ldcs the case of the everything but arms initiative by assessing the impact of the recently adopted everything but arms eba initiative of the eu on the least developed countries ldcs and by showing how further multilateral trade liberalisations erode the eba preferences and impact the ldcs this paper attempts to uncover the ldcs difficult positions in the wto trade negotiations due to its limited product coverage and previous preferences granted by the eu welfare impacts of the eba on the ldcs are shown to be small and the bulk of these gains are associated with the sensitive products that are subject to gradual liberalisations moreover these small gains are likely to disappear if the eu conducts trade policy reforms in fulfilling its wto obligations resulting in an actually worse off situation for the ldcs extending the analysis to a multilateral trade liberalisation scenario reinforces the above results that the ldcs may well lose due to preference erosion and higher world market prices it concludes that other development assistance measures from developed countries should be made available to the ldcs to ease their dependency on trade preferences and to foster their supply capacities the ldcs themselves should attempt to integrate the duty and quota free market access status contained in the eba into a binding wto agreement to secure a stable trading environment but more importantly in order to solve the difficulties at the root these countries should actively engage in reforming their own trade policies

some aspects of trade between australia and pacific island countries australia and pacific island countries pics have maintained an ongoing trade and economic relationship for several years the determinants of trade between australia and pics are examined using a gravity model by utilising time series cross country data for the period 1981 to 2005 the empirical findings indicate that imports by pic from australia are significantly determined by pics population and their per capita gdp the results also suggest that pics exports are significantly determined by pics and australia s population pics infrastructure telecommunications and the distance to australia consistent with the findings of other studies using the gravity model distance is found to be a friction to pics exports to australia while this study identifies factors influencing pics trade with australia a more substantial issue for the governments and trade policy makers in pics is to look into the generally disappointing long term trade performance from a policy perspective pics would need to seriously look at increasing their export potential

multiple solution indeterminacies in monetary policy analysis abstract a sizeable fraction of recent research on monetary policy has been concerned with issues relating to analytical indeterminacies i e multiple solutions in rational expectations re models most of the literature features sophisticated re analysis conducted within dynamic models that reflect optimizing behavior by individual agents and incorporate taylor style policy rules a few papers have suggested that some of the particular indeterminacy arguments are misleading or irrelevant for the most part however there has been little dissent from the position that these indeterminacies present a genuine problem for monetary policy makers the purpose of the present paper by contrast is to argue that conclusions based on multiple solution indeterminacy findings are of dubious merit rather generally

equilibrium selection in an experimental macroeconomy author affiliation vivian lei department of economics university of wisconsin milwaukee milwaukee wi 53201 usa vlei uwm edu corresponding authorcharles n noussair department of economics faculty of economics and business tilburg university p o box 90153 5000 le tilburg the netherlands c n noussair uvt nl acknowledgment we are grateful to the college of letters and science and center for research on international economics at the university of wisconsin milwaukee for financial support we thank colin camerer katarina kellar lutz hendricks nazrul islam tomomi tanaka filip vesely and two anonymous referees for helpful comments 1 introductionone of the most influential literatures in economics is the theory of growth for surveys see azariadis 1993 barro and sala i martin 1995 romer 1996 sala i martin 2002 the basis of much of the literature is the ramsey 1928 cass 1965 koopmans 1965 growth model in this model the economy is assumed to behave like a benevolent social planner who chooses capital stock and consumption levels over an infinite time horizon with the goal of maximizing the discounted utility of the consumption stream the principal result of the model is that consumption and capital stock converge to unique optimal steady state levels that are independent of the initial endowment and the utility function of the social planner an implication of the model therefore is that different countries would converge toward a common income level even if their initial endowment of capital differed provided that they have access to the same production technology relatively poor countries would exhibit higher growth rates than richer ones these two predictions are testable with field data however field studies have generally failed to support the hypothesis of convergence toward a common income level see durlauf and quah 1999 temple 1999 and islam 2003 for surveys rather the data are more consistent with the alternative hypothesis of club convergence baumol 1986 which postulates that a small number of steady states exist and that each country has a tendency to converge toward one of them 1 such a framework can explain the observed pattern over time of an increase in income differences between the organisation for economic cooperation and development countries and the developing world as well as a decrease in the differences within each of the two groups the empirical support for club convergence has encouraged the development of theoretical models with multiple equilibria while some countries may reach optimal equilibria unfortunate countries might find themselves in low income equilibria which are often labeled as poverty traps these countries are unable to reach a better equilibrium without coordination originally due to rosenstein rodan 1943 the insight that the existence of multiple equilibria might provide an explanation of international income differences has led to a literature that considers a variety of growth models with multiple equilibria for example azariadis and drazen 1990 construct an overlapping generations model with two stable pareto rankable equilibria in the inferior equilibrium no agent trades with members of other generations murphy shleifer and vishny 1989 build a model with synergies between industries each industry is profitable only if other industries are operating and there are equilibria where all of the industries operate and other pareto dominated equilibria where none operate galor and zeira 1993 and banerjee et al 2001 show that inequality and differential access to credit can keep an economy in a pareto dominated equilibrium recognizing whether or not an economy has multiple equilibria is important because policy prescriptions differ depending on whether an economy is in an inferior equilibrium or whether it is in an equilibrium that is unique

