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

competitive equilibria and the core of overlapping generations economies this paper analyzes whether the well known result that for arrow debreu economies all competitive equilibria belong to the core holds true in overlapping generations economies in these economies competitive equilibria are not a subset of the core we define the classical set as the set of all those competitive allocations which cannot be affected by a monetary tax transfer policy then we demonstrate that every competitive equilibrium in the classical set belongs to the core of the economy further we show that for large economies no monetary equilibrium belongs to the core journal of economic liferature classification numbers 021

efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

a simple model of growth cycles with technology choice abstract in this study we develop a simple computable overlapping generations model that exhibits endogenous fluctuations the key assumption is that a firm can choose from multiple technologies of production since the model reduces to a piecewise linear map on the unit interval it allows us to conduct an in depth analysis of its dynamic properties particularly this piecewise linearization reveals the ability of the model to exhibit periodic attracting cycles of an arbitrarily large period as well as non periodic attractors furthermore it is demonstrated that the occurrence of periodic patterns is completely characterized by the rotation number or the devil s staircase

habit persistence money and overlapping generations abstract this paper provides a comprehensive characterization of the stationary and non stationary monetary equilibria in a two period pure exchange overlapping generations model with multiplicative habit persistence preferences somewhat surprisingly the upshot is that multiplicative habit persistence preferences do not affect the qualitative properties of the dynamical system in these models in addition the qualitative properties of models with subtractive and multiplicative habits are largely similar any possibility of cyclical fluctuations beyond periodicity two is also ruled out

a characterization of erratic dynamics in the overlapping generations model abstract in this paper we characterize and give examples o wide classes of utility functions which generate erratic dynamics in the standard deterministic overlapping generations model erratic dynamics refers to feasible trajectories which are bounded but which do not converge to stationary points or periodic orbits we show that such trajectories are pareto efficient we introduce credit into the model and show how a constant credit expansion rate can result in erratic trajectories in prices and the real value of credit finally we briefly discuss certain technical aspects of the mathematics used and the statistical nature of the dynamics that can arise from deterministic dynamical systems

beliefs equilibria in an overlapping generations model we consider a standard two generations version of the overlapping generations model agents predict inflation rates on the basis of a perceived law of motion which is estimated by running a linear regression on past inflation rates we introduce the notion of beliefs equilibrium at such an equilibrium i the perceived law of motion is such that it fits the time series of inflation rates best and ii this time series of actual inflation rates is generated when agents use that perceived law of motion we show that beliefs might converge although inflation rates keep on fluctuating these fluctuations are consistent with the limit belief

equivariant general equilibrium theory abstract the main purpose of this paper is to investigate the properties of a version of the general equilibrium model where symmetry considerations are explicitely taken into account this version called the equivariant model is shown to be a natural framework to study sunspot equilibria the problem of sunspot equilibria can then be viewed as one of symmetry breaking existence of asymmetric or sunspot equilibria is addressed through the dual approach of price income equilibrium analysis that splits the problem of breaking symmetries into two separate easier problems

asset price fluctuations without aggregate shocks we analyze the pricing of a productive asset in a class of dynamic exchange economies with heterogeneous infinitely lived agents and self enforcing intertemporal trades individual incomes fluctuate and are correlated preferences dividends and aggregate income are fixed almost all economies in this class have a unique stationary markovian equilibrium with fluctuations in asset prices as the set of unrationed households changes over time and states excess demand functions shift asset returns fluctuate and some households are shut out of asset markets examples suggest that the amplitude of these movements is negatively correlated with the productivity of the asset and with the penalty for default

existence of equilibrium in single and double private value auctions we show existence of equilibria in distributional strategies for a wide class of private value auctions including the first general existence result for double auctions the set of equilibria is invariant to the tie breaking rule the model incorporates multiple unit demands all standard pricing rules reserve prices entry costs and stochastic demand and supply valuations can be correlated and asymmetrically distributed for double auctions we show further that at least one equilibrium involves a positive volume of trade the existence proof establishes new connections among existence techniques for discontinuous bayesian games

