the phillips curve macroeconomic policy and the welfare of canadians a review of the two competing paradigms explaining inflation and unemployment fluctuations singles out the keynesian phillips curve as the clear empirical winner over its classic competitors reestimation of the canadian phillips curve for 1957 90 identifies a sharp structural shift toward a high degree of unemployment hysteresis after 1972 the recent attempt of macropolicy to flatten the aggregate demand curve and limit supply side shock accommodation which aims at lower and more stable inflation is then shown to make unemployment higher and more unstable on average to an extent that is an increasing function of the degree of hysteresis understanding and reducing hysteresis and developing a consensus based incomes policy that has a chance of alleviating the dismal trade off should therefore to top research and policy priorities

learning to believe in sunspots a number of authors have shown that competitive economies may possess sunspot equilibria that is rational expectations equilibria in which purely extrinsic uncertainty affects equilibrium prices and allocations 2 such results demonstrate that it does not require a lack of faith in the rationality of market participants to believe that competitive markets may be subject to purely speculative fluctuations driven solely by expectations 3 the mere existence of sunspot equilibria as solutions to a system of marketclearing conditions however might not be judged sufficient to indicate that competitive markets with rational participants could ever be subject to speculative instability the sunspot equilibria represent states of affairs in which agents act differently in the case of different realizations of the sunspot variable and it is rational for each agent to do so but it might be thought unlikely that the beliefs of all the participants in the market could ever come to be coordinated so as to bring about an equilibrium of that kind it is rational to believe that sunspots convey information about future states of affairs once the economy is in a sunspot equilibrium but why would rational agents ever begin to believe in such a thing so as to create the conditions under which the belief is rational in order to address such a question one must go beyond the mere statement of the conditions for equilibrium and discussion of what states of affairs satisfy them one must specify an explicit dynamic process according to which the beliefs of agents adjust when out of equilibrium any exercise of this kind is necessarily unsatisfactory as there is no univocal meaning for the postulate of rational behavior outside of an equilibrium it may well be the case that

stability of functional rational expectations equilibria abstract in this paper we examine a representative agent forecasting prices in a first order self referential overlapping generations model we first consider intermediate stage learning where agents update the forecasting rule every m periods we show that in theory and simulations the learning rule does not converge to the rational expectations equilibrium ree we next consider two stage learning where agents learn the functional mapping between the current forecast function and the previous forecast function we show that in theory and simulations the two stage learning rule converges to the ree journal of economic literature classifications numbers c62 c63 d83

the expectational stability of underemployment equilibria i introduction one of the most important recent developments in macroeconomic theory has been the demonstration of how external economies of scale may generate multiple perfect foresight equilibria a positive externality such as that studied by diamond 1982 may generate two saddle path equilibria one converging to a high employment steady state and the other converging to an inferior low employment steady state for given initial conditions there are therefore two equilibrium choices of employment in howitt and mcafee s 1988 model which has both a positive and a negative externality any one of a continuum of employment choices will satisfy optimality conditions and converge to the low employment steady state thus the literature on externalities demonstrates that there may exist a stable or saddle path stable pareto inferior low employment equilibrium in a perfect foresight model with market clearing and flexible prices 1 an intriguing feature of these models is the possibility that economic fluctuations might be driven by waves of optimism or pessimism that move the economy from one equilibrium to another along with the possibility of multiple equilibria there is however a problem of indeterminacy how do we say which equilibrium will be chosen the idea that waves of optimism or pessimism move the economy is provocative and intuitively appealing but a more explicit account of how individuals come to focus on a particular equilibrium a selection criterion is needed one criterion that has been used successfully to limit the multiplicity of equilibria in rational expectations and perfect foresight models is the stability of an adaptive learning procedure 2 under adaptive learning the agents in the model learn about the economy in much the same way as an econometrician they have a perfect foresight equilibrium model of the economy and they use the available macroeconomic data to infer the value of that model s parameters their parameter estimates determine their forecasts and these forecasts determine their choice of labor inputs if a given steady state equilibrium is unstable under a broad class of plausible learning rules it is unlikely that the economy will converge to that equilibrium even if it is stable under perfect foresight if a steady state is stable under learning then we are more confident that it may be observed in an actual economy in this paper i apply the concept of expectational stability to howitt and mcafee s 1988 model of aggregate employment in the presence of externalities 3 expectational stability is a simple and therefore highly tractable iterative learning scheme that has been used by evans 1985 and by bray 1982 proposition 4 to study the convergence of learning to rational expectations in addition to being tractable the procedure is general indeed the local stability conditions of the procedure used in this paper are the same as the conditions for local stability of least squares learning as derived by marcet and sargent 1989a 1989b these same conditions are necessary for the stability of a broad class of learning algorithms including least squares estimation kalman filtering and iterative gauss newton procedures as is shown in ljung and soderstrum 1983 i study learning in howitt and mcafee s 1988 model because it is also highly general it incorporates both thick market positive and congestion negative externalities it allows for multiple perfect foresight steady states that are alternately stable and saddle path stable 4 further i show that the widely cited model of diamond 1981 1982 is a special case of the howitt and mcafee model in this paper i show that the learning rule eliminates the problem of indeterminacy it will however also rule out those steady states that are unambiguously pareto inferior stable low employment steady states may exist but they cannot be ranked