limited rationality and strategic interaction the impact of the strategic environment on nominal inertia much evidence suggests that people are heterogeneous with regard to their abilities to make rational forward looking decisions this raises the question as to when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results we examine this question in the context of a long standing and important economic problem the adjustment of nominal prices after an anticipated monetary shock our experiments suggest that two types of bounded rationality money illusion and anchoring are important behavioral forces behind nominal inertia however depending on the strategic environment bounded rationality has vastly different effects on aggregate price adjustment if agents actions are strategic substitutes adjustment to the new equilibrium is extremely quick whereas under strategic complementarity adjustment is both very slow and associated with relatively large real effects this adjustment difference is driven by price expectations which are very flexible and forward looking under substitutability but adaptive and sticky under complementarity moreover subjects expectations are also considerably more rational under substitutability

monetary and fiscal policy design at the zero lower bound evidence from the lab the global economic crisis of 2007 8 pushed many advanced economies into a liquidity trap a macroeconomic scenario characterised by nomial rates at the zero lower bound zlb low inflation and output below trend we design an experiment to generate empirical evidence on the effectiveness of policies aimed at managing expectations against liquidity traps in a controlled laboratory environment where expectations are elicied directly from human subjects our results suggest that monetary policy alone is not sufficient to insulate the economy form the risk of falling into a liquidity trap even if it preventively cuts the policy augmented with a fiscal switching rule succeeds in avoiding and escapiing liquidity trap episodes we also measure larger than unity fiscal mulipliers when monetary policy is constrained by the zlb experimental results in different treatments are well explained by adaptive learning

why do monetary policies matter an experimental study of saving and inflation in an overlapping generations model we study experiments of an overlapping generations model where inflation is determined by the monetary policy and by the amount of average saving within each period we use a new experimental setup that allows us to observe more details of the process of expectation forming and separate this process from the actual saving process in contrast to experimental findings by lim prescott sunder marimon spear sunder and marimon sunder we find that 1 agents do not form first order adaptive expectations 2 subjects over save for precautionary reasons as a result 3 the so called friedman conjecture holds i e monetary policies which are equivalent in static equilibrium exhibit different levels and different volatility of inflation in the experiment this may generate important policy trade offs between monetary regimes we discuss our findings and relate them to current research on adaptive learning and the role it may have in ranking alternative monetary policies

stabilizing expectations at the zero lower bound experimental evidence abstract our study demonstrates how agents expectations can interact dynamically with monetary and fiscal policy at the zero lower bound we study expectation formation near the zero lower bound using a learning to forecast laboratory experiment under alternative policy regimes in our experimental economy monetary policy targets inflation around a constant or state dependent target we find that subjects expectations significantly over react to stochastic aggregate demand shocks and historical information leading many economies to experience severe deflationary traps neither quantitatively nor qualitatively communicating the state dependent inflation targets reduce the duration or severity of economic crises introducing anticipated and persistent fiscal stimulus at the zero lower bound reduces the severity of the recessions when the recovery of fundamentals is sufficiently slow participants expectations become highly pessimistic and neither monetary nor fiscal policy are effective at stabilizing the economy

commercial land use regulation and local government finance land use regulation in american cities is pervasive taken together these rules probably represent the most significant market intervention undertaken by state and local governments land use regulation includes a wide variety of rules governing the physical location of economic activities within jurisdictions regulations governing the design height or capital intensity of commercial and industrial property rules regarding the minimum lot sizes for residential parcels the number of bedrooms in new dwellings or other restrictions on residential density and rules delineating developer responsibilities for infrastructure provided in newly subdivided areas by international standards regulations in the united states are adopted by rather small units of government i e by towns rather than regional authorities whose objectives are typically confined to narrowly defined geographical portions of metropolitan areas the small scale at which regulations are promulgated and the existence of substitutable sites within metropolitan areas for residential commercial and industrial activity suggest that recognition of competition across jurisdictions is crucial to understanding the impact of land use rules as they affect the quality of life or the fiscal health of the residents of any jurisdiction many economic models ignore these competitive forces concentrating instead upon the case of the regulatory monopolist in consequence there is considerable theoretical uncertainty about the impact of locally adopted regulations upon the utilities of local citizens or their economic wealth a selective review is provided by j m pogodzinski and tim sass 1989 land use regulations in urban areas are motivated by two conceptually distinct concerns the control of externalities and the pursuit of fiscal objectives these mixed objectives make it more difficult to understand the effects of regulation especially since externality arguments are notoriously difficult to confirm in empirical analyses fiscal arguments on the other hand are more easily tested in this paper we investigate a new but increasingly popular form of land use control limitations on the growth of commercial property in one instance we provide bounds on the fiscal implications of controls on commercial property this in turn bounds the magnitude of the implied efficiency gains when the land use policy is viewed as a rational choice by citizens

performance of monetary policy with internal central bank forecasting abstract recent models of monetary policy have analyzed the desirability of different optimal and ad hoc interest rules under the restrictive assumption that forecasts of the private sector and the central bank are homogeneous this paper studies the implications of heterogeneity in forecasting by the central bank and private agents for the performance of interest rules in a framework of econometric learning