endogenous vs exogenously driven fluctuations in vintage capital models in this paper we present a particular case of the creative destruction model of caballero and hammour quart j econ 111 1996 805 851 in which both exogenous and endogenous fluctuation sources are present we show that job creation follows a delayed differential equation with periodic coefficients the delay is equal to the optimal age of capital goods the period of the coefficients is equal to the period of an exogenous profitability cycle we mathematically show that job creation is asymptotically periodic with the same period as the profitability cycle furthermore using an explicit numerical method we find that replacement echoes generally dominate the short run dynamics finally we find that the combination of the two fluctuations sources favors the appearance of asymmetries in job creation and job destruction patterns

a dynamic ellsberg urn experiment two rationality arguments are used to justify the link between conditional and unconditional preferences in decision theory dynamic consistency and consequentialism dynamic consistency requires that ex ante contingent choices are respected by updated preferences consequentialism states that only those outcomes which are still possible can matter for updated preferences we test the descriptive validity of these rationality arguments with a dynamic version of ellsberg s three color experiment and find that subjects act more often in line with consequentialism than with dynamic consistency

pricing and risk management of interest rate swaps this paper reformulates the valuation of interest rate swaps swap leg payments and swap risk measures all under stochastic interest rates as a problem of solving a system of linear equations with random perturbations a sequence of uniform approximations which solves this system is developed and allows for fast and accurate computation the proposed method provides a computationally efficient alternative to monte carlo based valuations and risk measurement of swaps this is demonstrated by conducting numerical experiments and so our method provides a potentially important real time application for analysis and calculation in markets

exponentially fading memory learning in forward looking economic models abstract in this paper we analyze forward looking economic models under bounded rationality we consider a learning mechanism characterized by exponentially fading memory with a learning step not vanishing in the limit the dynamics of the model under bounded rationality can be parametrized with respect to the memory of the learning mechanism we show that memory plays a stabilizing role in a local sense it induces local convergence towards a stationary rational expectations equilibrium and in some cases it does not allow for nonperfect foresight attractors obtained through local bifurcations we discuss this learning mechanism in pure exchange overlapping generations models we also analyze models with predetermined state variables in this setting the effect of memory on the learning dynamics is controversial

interest rates and bank profitability additional evidence note large banking organizations 1978 assets greater than 2 billion are well hedged against interest rate fluctuations 2 when market rates change their revenues and costs adjust equally quickly leaving net current operating earnings largely unaffected at the other institutional extreme thrift institutions have seriously mismatched balanced sheets 1 4 causing their earnings to fluctuate violently when interest rates change small commercial banks in many ways lie between their larger counterparts and the thrifts small banks share the predominantly retail orientation of thrifts often holding large mortgage portfolios but have access to a broader range of asset and liability powers it is therefore unclear ex ante whether small banks bear a greater resemblance to thrifts or large commercial banks in terms of interest rate risk exposure to resolve the issue empirically this note applies the methodology of 2 to a set of sixty smaller banks the empirical results are similar to the results for large banks the data do not support the conventional wisdom that banks chronically and extensively borrow short and lend long

the household fallacy we refer to the idea that government must tighten its belt as a necessary policy response to higher indebtedness as the household fallacy we provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear our argument rests on the fact that in an overlapping generations olg model changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations we do not rely on the assumption that the equilibrium is dynamically inefficient and our argument holds in a version of the olg model where the real interest rate is always positive