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

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations

equilibrium selection observability and backward stable solutions abstract the robustness of stability under learning to observability of exogenous shocks is examined regardless of observability assumptions the minimal state variable solution is robustly stable under learning provided the expectational feedback is not both positive and large while the nonfundamental solution is never robustly stable overlapping generations and new keynesian models are considered and concerns raised in cochrane 2011 2017 are addressed

the fragility of sunspots and bubbles abstract expectational stability e stability is used to examine the multiplicity of solutions in a range of rational expectations models of interest including muth s inventory model and an overlapping generations model in these model it is found that sunspot and other rational bubble solutions are either e unstable or weakly but not strongly e stable

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

bargaining one dimensional social choices we analyze bargaining over the one dimension characteristic of a public good among n impatient players when decisions require q favorable votes q 2 stationary subgame perfect equilibrium strategies are characterized for all games with deterministic protocol we provide a monotonicity condition satisfied by all single peak strictly quasi concave and concave utilities that assures uniqueness for every q whenever player s utilities are symmetric around the peak without symmetry the monotonicity condition assures uniqueness for qualified majorities q n 2 provided that agents are sufficiently patient and utilities satisfy an additional regularity condition asymptotic uniqueness is assured for qualified majorities by imposing only the monotonicity condition

do institutions promote rationality an experimental study of the three door anomaly the three door problem is an example of a systematic violation of a key rationality postulate that has attracted much attention in this seemingly simple individual decision task most people initially fail to apply correctly bayes law and to make the payoff maximizing choice previous experimental studies have shown that individual learning reduces the incidence of irrational choices somewhat but is far from eliminating it we experimentally study the roles of communication and competition as institutions to mitigate the choice anomaly we show that the three door anomaly can be entirely eliminated by these institutions

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

stability chaos and multiple attractors a single agent makes a difference abstract this paper provides an example in which a slight behavioral heterogeneity may fundamentally change the dynamical properties of a nonlinear cobweb market with a quadratic cost function and an isoelastic demand function we consider two types of producers cautious adapters and naive optimizers in a market of naive optimizers a single cautious adapter stabilizes the otherwise exploding market in a market of cautious adapters a single naive optimizer may destabilize the market without him there exists at most one periodic attractor in the market but with him there may appear many and even infinitely many coexisting periodic attractors

constructive consumer choice processes consumer decision making has been a focal interest in consumer research and consideration of current marketplace trends e g technological change an information explosion indicates that this topic will continue to be critically important we argue that consumer choice is inherently constructive due to limited processing capacity consumers often do not have well defined existing preferences but construct them using a variety of strategies contingent on task demands after describing constructive choice consumer decision tasks and decision strategies we provide an integrative framework for understanding constructive choice review evidence for constructive consumer choice in light of that framework and identify knowledge gaps that suggest opportunities for additional research

limits to institutional reforms the essay draws on the theory of macro economic policy as it has evolved to discuss implicit policy determinism in the new economics of institutions the extension of rational choice methods to new levels of analysis such as micropolitics macropolitics political macroeconomics and microfoundations of cooperation has apparently reduced the policy choice set and diminished the role of experts all outcomes reflect constrained maximization by rational agents the essay argues however that scarcity of knowledge leads to incomplete and variable policy models and that competition among policy models creates a role for experts in social change