traders expectations in asset markets experimental evidence we elicit traders predictions of future price trajectories in repeated experimental markets for a 15 period lived asset we find that individuals beliefs about prices are adaptive and primarily based on past trends in the current and previous markets in which they have participated most traders do not anticipate market downturns the first time they participate in a market and when experienced they typically overestimate the time remaining before market peaks and downturns occur when prices deviate from fundamental values belief data are informative to an observer in predicting the direction of future price movements and the timing of market peaks

jobs versus amenities in the analysis of metropolitan migration abstract this paper demonstrates that jobs and wages are considerably more important than location specific amenities in explaining net metropolitan migration of employed persons these results which are derived mainly from a unique set of annual migration data differ considerably from the earlier findings of p e graves j urban econom 6 135 147 1979 that show amenities to be powerful contributors to the analysis of net metropolitan migration several hypotheses are offered and tested to explain the appreciable difference between graves s results and those of the present study but the importance of economic factors as opposed to amenities persists the findings of this study are generally consistent with the earlier findings of muth southern econom j 37 295 306 1971

legal restrictions and international currencies an experimental approach abstract this paper integrates theory and experiments to explore how policy rules related to government interventions can affect economic allocations and the international status of a currency using a two country two currency search model we study two types of government interventions 1 legal restrictions impacting a seller s ability to accept a foreign currency and 2 reductions to the cost a seller must pay to accept a foreign currency the first intervention can be viewed as a way to capture a decrease in capital controls while the second can be viewed as a way to explore the impact of reducing information costs associated with using a foreign currency our results indicate that abolishing legal restrictions that impact a seller s ability to accept a foreign currency can increase both quantities traded and the number of trades involving two types of currencies additionally the international status of currencies is significantly enhanced when sellers face very low foreign currency acceptance costs

evolutionary dynamics of currency substitution abstract this paper examines the issues related to the competition between two currencies in an agent based computational economic model the economic environment is a two country overlapping generations economy with no restrictions on foreign currency holdings governments of both countries finance their deficits via seignorage agents make decisions about their savings and portfolio decisions they use the genetic algorithm to update their decision rules the results presented in the paper show that the currency of the country that finances larger of the two deficits becomes valueless the adjustment process is characterized by a flight away from the currency used to finance the larger of the two deficits the economy converges to a stationary equilibrium that corresponds to a single currency economy

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

inflation tax in the lab a theoretical and experimental study of competitive search equilibrium with inflation in this paper we measure the effect of the inflation tax on economic activity and welfare within a controlled setting to do so we develop a model of price posting and monetary exchange with inflation and finite populations the model which provides a game theoretic foundation to rocheteau and wright 2005 s competitive search monetary equilibrium is used to derive theoretical propositions regarding the effects of inflation in this environment which we test with a laboratory experiment that closely implements the theoretical framework we find that the inflation tax is harmful with cash holdings production and welfare all falling as inflation rises and that its effect is relatively larger at low inflation rates than at higher rates for instance for inflation rates between 0 and 5 welfare in the two markets we consider 2 seller 2 buyer and 3 2 falls by roughly 1 percent for each percentage point rise in inflation compared with 0 4 percent over the range from 5 to 30 our findings lead us to conclude that the impact of the inflation tax should not be underestimated even under low inflation

a dynamic interregional theory of migration and population growth the authors attempt to bring the theory of regional amenity value determination together with a theoretical framework on migration to form a cohesive theoretical model they build on previous efforts to do this by introducing factors such as the housing market and determination of the equilibrium level of real full income the implied geographical focus is on the united states annotation

sweetening the transition in eu sugar preferences the case of fiji the european union grants preferential market access for sugar to a group of african caribbean and pacific acp countries sugar exported under these quotas receives between two and three times the world price these trade preferences are intended as a form of aid but they tend to stifle productivity growth in the recipient countries the european union could better assist acp countries by providing direct development assistance in place of sugar subsidies for example by investing the aid transfers into infrastructure or other essential public services this paper tests this proposition for the case of fiji using a computable general equilibrium model it is found that significant gains in economic performance can be achieved by employing such alternative strategies for aid these gains are particularly strong over the medium to long term when the aid funds are diverted to infrastructure development however there are issues of equity to consider since in the case of fiji the rural poor would be the losers if trade preferences were to be removed moreover the degree of benefit in alternative strategies such as infrastructure development will be contingent on the economy s flexibility which in turn depends upon the country s regulatory regime and education performance

fiat exchange in finite economies the state of the art of rendering fiat money valuable is either to impose a boundary condition or to make the boundary condition unimportant through an infinite sequence of markets so as to circumvent backward induction we show fiat exchange may nevertheless arise in finite economies if agents have incomplete information about their relative position in the trade cycle or when the barter and autarky equilibria of the one shot trading round support a monetary equilibrium with repeated trades

adaptive versus eductive learning theory and evidence adaptive and eductive learning are two widely used ways of modeling the process by which agents learn a rational expectation equilibrium ree in this paper we report an experiment where we exploit differences in the conditions under which adaptive and eductive learning converge to ree so as to investigate which approach provides the better description of the learning behavior of human subjects our results suggest that the path by which the system converges appears to be a mixture of both adaptive and eductive learning model predictions