market evidence on the effective maturity of bank assets and liabilities the recent years increase in interest rate volatility has intensified concern over the exposure of commercial banks to interest rate or funding risk since the effect of interest rate changes on the equity value of a bank depends on the maturity or duration of the bank s assets and liabilities assessing an individual bank s interest rate risk exposure requires information about the maturity composition of its portfolio it is difficult however to assess a bank s risk exposure from balance sheet data because several important asset and liability items have theoretically ambiguous effective maturities in a frictionless market a security s effective maturity will equal its stated maturity or time to repricing with market imperfections e g depositors transaction or information costs however the equilibrium cost of some deposit items may respond sluggishly or incompletely to market rate changes see hester and pierce 1975 or flannery 1982 such liabilities market values discounted at market rates would therefore fluctuate with the level of interest rates these liabilities are sometimes called core deposits which manifest sticky responses to market rate changes we define an asset or liability s effective maturity as the maturity of a fixed rate perfectly elastically supplied security with the same market value elasticity as the bank balance sheet item under consideration naturally a balance sheet item s effective maturity is the relevant determinant of its contribution to the bank s overall interest rate risk sensitivity

networth exposure to interest rate risk an empirical analysis of indian commercial banks abstract in the basel ii era management of interest rate risk in the banking book has become significant in the first study of its kind we develop a simulation based driver driven approach to estimate the impact of interest rate volatility on the networth of indian banks during the period 2002 2004 we derive the interest rates that drive changes in deposit and prime lending rates plr then we perform monte carlo simulation and multiple regressions on these driver rates to obtain simulated shocks to deposit rates and plr we use these simulated shocks to get the 99 worst eve loss for the sample banks these losses are much larger than what the existing literature suggests this is because apart from repricing risk we are the first to find evidence of significant basis risk our results have important policy implications both for banks and regulators

the emergence of chaos from classical economic growth this paper shows how fluctuations of an erratic and unstable nature can emerge from the classical deterministic economic growth process implications of the analysis would appear to be at least two first pronounced changes in the way an economy behaves need not cause us to reject our understanding of how it works second we need not seek in exogenous forces an explanation as to why behavioral patterns change and why it may be so difficult to anticipate future events from the profile of past experience

robust implementation in direct mechanisms a social choice function is robustly implementable if there is a mechanism under which the process of iteratively eliminating strictly dominated messages lead to outcomes that agree with the social choice function for all beliefs at every type profile in an interdependent value environment with single crossing preferences we identify a contraction property on the preferences which together with strict ex post incentive compatibility is sufficient to guarantee robust implementation in the direct mechanism strict ex post incentive compatibility and the contraction property are also necessary for robust implementation in any mechanism including indirect ones the contraction property requires that the interdependence is not too high in a linear signal model the contraction property is equivalent to an interdependence matrix having all eigenvalues smaller than one

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

irregular growth cycles this paper uses the familiar neoclassical theory of capital accumulation to show how complex behavior can emerge from quite simple economic structures indeed when sufficient nonlinearities and a production lag are present the interaction alone of the propensity to save and the productivity of capital can lead to growth cycles that exhibit a wandering sawtooth pattern not unlike those observed in reality these fluctuations need not converge to a cycle of any regular periodicity so they are not quasi periodic because such chaotic trajectories are unstable errors of estimation in parameters or initial conditions however tiny will accumulate rapidly into substantial errors of forecast moreover periods of erratic cycling can be interspersed with periods of more or less stable growth evidently the future behavior of a model solution cannot be anticipated from its patterns in the past a situation that seems to mimic experience apparent structural change and unpredictability is explained in the present theory by a deterministic single equation model random shocks play no role so the reader can visualize just what it is we are are talking about a noteworthy simulation is presented in figure 1 for gnp in a growth model that is described below in section iii a period of relatively rapid growth is followed by a period of cycles then remarkably for a considerable time about twenty periods apparently steady state growth occurs wandering cycles however emerge another brief period close to the steady state appears again toward the end of the series i establish conditions of savings and productivity that lead to results of this kind this analysis makes use of the mathematical theory of chaos which in the form exploited here originated in the work of edward lorenz a formal definition of chaos and sufficient conditions for chaotic trajectories were provided in a seminal paper by t y li and james yorke a survey of these related contributions is found in yorke and evelyn yorke this theory was introduced into economics by jess benhabib and myself 1981 where we showed that sequences of rational choices can be erratic when preferences depend on experience in a certain way by michael stutzer who provides a detailed analysis of trygve haavelmo s growth model by benhabib and myself 1980 in an application of the overlapping generations model and in my forthcoming study of the classical growth model