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

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

a monetarist model of inflation abstract we consider an overlapping generations model with new money introduced via autocorrelated lump sum transfers hence the own rate of return on money is fixed implying that dynamic neutrality may fail due to inflation tax effects we derive a condition less restrictive than serial independence of monetary growth rates which is necessary as well as sufficient for neutrality we determine whether various properties of the joint distribution of monetary growth rates and inflation rates which are weaker than neutrality for example positive correlation between the two can be expected to obtain in general settings

comments on arrow and on lucas such a number of interesting and provocative things are put forward in lucas and in arrow in this issue that i would like to be able to dissect them in detail for example lucas states that the problem of controlling inflation has been successfully solved in a scientific sense p s405 i am tempted to explore the limits of the set of problems that might be said to be scientifically solved in the lucas sense but i fear that this would take up a good deal of space arrow deplores the use of homogeneity assumptions as a device for adding content to otherwise inconclusive economic theories but presumably he does not believe that the sonnenschien mantel debreu theorem is the ultimate conclusion regarding the useful content of the propositions of general equilibrium theory some restrictions of intermediate strength are presumably called for and i would like to make the case that strong empirical generalizations about the nature of human actors such as those describing the biological requirements for survival are available and relevant in this connection this too would take some space to develop in detail though not as much as the first subject given the constraints i must choose a focus i will focus on what i take to be the main message that lucas has put forward regarding the relationship between adaptive behavior and the rationality assumptions employed in standard economic theory this message is recognizable as the intellectual descendant of similar discussions by friedman and machlup in the 1940s and 1950s and the ideas involved remain extremely influential in the discipline today i will present and comment on my own statement of this position which i following blaug 1980 will call the classic defense of the rationality as

complexity and economic policy a paradigm shift or a change in perspective a review essay on david colander and roland kupers s complexity and the art of public policy in their recent book colander and kupers 2014 argue that viewing the economy as a complex adaptive system should change the way in which we make economic policy this would necessitate a paradigm shift economics has over time tried to produce a coherent model to underpin the dominant laissez faire liberal approach but we have never proved in that model that left to their own devices the participants in an economy will self organize into a satisfactory state this is an assumption complex interactive systems with direct interaction between heterogeneous agents may show no tendency to self equilibrate and will undergo endogenous crises economists should concentrate on the emergence of certain patterns colander and kupers suggest that we may be able to nudge the system into good basins of attraction a more radical view is that there are no fixed basins of attraction these change with the evolution of the system and it is illusory to believe that we can choose good basins we may be able to recognize and influence the emergence of certain states of the economy but we are far from leon walras s dream of economics as a science like astrophysics

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

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

an overview of the securitization of sba guaranteed loans originated by commercial banks securitization involves the repackaging of individual sba guaranteed loans made by financial institutions into pools of varying maturities for resale to intermediaries and final investors pool volume has been increasing at a rapid rate since the program s inception in 1985 national and regional investment companies acting as intermediaries are the major pool buyers investors in pools include banks savings loans associations and pension funds securitization has resulted in a major secondary market for institutions that make sba guaranteed loans public policy goals are served by the increase in sba lending activity that appears related to the securitization process

the emergence of cooperation among egoists this article investigates the conditions under which cooperation will emerge in a world of egoists without central authority this problem plays an important role in such diverse fields as political philosophy international politics and economic and social exchange the problem is formalized as an iterated prisoner s dilemma with pairwise interaction among a population of individuals results from three approaches are reported the tournament approach the ecological approach and the evolutionary approach the evolutionary approach is the most general since all possible strategies can be taken into account a series of theorems is presented which show 1 the conditions under which no strategy can do any better than the population average if the others are using the reciprocal cooperation strategy of tit for tat 2 the necessary and sufficient conditions for a strategy to be collectively stable and 3 how cooperation can emerge from a small cluster of discriminating individuals even when everyone else is using a strategy of unconditional defection

induction and the ramsey policy abstract we examine the classic policy problem of ramsey 1927 modeled as an infinitely repeated game stokey 1991 between the government and the private sector where the private sector consists of a continuum of identical households we assume that the private sector is boundedly rational in the sense that its behavior is dictated by a forecasting scheme which is inductive instead of assigning a particular forecasting scheme to the players we let each player choose one from a class of inductive forecasting schemes by focusing on the actions dictated by forecasting schemes selected by the player we identify the ramsey policy as the unique solution of the game where players do not discount future payoffs when players discount future payoffs the ramsey policy is the only solution which is robust against small changes in the discount factor in the neighborhood of one kalai samet and stanford 1988 if we modify the model so that the private sector incurs memory costs in forecasting the action of the government we obtain that the only equilibrium outcome is to play the ramsey outcome every period