on measuring the effects of fiscal policy in recessions we do not have a good measure of the effects of fiscal policy in a recession because the methods that we use to estimate the effects of fiscal policy both those using the observed outcomes following different policies in aggregate data and those studying counterfactuals in fitted model economies almost entirely ignore the state of the economy and estimate the government multiplier which is presumably a weighted average of the one we care about the multiplier in a recession and one we care less about the multiplier in an expansion notable exceptions to this general claim sug gest this difference is potentially large our lack of knowledge stems significantly from the focus on linear dynamics vector autoregressions and linearized or close to linear dynamic stochastic general equilibrium dsge models our lack of knowledge also reflects a lack of data deep recessions are few and nonlinearities hard to measure the lack of statistical power in the estimation of nonlinear models using aggregate data can be addressed by exploiting estimates of partial equilibrium responses in disaggregated data microeconomic estimates of the partial equilibrium causal effects of a policy can discipline the causal channels inherent in any dsge model of the general equilibrium effects of policy microeconomic studies can also provide measures of the dependence of the effects of a policy on the states of different agents which is a key component of the dependence of the general equilibrium effects of fiscal policy on the state of the

monetary policy obeying the taylor principle turns prices into strategic substitutes abstract monetary policy affects the degree of strategic complementarity in firms pricing decisions if it responds to the aggregate price level in normal times when monopolistic competitive firms increase their prices the central bank raises interest rates which lowers demand and creates an incentive for firms to reduce their prices thereby monetary policy reduces the degree of strategic complementarities among firms pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong we show that this condition holds when monetary policy follows the taylor principle by contrast if the equilibrium is indeterminate because monetary policy violates the taylor principle or in a liquidity trap where monetary policy is restricted by the zero lower bound pricing decisions are strategic complements we discuss the consequences for dynamic adjustment processes after shocks and some policy implications

adaptive learning and monetary exchange abstract this paper investigates three classic questions in monetary theory how can an intrinsically worthless asset such as fiat money maintain value as a medium of exchange what are the short run and long run effects of a change in the money supply what is the social cost of inflation i answer these questions using a microfounded model of monetary exchange that replaces the rational expectations assumption with an adaptive learning rule first i show that monetary exchange is a robust arrangement in the sense that agents are able to learn the stationary monetary equilibrium while the non monetary equilibrium is unstable under learning second an unanticipated monetary injection has real effects in the short run because learning the value of money takes time in the long run agents successfully learn the value of money hence money is neutral third under a constant money growth policy an increase in the growth rate of money increases output in the short run producing a short run phillips curve a ten percent increase in the money growth rate has a social cost of 0 41 percent of output per year alternatively a ten percent decrease in the money growth rate has a social benefit of 0 37 percent of output per year

net migration endogenous incomes and the speed of adjustment to the north south differential the model of net migration is developed in the next section in section iii the model is used to estimate the net flow of heterogeneous labor over the 1965 to 1970 period between the northern and southern regions of the united states forty eight age education race specific categories of labor constitute the observation set the estimates of the net migration function are then used with the relationship developed in section iv to obtain a measure of the speed for each labor category at which the long run north south income disparity was being eliminated the estimates obtained indicate that migration systematically induced by interregional income differences does operate to close the income differential but that the process is quite slow for every demographic category considered excerpt

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

inflation targeting and liquidity traps under endogenous credibility abstract policy implications are derived for an inflation targeting central bank whose credibility is endogenous and depends on its past ability to achieve its targets this is done in a new keynesian framework with heterogeneous and boundedly rational expectations we find that the region of allowed policy parameters is strictly larger than under rational expectations however when the zero lower bound on the nominal interest rate is accounted for self fulfilling deflationary spirals can occur depending on the credibility of the central bank deflationary spirals can be prevented with a high inflation target and aggressive monetary easing

do fiscal variables affect fiscal expectations experiments with real world and lab data we generate observable expectations about fiscal variables through laboratory experiments using real world data from several european countries as stimuli we compare a var model of expectations for data which is presented in a fiscal frame with one for neutrally presented data we measure the degree to which participants use fiscal data for their forecasts agents expectations are found neither to be consistent with rational nor with purely adaptive expectations but instead follow an augmented adaptive scheme methodological implications of the present approach for experiments in macroeconomics are also discussed

convergence of least squares learning in environments with hidden state variables and private information we study the convergence of recursive least squares learning schemes in economic environments in which there is private information the presence of private information leads to the presence of hidden state variables from the viewpoint of particular agents by applying theorems of ljung we extend some of our earlier results to characterize conditions under which a system governed by leastsquares learning will eventually converge to a rational expectations equilibrium we apply insights from the learning results to formulate and compute the equilibrium of a version of townsend s model