micro level transmission of monetary policy shocks the trading book channel abstract we open the black box of the monetary policy transmission mechanism with a granular model that considers the balance sheet composition and network relationships of each economic agent though there are several well documented channels through which monetary policy operates we focus on the overlooked trading book channel which arises because of adjustments in the accounting value of trading book exposures on banks balance sheets that have to be marked to market when interest rates change variations in banks net worth due these adjustments are used as input to a network model that incorporates the financial and corporate sectors the framework permits us to determine the effects of interest rate changes on every bank and firm in the economy and any second round contagion effects in the short run we apply the model to a comprehensive database of brazilian banks and firms from 2015 to 2020 we find that interest rate shocks affect more strongly financial stability in periods of monetary policy tightening we also find notable asymmetric effects of positive and negative interest rate shocks in the brazilian economy with positive interest rate shocks affecting more financial stability finally our results also suggest a non linear relationship between interest rate changes and financial stability reinforcing the need to mitigate monetary policy shocks through interest rate smoothing and adequate communication and transparency to society

parameters measuring bank risk and their estimation the paper develops estimation of three parameters of banking risk based on an explicit model of expected utility maximization by financial institutions subject to the classical technology restrictions of neoclassical production theory the parameters are risk aversion prudence or downside risk aversion and generalized risk resulting from a factor model of loan prices the model can be estimated using standard econometric techniques like gmm for dynamic panel data and latent factor analysis for the estimation of covariance matrices an explicit functional form for the utility function is not needed and we show how measures of risk aversion and prudence downside risk aversion can be derived and estimated from the model the model is estimated using data for eurozone countries and we focus particularly on i the use of the modeling approach as a device close to an early warning mechanism ii the bank and country specific estimates of risk aversion and prudence downside risk aversion and iii the derivation of a generalized measure of risk that relies on loan price uncertainty moreover the model provides estimates of loan price distortions and thus allocative efficiency

liquidity profit rate cycles in a capitalist economy abstract a monetary economy consisting of independent capitalist firms in which workers spend wages instantly and labor is not scarce is studied the firms create demand for each other s output through their capital outlays and create the backing for money through borrowing when all firms are identical in behavior and initial conditions and the rate of growth of money is constant the economy may be unstable around the equilibrium steady state growth path due to strong accelerator effects and follow a limit cycle trajectory

implementation under ambiguity abstract we introduce the idea of implementation under ambiguity in particular we study maximin efficient notions for an ambiguous asymmetric information economy i e economies where agents preferences are maximin a la wald 1950 the interest on the maximin preferences lies in the fact that maximin efficient allocations are always incentive compatible de castro and yannelis 2009 a result which is false with bayesian preferences a noncooperative notion called maximin equilibrium is introduced which provides a noncooperative foundation for individually rational and maximin efficient notions specifically we show that given any arbitrary individually rational and ex ante maximin efficient allocation there is a direct revelation mechanism that yields the efficient allocation as its unique maximin equilibrium outcome thus an incentive compatible individually rational and efficient outcome can be reached by means of noncooperative behavior under ambiguity

endowments stability and fluctuations in og models abstract in the present paper we consider a stationary overlapping generations model with many commodities and many different consumers and investigate how the distribution of endowments influences the dynamical properties of the model such as stability of steady states and existence of cycles our main results are 1 1 preferences place no restrictions on stability properties of steady states 2 2 cycles exist for all aggregate savings real or nominal and 3 3 equilibria of economies with equilibria close to a no trade equilibrium with constant prices are either steady states or equilibria which converge to a steady state in backward time and another steady state in forward time these results are obtained generically in utility functions and do not depend on whether the utility functions are of the discounted form or not