a learning to forecast experiment on the foreign exchange market with a classifier system abstract this paper reports on an experiment of learning and forecasting on the foreign exchange market by means of an artificial intelligence methodology a classifier system which simulates learning and adaptation in complex and changing environments the experiment has been run for two different exchange rates the us dollar d mark rate and the us dollar yen rate representative of two possibly different market environments a fictitious artificial agent is first trained on a monthly data base from 1973 to 1990 and then tested out of sample from 1990 to 1992 its forecasting performance is then compared with the performance of decision rules which follow the prescription of various economic theories on exchange rate behaviour and the performance of forecasts given by var estimations of the exchange rate s determinants

learning adaptive expectations and technology shocks this study explores the macroeconomic implications of adaptive expectations in a standard growth model we show that the self confirming equilibrium under adaptive expectations is the same as the steady state rational expectations equilibrium for all admissible parameter values but that dynamics around the steady state are substantially different between the two equilibria the differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect not by escapes emphasised by williams 2003 consequently adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labour market dynamics

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

exchangeability and its economic applications abstract the symmetry possessed by exchangeability is the key to its usefulness the methods that are used to comprehend reality will edify insofar as they reflect this symmetry this is true of theoretical models empirical methods and algorithms indeed if the design of mechanisms is by rearrangement of natural matter their survival value will depend on the degree to which they retain the symmetry of the original matter this comment encompasses complex machinery and sophisticated political social and economic institutions the paper simply embroiders this observation

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

consumer inertia choice dependence and learning from experience in a repeated decision problem abstract understanding when and how individuals think about real life problems is a central question in economics this paper studies the role of inertia inattention state dependence and learning the empirical setting is a tariff experiment when optional measured tariffs for local telephone calls were introduced unanticipatedly we find that consumers tend to align their choices of tariff and telephone use levels correctly despite low potential savings mistakes are not permanent as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results

modelling cognitively bounded rationality an evaluative taxonomy abstract since its origins in the 1950s the notion of bounded rationality has been incorporated into economic theory using an array of methodological approaches this paper presents a taxonomy by which these approaches can be categorized and understood evaluating each approach against a range of important criteria at a time when the foundations of economic theory are being re examined this paper should be viewed as a first step towards an assessment of the appropriate role that this more realistic view of cognition should take in different areas of economic theory and also of the desirable characteristics of models that incorporate it

commodity choice behavior with pigeons as subjects starting from an initial baseline budget line income compensated price changes always resulted in substitution effects consistent with the slutsky hicks theory this behavior cannot be explained by a simple random behavior model similar changes in relative prices that did not originate from the initial baseline budget line resulted in undersubstitution effects the composition of consumption changed in the expected direction but the magnitude of change was not large enough to be consistent with the initial commodity bundle chosen these undersubstitution effects are not explainable by shifting preference patterns or anchoring effects found in inconsistent choice sequences with human subjects

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

the indeterminacy of prices under interest rate pegging the non ricardian case abstract this paper investigates the issue of price level indeterminacy under a pure interest rate peg in models that depart from standard ricardian assumptions using a monetary version of blanchard s finite horizons model i find wealth effects operating on government bonds are not sufficient to determine a unique price level next i consider price determination under a non ricardian fiscal authority i show that if agents rationally perceive the possibility of fiscal default the price level is again indeterminate i conclude that departures from ricardian equivalence are not sufficient to ensure a unique price level under a monetary policy of pure interest rate pegging

the origin of predictable dynamic behavior abstract nonlinear dynamic theory implies optimal decisions often behave like random chaos such random target motion is impossible for imperfect agents to follow without error however they can still gradually approach the optimal target if and only if they partially adjust toward its perceived location so as to induce their behavior to converge to an equilibrium reducing dynamic errors through partial adjustment thereby induces a stable regularity in behavior that otherwise may never evolve this result agrees with the stability properties observed in experimental markets including cobweb auction and asset markets whose dynamics before reaching equilibrium exhibit adaptive rather than rational expectations