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

selection dynamics asymptotic stability and adaptive behavior selection dynamics are often used to distinguish stable and unstable equilibria this is particularly useful when multiple equilibria prevent a priori comparative static analysis this paper reports an experiment designed to compare the accuracy of the myopic best response dynamic and an inertial selection dynamic the inertial selection dynamic makes more accurate predictions about the observed mutual best response outcomes

the conquest of south american inflation we infer determinants of latin american hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden markov model that assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals levels and conditional volatilities of monetized deficits drove most hyperinflations and stabilizations with a notable exception in peru where a cosmetic reform of the type emphasized by marcet and nicolini occurred

new estimates of quality of life in urban areas implicit markets capture compensation for intraurban and interregional differe nces in amenities and yield differences in housing prices and wages these pecuniary differences become preference based weights in a qual ity of life index hedonic equations are estimated using microdata fr om the 1980 census and assembled county based amenity data on climati c environmental and urban conditions ranking of 253 urban counties reveals substantial variation within as well as among the 185 urba n areas the quality of life differences across counties within one s msa is almost one half of the difference between the top and bottom ranked counties in the nation copyright 1988 by american economic association

wages rents and the quality of life this study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities the theory demonstrates that if the amenity is also productive then the sign of the wage gradient is unclear while the rent gradient is positive the theory is extended to include the housing market and nontraded goods these extensions require little modification of the conclusion the empirical work on wages shows that the regional wage differences can be explained largely by these local attributes with the use of site price data implicit prices are estimated and quality of life rankings for the cities are computed

information aggregation and belief elicitation in experimental parimutuel betting markets this paper studies the impact of belief elicitation on informational efficiency and individual behavior in experimental parimutuel betting markets in one treatment groups of eight participants who possess a private signal about the eventual outcome play a sequential betting game the second treatment is identical except that bettors are observed by eight other participants who submit incentivized beliefs about the winning probabilities of each outcome in the third treatment the same individuals make bets and assess the winning probabilities of the outcomes market probabilities more accurately reflect objective probabilities in the third than in the other two treatments submitting beliefs reduces the favorite longshot bias and making bets improves the accuracy of elicited beliefs a level k framework provides some insights about why belief elicitation improves the capacity of betting markets to aggregate information

out of equilibrium bids in first price auctions wrong expectations or wrong bids deviations from risk neutral equilibrium bids in auctions can be related to inconsistent expectations with correct best replies or correct expectations but deviant best replies e g because of risk aversion regret quantal response mistakes to distinguish between these two explanations we use a novel experimental procedure and study expectations together with best replies in symmetric and asymmetric auctions we extensively test the internal validity of this setup we find that deviations from equilibrium bids do not seem to be because of to wrong expectations but because of deviations from a risk neutral best reply

a brief analysis of aggregate measures as an alternative to the median at central bank of brazil s survey of professional forecasts abstract this paper presents a brief analysis of representative measures of inflation expectations from central bank of brazil s survey of professional forecasts that are alternative to the median response we build time series with the mode and core measures of inflation expectations from the panel of professional forecasts surveyed from january 2002 to september 2012 we compare them to the median response with respect to their predictive power in a 12 month ahead horizon we also compare the predictive power of the alternative measures with the realized core of consumer price inflation

fiscal policy in an expectations driven liquidity trap we study the effects of fiscal policy interventions in a liquidity trap in a model with nominal rigidities and an interest rate rule in a liquidity trap caused by a self fulfilling state of low confidence higher government spending has deflationary effects that reduce the spending multiplier when the zero lower bound is binding instead cuts in marginal labor tax rates are inflationary and become more expansionary when the zero lower bound is binding these findings contradict popular views about the effects of fiscal policy in a liquidity trap

the effect of short selling on bubbles and crashes in experimental spot asset markets a series of experiments illustrate that relaxing short selling constraints lowers prices in experimental asset markets but does not induce prices to track fundamentals we argue that prices in experimental asset markets are influenced by restrictions on short selling capacity and limits on the cash available for purchases restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner a simulation model based on delong et al 1990 generates average price patterns that are similar to the observed data asset market bubbles are persistent deviations of prices from fundamentals to the extent that bubbles exist they can influence investment levels and the allocation of capital and thereby have considerable economic effects in recognition of their potential importance the question of the existence and pervasiveness of bubbles has been a focus of extensive empirical investigation see e g shiller 1981 blanchard and watson 1982 diba and grossman 1988 and west 1988 these studies yield mixed results regarding the empirical relevance of bubble phenomena one source of the differences in conclusions may be that because the fundamental value of the assets cannot be observed tests of the presence of bubbles are joint tests with the particular specification of the process guiding the evolution of fundamentals also being tested the availability of short selling is widely believed to make bubble formation less likely one rationale for such a belief is the notion that the cause of asset market bubbles is a constraint on the ability of traders to speculate on future downward price movements see e g miller 1977 jarrow 1980 diamond and verrecchia 1987 or figlewski and webb 1993 in the absence of short sales traders may sell only the shares in their portfolios the availability of short sales relaxes this constraint in this paper we study empirically the effect of allowing short sales on both the incidence and magnitude of market bubbles we choose a setting in which the fundamental value of the asset is clearly and unambiguously defined and known at all times and bubbles typically occur namely we use the experimental environment that smith suchanek and williams 1988 introduce while