implementation with incomplete information in exchange economies in this paper we analyze the problem of designing incentive compatible mechanisms in pure exchange economic environments when agents have incomplete information the equilibrium concept employed is bayesian nash equilibrium and the notion of implemantation is full implementation which is stronger than the more commonly employed notion of truthful implementation an allocation rule is truthfully implementable if there exists a direct mechanism to which truth telling is an equilibrium and which yields the allocation rule as its truthful equilibrium outcome an allocation rule is fully implementable if there exists mechanism which yields the allocation rule as its unique equilibrium outcome more generally a set of allocation rules or a social choice set is fully implementable if there exist a mechanism whose equilibrium outcomes coincide with the set this stronger notion of implemention avoids the well known problems of multiple equilibria which arise in direct revelation games we develop a condition termed bayesian monotonicity which we show is necessary for full implementation an incentive compatibility condition is also necessary we prove that bayesian monotonicity and a slightly stronger incentive compatibility condition are sufficient for full implementation when there are at least three agents we present several examples of allocation rules which do and do not satisfy our condition one example is that of an allocation rule which is fully inplementable by an indirect mechanism but for which every equivalent direct mechanism has multiple equilibrium outcomes

observational equivalence of the overlapping generations and the cash in advance economies abstract this paper demonstrates that any equilibrium in an overlapping generations economy a la grandmont 1985 can be supported as an equilibrium in a cash in advance economy a la lucas and stokey 1987 and vice versa thus business cycles could occur at real life frequencies

on endogenous competitive business cycles the belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks whether originating from the external environment or from policy should be modelled as a state that is stationary or perhaps growing at a constant rate seems to be deeply rooted in the mind of some economists

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

on rational dynamic strategies in infinite horizon models where agents discount the future abstract in this paper we show that the equilibrium dynamics arising in three models of rational choice over an infinite horizon are described by choice functions belonging to huge classes of maps including chaotic ones the results are obtained by studying the relationship between the primal functions of the models and the corresponding choice functions the three models are the economic growth model with discounting a duopoly game with alternate moves a duopoly with simultaneous moves

rational choice and erratic behaviour in this paper we show that rational choice in a stationary environment can lead to erratic behaviour when preferences depend on experience we mean by erratic behaviour choice sequences that do not converge to a long run stationary value or to any periodic pattern early investigations of the effects of experience on choice goes back to pareto see also benhabib 1979 some keynesian theories of the consumption function incorporate the effects of experience and habit formation on current levels of consumption duesenberry 1949 modigliani 1949 and brown 1952 a general model of experience dependent choice was described in day 1970 and investigated in day and kennedy 1971 while the specific issue of the existence of stable representable long run consumer demand when tastes vary endogenously has been treated by gorman 1967 pollak 1970 1976 weizsaicker 1971 mccarthy 1974 and hammond 1976 pollak gave conditions for the representability of long run choice when the equations of preference dependence are linear and utility additive hammond in a generalization of these findings provides conditions for stable representable long run choice when preferences are acyclic a condition which in essence assures convergence to a long run choice

equilibrium and optimality some imprints of david gale abstract the paper is a review of some of the themes to which david gale made lasting contributions it touches upon a number of the fundamental issues in the walrasian equilibrium theory existence uniqueness and stability the overlapping generations model non optimality and indeterminacy of competitive equilibria the von neumann equilibrium as a turnpike and in the theory of decentralized intertemporal allocation through competitive prices efficiency and golden rules duality and existence of optimal programs

on dynamics and the core of og models stationary overlapping generations models can exhibit fluctuations however the fluctuations which have been studied by benhabib and day journal of economic dynamics and control 1982 4 37 55 gale journal of economic theory 1973 6 12 36 grandmont econometrica 1985 53 995 1046 and others are not in the core even though they are pareto optimal in the present paper it is shown that general stationary overlapping generation economies can have periodic equilibria in the core

generic existence of completely revealing equilibria for economies with uncertainty when prices convey information conditions which imply the existence of strict rational expectations equilibria for most static pure exchange economies where prices convey information about the state of the world are analyzed information is aggregated and transmitted by prices because agents have different initial information and maximize the conditional expectation of state dependent utility functions major results state that if with probability one agents characteristics do not vary too much as the state of the world varies then generically there exist equilibrium price functions which reveal all initial information more precisely if the support of the image measure is contained in a compact c1 manifold satisfying some technical conditions which is of sufficiently low dimension relative to the number of commodities then existence of completely revealing equilibria is generic any economy satisfying these assumptions can be approximated by a sequence of economies which also obey these assumptions and have completely revealing equilibrium price functions slight perturbations do not destroy the existence property

unemployment migration and growth economic development is typically accompanied by migration from rural to urban employment this migration is often associated with significant urban underemployment both factors are important in the development process we consider a neoclassical growth model with rural urban migration and urban underemployment which arises from an adverse selection problem in labor markets we demonstrate that rural urban migration and underemployment can be a source of development traps and can give rise to a large set of periodic equilibria display long periods of uninterrupted growth punctuated by brief but severe recessions

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

externalities internalization and fluctuations in this paper the authors introduce consumption externalities as developed by k arrow in overlapping generations economies they show how the internalization of externalities through exchanges at markets for externalities may give rise to new phenomena such as altered stability properties and fluctuations even though it restores optimality copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

two period cycles in a three period overlapping generations model abstract we study the properties of two period monetary cycles in simple pure exchange overlapping generations economies in which the households live for three periods we demonstrate that these economies can support cycles under a much broader and arguably more plausible range of assumptions than the analogous two period economies we show that economies that fail the well known grandmont econometrica 53 1985 995 condition can have cycles and that economies that satisfy the condition can fail to have cycles in addition we show that economies can have monetary cycles when they do not have conventional monetary steady states and when aggregate demand for assets is not decreasing in the real return rate at a gross real rate of unity

uncertainty efficiency and incentive compatibility ambiguity solves the conflict between efficiency and incentive compatibility abstract a fundamental result of modern economics is the conflict between efficiency and incentive compatibility that is the fact that some pareto optimal efficient allocations are not incentive compatible this conflict has generated a huge literature which almost always assumes that individuals are expected utility maximizers what happens if they have other kind of preferences is there any preference where this conflict does not exist can we characterize those preferences we show that in an economy where individuals have complete transitive continuous and monotonic preferences every efficient allocation is incentive compatible if and only if individuals have maximin preferences

ambiguous beliefs and mechanism design abstract this paper develops a payoff equivalence theorem for mechanisms with ambiguity averse participants with preferences of the maxmin expected utility meu form gilboa and schmeidler 1989 we use our payoff equivalence result to explicitly characterize the revenue maximizing private value auction mechanism for agents with arbitrary forms of ambiguous beliefs we also show that the revenue ranking between first and second price auctions is sensitive to the form of ambiguity aversion our payoff equivalence techniques allow us to study the constrained efficient budget balanced bilateral trade mechanism and show that increased ambiguity improves the efficiency of the mechanism in addition we characterize the revenue maximizing efficient bilateral trade mechanism and show that heightened ambiguity lowers ex ante budget deficits

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

population and the environment a parable of firewood and other tales the author analyzes the relationship between population and the environment with a focus on the role which environmental degradation and natural resources depletion may play in producing the population pressure which lies behind such degradation and depletion especially in developing countries the principal conclusion of this analysis is that the possibilities for a stable equilibrium between human population and its environment are quite limited i show that parental altruism toward their children can only make matters worse if socially unchecked by leading to an increase of the birthrate in every environmental state in comparison with that which would occur in its absence excerpt