endogenous market formation and monetary trade an experiment the theory of money assumes decentralized bilateral exchange and excludes centralized multilateral exchange however endogenizing the exchange process is critical for understanding the conditions that support the use of money we develop a traveling game to study the emergence of decentralized and centralized exchange theoretically and experimentally players located on separate islands can either trade locally or pay a cost to trade elsewhere so decentralized and centralized markets can both emerge in equilibrium the former minimize trade costs through monetary exchange the latter maximizes overall surplus through nonmonetary exchange monetary trade emerges when coordination is problematic whereas centralized trade emerges otherwise this shows that to understand the emergence of money it is important to amend standard theory such that the market structure is endogenized

urban agglomeration capital augmenting technology and labor market equilibrium abstract the objective of this paper is to measure urban productivity using japanese city based cross sectional data of 1980 the results of a labor demand ols regression analysis suggest two kinds of possible model specifications capital augmenting and demand supply equilibrium each model type is considered and the average effect of population density on labor productivity is shown to be 4 3 in the capital augmenting model and 8 0 in the equilibrium model

regional trade agreements versus global trade liberalisation implications for a small island developing state this study undertakes an empirical investigation of the macroeconomic and sectoral impacts of two forms of regional trade agreements vis a vis global trade liberalisation on a small island country using fiji as a case study in order to capture the feedback effects of such a complex set of policies we employ a dynamic computable general equilibrium model of the fijian economy to investigate i the impact of the pacific island countries trade agreement picta ii the impact of picta the pacific agreement for closer economic relations pacer and the economic partnership agreements epas iii the impact of full tariff liberalisation i e tariff removal only and iv the impact of full trade liberalisation with removal of both tariff and non tariff barriers while picta consistently provides the least benefits across a range of macroeconomic indicators including real output welfare trade volumes and employment full trade liberalisation involving the removal of tariff and non tariff barriers provides the greatest benefits compared to the other scenarios in terms of real output however the latter scenario is outperformed by picta pacer the epas and full tariff liberalisation in terms of welfare effects trade volumes and employment the policy implications hold important lessons for developing countries considering trade liberalisation

can government purchases stimulate the economy this essay briefly reviews the state of knowledge about the government spending multiplier drawing on theoretical work aggregate empirical estimates from the united states as well as cross locality estimates i assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate a temporary deficit financed increase in government purchases i conclude that the multiplier for this type of spending is probably between 0 8 and 1 5 jel e23 e62 h50

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

are hyperinflation paths learnable abstract earlier studies of the seigniorage inflation model have found that the high inflation steady state is not stable under learning we reconsider this issue and analyze the full set of solutions for the linearized model our main focus is on stationary hyperinflationary paths near the high inflation steady state these paths are shown to be stable under least squares learning if agents can utilize contemporaneous data in an economy with a mixture of agents some of whom only have access to lagged data stable hyperinflationary paths emerge only if the proportion of agents with access to contemporaneous data is sufficiently high

learning to believe in simple equilibria in a complex olg economy evidence from the lab abstract we set up a laboratory experiment to empirically investigate equilibrium selection in a complex economic environment we use the overlapping generation model of grandmont 1985 which displays multiple perfect foresight equilibria including periodic and chaotic dynamics the equilibrium selection problem is not solved under learning as each outcome is predicted by at least one existing learning theory we find that subjects in the lab systematically coordinate on an equilibrium despite the complexity of the environment coordination only happens on simple equilibria in this case the steady state or the period two cycle a result which is predicted only if the subjects follow simple learning rules this suggests that relevant perfect foresight equilibria should be robust to the use of simple rules

asset holdings caps and bubbles in experimental asset markets abstract we report the results of an experiment designed to study the effect of individual asset holdings restrictions on the formation of bubbles and crashes in laboratory asset markets bubbles and crashes are a quite robust phenomenon in experimental settings motivated by demand control policies employed in the chinese real estate market we explore the effects of permanent and short term caps on individual asset holdings we find that permanent caps greatly reduce positive bubbles but tend to generate negative bubbles in later periods under short term caps on the other hand neither positive nor negative bubbles are observed our results indicate that asset holdings caps can be effective in eliminating bubbles if properly designed

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

coordination on bubbles in large group asset pricing experiments abstract we present a large group experiment in which participants predict the price of an asset whose realization depends on the aggregation of individual forecasts the markets consist of 21 to 32 participants a group size larger than in most experiments multiple large price bubbles occur in six out of seven markets the bubbles emerge even faster than in smaller markets individual forecast errors do not cancel out at the aggregate level but participants coordinate on a trend following prediction strategy that gives rise to large bubbles the observed price patterns can be captured by a behavioral heuristics switching model with heterogeneous expectations

price dynamics in general equilibrium experiments general equilibrium ge theory faces several related challenges classical theories of out of equilibrium adjustment are intuitive but implausibly centralized further standard restrictions on individual preferences place little structure on aggregate excess demand functions amongst other issues this fact implies that economies can be unstable under classical dynamics and thus instability appears to be an unavoidable feature of ge theory this paper recounts laboratory studies of ge environments which reveal that classical theories of dynamics do in fact organize market activity surprisingly well these experiments suggest that the walrasian auctioneer for example appears to be a constructive abstraction and that instability should be accommodated within theory rather than circumscribed laboratory applications of ge theory focused on issues beyond stability and dynamics are also briefly surveyed

wages rents and amenities differences among workers and regions what explains persistent regional earnings differences this paper argues that regional differences in amenities can account for the wage differences in contrast cost of living variations do not account for wage differences but actually exacerbate them this conclusion results from a model in which variations in rents and wages are equalizing differences for amenity differences empirical results are consistent with the model

nonlinear adventures at the zero lower bound abstract in this paper we argue for the importance of explicitly considering nonlinearities in analyzing the behavior of the new keynesian model with a zero lower bound zlb of the nominal interest rate to show this we report how the decision rules and the equilibrium dynamics of the model are substantially affected by the nonlinear features brought about by the zlb we also illustrate a tension between the length of a spell at the zlb and the drop in consumption there

individual expectations limited rationality and aggregate outcomes recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price we present an experiment where the fundamental price experiences large unexpected shocks markets with negative expectation feedback strategic substitutes quickly converge to the new fundamental while markets with positive expectation feedback strategic complements do not converge but show underreaction in the short run and overreaction in the long run a simple evolutionary selection model of individual learning explains these differences in aggregate outcomes

indeterminacy of equilibria in a hyperinflationary world experimental evidence the authors design and study an olg experimental economy where the government finances a fixed real deficit through seigniorage the economy has continua of nonstationary rational expectations equilibria and two stationary rational expectations equilibria the authors do not observe nonstationary rational expectations paths observed paths tend to converge close to or somewhat below the low inflation stationary state the adaptive learning hypothesis is consistent with the data in selecting the low inflation stationary state rational expectations equilibrium as a long run stationary equilibrium nevertheless simple adaptive learning models do not capture the market uncertainty or the biases observed in the data copyright 1993 by the econometric society

experimental evidence on inflation expectation formation using laboratory experiments within a new keynesian sticky price framework we study the process of inflation expectation formation we focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40 of subjects more than 20 of subjects are also best described by adaptive learning models where they behave like econometricians and update their model estimates every period however rather than using a single forecasting model switching between models describes their behavior better switching is more likely to occur when experimental economy is in a recession

is there a fiscal free lunch in a liquidity trap this paper uses a dsge model to examine the eects of an expansion in government spending in a liquidity trap the spending multiplier can be much larger than in the normal situation if the liquidity trap is very persistent and scal stimulus can be rapidly implemented moreover the budgetary costs may be minimal as the large response of output boosts tax revenues allowing for something close to a scal free lunch however we caution that the multiplier may be much smaller under plausible implementation lags for many types of public spending and or if the liquidity trap lasts less than two years in addition because the marginal impact of scal expansion decreases in the scale of the outlay it is crucial to distinguish between average and marginal multipliers

the fundamentals of land prices and urban growth abstract in a very simple model in which capital is durable and landowners have perfect foresight the price of urban land has four additive components the value of agricultural land rent the cost of conversion the value of accessibility and the value of expected future rent increases a growth premium in rapidly growing cities the growth premium may easily account for half of the average price of land and may create a large gap between the price of land at the boundary minus conversion cost and the value of agricultural land rent

are sunspots learnable an experimental investigation in a simple macroeconomic model abstract we conduct experiments with human subjects in a model with a positive production externality in which productivity is a nondecreasing function of the average level of employment of other firms the model has three steady states and a sunspot equilibrium that fluctuates between the high and low steady states steady states are payoff ranked low values give lower profits than higher values we investigate whether subjects can learn a sunspot equilibrium we observe coordination on the extrinsic announcements in our experimental economies cases of apparent convergence to the low and high steady states are also observed

genetic algorithms and inflationary economies abstract this paper studies overlapping generations economies in which agents use genetic algorithms to learn correct decision rules the results of computer simulations show that a genetic algorithm converges to the unique monetary steady state in case of a constant money supply policy and to the low inflation stationary equilibrium in case of a constant real deficit financed through seignorage features of the genetic algorithm adaptation are compared to the performance of other learning algorithms and to the behavior observed in experiments with human subjects in the same olg environments

does volatility matter expectations of price return and variability in an asset pricing experiment abstract we present results of an experiment on expectation formation in an asset market participants in our experiment must provide forecasts of the stock future return to computerized utility maximizing investors and are rewarded according to how well their forecasts perform in the market in the baseline treatment participants must forecast the stock return one period ahead in the volatility treatment we also elicit subjective confidence intervals of forecasts which we take as a measure of perceived volatility the realized asset price is derived from a walrasian market equilibrium equation with non linear feedback from individual forecasts our experimental markets exhibit high volatility fat tails and other properties typical of real financial data eliciting confidence intervals for predictions has the effect of reducing price fluctuations and increasing subjects coordination on a common prediction strategy

a north american free trade agreement analytical issues and a computational assessment abstractthe following sections are included introductionissues in analyzing the economic impact of the naftathe computational modelcomputational resultsconclusionsstudy questionsreferencessuggested further reading this abstract was borrowed from another version of this item