on endogenous formation of price expectations abstract we study a two period exchange economy with complete financial markets and endogenous borrowing constraints contrary to perfect foresight paradigm we assume that agents are heterogeneous in their ability to forecast future prices we introduce a new equilibrium concept called informationally constrained equilibrium where the formation of price expectations is endogenous and reflects the revelation of information from observing bounds on liabilities designed to ensure solvency at any contingency we prove that under standard assumptions an equilibrium always exists and we characterize the degree of information revealed by the endogenous debt limits

expectations in stability and in viability in realistic overlapping cohorts models abstract in this paper we shall consider the multi cohort generalization of overlapping generations models namely overlapping cohorts olc models each time period consumers of different ages form expectations on future interest rates and conditionally maximize utility arising from their remaining consumption paths under the condition of zero bequest for every time period a coordinator determines the new interest rate to ensure that the total consumption is equal to the total endowment of the society the message of the paper is the following 1 in olc the dynamics generated by rational expectations is frequently not only unstable but unviable 2 in olc the dynamics generated by naive expectations is practically asymptotically stable and viable around the lower steady state

habit persistence in overlapping generations economies under pure exchange abstract this paper analyzes the implications of habit persistence preferences for savings and equilibrium dynamics in the context of an overlapping generations model under pure exchange we show that habit persistence can convert an economy which otherwise has no role for government currency into an economy where there does exist a role for such currency further the increased saving induced by habit persistence implies that governments are able to float higher levels of deficits in such economies relative to economies without habit persistence the paper also shows that relative to standard preferences habit persistence preferences cause the savings function to become decreasing in the rate of interest at lower values for relative risk aversion this is of particular interest since the paper demonstrates that this result is closely related to the relative success of models with habit persistence in explaining the equity premium puzzle journal of economic literatureclassification numbers e21 e32

ergodic fluctuations in deterministic economic models abstract nonperiodic business fluctuations are shown to exist with positive measure generically and to behave like stationary stochastic processes in the standard dynamic macro model the implication is that so called chaotic fluctuations are probable for random initial conditions in a large class of recursive economies

market interest rates and commercial bank profitability an empirical investigation the widespread notion that commercial banks borrow short and lend long implies that sharp market interest rate increases may induce a significant number of banking failures this paper develops a method for estimating average asset and liability maturities for a sample of large money center banks regression models are tested to determine if market rate fluctuations have a significant impact on bank profitability the conclusion is negative large banks have effectively hedged themselves against market rate risk by assembling asset and liability portfolios with similar average maturities the impact of market interest rates on commercial bank revenues costs and profitability has increasingly concerned economists and policymakers as financial market conditions have become more volatile in recent years the widespread notion that depository intermediaries borrow short and lend long implies that rapid market rate increases may induce an unacceptable number of financial firm failures monetary policy discussions have reflected this concern for many years the federal reserve board considered stable market rates a goal or at least an intermediate target of monetary policy the extent to which money market conditions are permitted to fluctuate in the short run is also affected by the unique role of the federal reserve system as the nation s lender of last resort liquidity pressures ultimately devolve on the money market and the federal reserve has a responsibility for maintaining orderly conditions in that market

correlated equilibria and sunspots we examine when sunspots uncertainty that has no influence on endowments preferences or technology can affect equilibrium in a simple two period two commodity two class economy we find that such an effect is possibly only if the signals random variables that different agents observe are imperfectly correlated neither perfectly correlated nor independent and at least one commodity is a giffen good for two special cases we characterize the set of equilibria due to sunspots we conclude by showing the intimate connection between the sunspot equilibria of our finite horizon model and those of the overlapping generations literature

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

institutions and short run macroeconomic performance abstract this paper reviews the growing interest in institutions it argues that the explanation for this interest is a fresh awareness of how institutions affect economic performance this connection arises because many economic interaction take the form of one or other of three classic games prisoners dilemma coordination and chicken and the outcome in these games and hence performance of the economy is influenced by the institutional context of these interactions the paper provides a detailed illustration of this argument with a survey of the literature which relates unemployment performances to the institutions of wage setting in oecd countries