equilibrium selection in a nonlinear duopoly game with adaptive expectations abstract we analyze a nonlinear discrete time cournot duopoly game where players have adaptive expectations the evolution of expected outputs over time is generated by the iteration of a noninvertible two dimensional map the long run behavior is characterized by multistability that is the presence of coexisting stable consistent beliefs which correspond to nash equilibria in the quantity space hence a problem of equilibrium selection arises and the long run outcome strongly depends on the choice of the players initial beliefs we analyze the basins of attraction and their qualitative changes as the model parameters vary we illustrate that the basins might be nonconnected sets and reveal the mechanism which is responsible for this often neglected kind of complexity the analysis of the global bifurcations which cause qualitative changes in the topological structure of the basins is carried out by the method of critical curves

learning forecasting and optimizing an experimental study rational expectations re models have two crucial dimensions i agents on average correctly forecast future prices given all available information and ii given expectations agents solve optimization problems and these solutions in turn determine actual price realizations experimental tests of such models typically focus on only one of these two dimensions in this paper we consider both forecasting and optimization decisions in an experimental cobweb economy we report results from four main experimental treatments 1 subjects form forecasts only 2 subjects determine quantity only solve an optimization problem 3 they do both and 4 they are paired in teams and one member is assigned the forecasting role while the other is assigned the optimization task all treatments converge to rational expectation equilibrium ree but at different speeds we observe that performance is the best in treatment 1 and the worst in treatment 3 we further find that most subjects use adaptive rules to forecast prices given a price forecast subjects are less likely to make conditionally optimal production decisions in treatment 3 where the forecast is made by themselves than in treatment 4 where the forecast is made by the other member of their team which suggests that two heads are better than one in term of the speed of finding the ree

expectational diversity in monetary economies abstract we investigate an overlapping generations monetary economy in which expectations depend upon backward looking predictors of the future price level we use discrete choice theory to model how agents select a predictor based on its past forecast error letting the number of available predictors tend to infinity we obtain the large type limit of the system taking the large type limit dramatically reduces the number of free parameters while maintaining the expectational diversity which we argue is necessary for constructing plausible learning based models the model s dynamics are strongly influenced by the intensity of choice which measures how sensitive an agent s predictor choice is to differences in forecast errors across predictors when the intensity of choice is low the monetary steady state is stable as the intensity of choice increases and if certain parametric restrictions are met the system undergoes a hopf bifurcation in which case we document the existence of highly irregular equilibrium price paths

industry migration and growth in the south for at least the last two decades the south and southwest have been the fastest growing regions in the united states during this period we have witnessed considerable shifts in the location of economic activity and overall the movement has been decidedly toward the south since the early sixties when this southern migration began to accelerate an increasing amount of public attention has been directed to this topic so much so that it is now popularly referred to as the sunbelt phenomenon numerous explanations have been advanced to account for this rapid growth in the south but three explanations have persistently evoked an impressive level of debate first many have argued that a significant portion of this regional redistribution can be attributed to differentials in state and local taxing policies in particular the state corporate income tax these rates vary considerably across states but even more important is the observation that there have been significant changes in the structure of corporate taxes over the last few decades beginning in the early 1950s the relative tax rate for several southern states particularly those in the east south central and west south central divisions began to decline sharply on the other hand relative tax rates for three divisions new england the east north central and the midatlantic rose in the early sixties by 1970 the relative tax rate ranged from 0 60 in the west south central down from 1 20 in 1950 to 1 37 in the mid atlantic up from 1 15 in 1950 notwithstanding these stylized facts the consensus from previous empirical work on industry location suggests that state taxes have not influenced the direction or magnitude of industry migration however there are reasons to believe that acceptance of this conclusion may be premature for example in the early body of work results were based on simple correlations of tax levels and changes in either value added or employment 2 more recent attempts to empirically model corporate tax effects have arrived at somewhat ambiguous results carlton 1977 examining three 4 digit industries found that corporate tax differentials failed to explain any of the variation in new births of firms across smsas hodge 1979 while confirming carlton s results for the same industries discovered that taxes have significantly affected regional investment patterns in another industry not covered in carlton s study 3 why taxes mattered in one industry and not in the other three remained a matter of ad hoc speculation a second explanation alleges that states in the south have begun to exhibit a more favorable business climate although it is difficult to measure directly a state s business climate one important manifestation of that climate is its position with respect to the division of power between union and management in the collective bargaining process legal obstacles to union organization and bargaining power will be viewed by firms as a positive signal of a pro business environment the creation of legislative obstareceived for publication october 29 1981 revision accepted for publication april 16 1982 miami university the author is especially indebted to michael ward at the rand corporation for numerouls helpful discussions throughout the preparation of this study also the author benefited from the advice and comments of john antel robert cotterman lee lillard john lunn william j moore james smith finis welch and two referees of this review financial suppoi t was provided by the foundation for research in economics and education at ucla and the university of british columbia humanities and social sciences committee i the relative tax is defined as a state s tax rate divided by the average for all states as in most economic discussions it is relative price that matters 2 for a review of earlier work see due 1961 some of the studies reviewed include bloom 1955 campbell 1958 floyd 1952 and larson 1957 see also garwood 1952 3 most of the other empirical work focused exclusively on intt urban location decisions and hence had no reason to examine state corporate taxes however they found local tax differentials inter zonal were unimportant in determining intra urban movement for example see moses and williamson 1967 and schmenner 1978