bulls bears and market sheep abstract a deterministic excess demand model of stock market behavior is presented that generates stochastically fluctuating prices and randomly switching bear and bull markets

marginal commodity tax reforms a survey as noted 30 years ago by martin feldstein optimal taxes may be useless for practical purposes and emphasis should instead be placed on the possibility of enhancing welfare by reforming existing tax rates in this perspective marginal commodity tax reforms are gaining increasing attention due to political and economic constraints on large reforms of direct or indirect taxation in this paper we summarize the main features and results of the literature on marginal commodity tax reforms pioneered by ahmad and stern further developed by yitzhaki and thirsk and recently reinterpreted by makdissi and wodon we establish new links to other fields of research namely the literature on the use of equivalence scales and on poverty measurement we also critically examine some issues associated with the implementation of marginal tax reforms with special reference to the calculation of welfare weights and revenue effects finally we suggest directions for future research on poverty reducing commodity tax reforms

are outcomes driving expectations or the other way around an i 2 cvar analysis of interest rate expectations in the dollar pound market abstract this paper uses consensus forecasts to address empirical puzzles in international macro using the cointegrated var model the data consisting of three month libor rates their three month ahead forecasts prices and exchange rates for the us and uk were all found to be near i 2 consistent with imperfect knowledge expectations the i 2 analysis showed that over the medium run the nominal exchange rate has moved away from equilibrium values with interest rates following suit whereas over the long run the nominal exchange rate was adjusting while the interest rate forecasts pushed the system away from steady state evidence of self reinforcing feedback mechanisms in the system signals the importance of speculative bubbles for the determination of the exchange rate and the interest rates

taking stock a rigorous modelling of animal spirits in macroeconomics modelling animal spirits this paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro dynamic models that can capture some of its crucial aspects in a rigorous way two approaches are considered the discrete choice and the transition probability approach where individual agents face a binary decision and choose one of them with a certain probability these assessments are adjusted upward or downward in response to what the agents observe which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits on the whole the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework

heterogeneous beliefs and adaptive behaviour in a continuous time asset price model abstract this paper extends the analysis of the seminal work of brock and hommes 1997 brock and hommes 1998 on heterogeneous beliefs and rational routes to randomness in discrete time models to a continuous time model of asset pricing the resulting model characterised mathematically by a system of stochastic delay differential equations provides a unified approach to deal with adaptive behaviour of heterogeneous agents and market stability impact of lagged price used by chartists to form their expectations for the underlying deterministic model we show not only that the result of brock and hommes on rational routes to market instability in discrete time holds in continuous time but also a double edged effect of an increase in lagged price used by the chartists on market stability for the stochastic model we demonstrate that the interaction and boundedly rational behaviour of heterogeneous agents can generate various market phenomena such as bubbles and crashes and replicate stylised facts including volatility clustering and long range dependence in volatility

money and financial markets introduction money and financial markets mark p taylor part 1 assessing the literature money demand analysis an outline keith cuthbertson david barlow financial market analysis an outline ronald macdonald and mark p taylor part 2 money demand studies money demand in five major countries estimating and interpreting error correction models james m boughton modelling broad and narrow money a study using cointegration martin brookes et al endogenous financial innovation and the demand for mo peter westaway and david walton money demand in high inflation countries a south american perpsective kate phylakis and mark p taylor the demand for money in four countries in the interwar period a study using monthly data jonathan slow et al part 3 money and financial markets some news on covered interest arbitrage mark p taylor patricia fraser monitoring bank risk a market based approach david miles stephen hall information interest rates and the volatility of asset prices laurence copeland richard c stapleton the decision to disclose research and development expenditure in the presence of a takeover threat jane black ian tonks persistence in stock market returns a disaggregated perspective roanld macdonald david power global capital market integration and the current account michael artis tamim bayoumi financial disorder and the theory of crisis e p davis part 4 new directions in financial market analysis neural networks and asset prices paul ormerod chartists fundamentalists and the transmission of opinion alan kirman

positive welfare effects of trade barriers in a dynamic partial equilibrium model we develop a simple two region cobweb type dynamic partial equilibrium model to demonstrate the existence of optimal possibly non zero trade barriers a pure comparative statics analysis of our model suggests that a reduction of trade barriers modeled as small but positive import tariffs always enhances welfare however taking a dynamic perspective reveals that nonlinear trade interactions between two regions may generate endogenous price fluctuations which can hamper welfare finally we allow special interest groups such as consumers or producers from these two regions to lobby for a particular level of trade barriers our model predicts that time varying trade barriers may be another channel for market instability

costs of nuclear power plant construction theory and new evidence studies of the cost of construction of nuclear power plants rely upon a measure of cost called overnight cost that contradicts accepted capital theory the studies report evidence that construction cost per megawatt of capacity decreases as plant scale increases we employ a more correct measure of cost and compare the results of this measure versus overnight cost for japanese nuclear power plants using overnight cost the results give evidence of economies of scale in japanese power plants but when the correct measure of cost is substituted the scale variable is not statistically significant

a model of tax reform for belgium abstract the paper deals with determining second best optima and existence conditions of pareto improving directions of tax reform for an economy experiencing keynesian unemployment i e characterised by excess supply of labour and commodities it is then tested whether these existence conditions were fulfilled in belgium in 1982 the model considers the taxation of seven consumption goods plus labour in a ten consumer economy empirical evidence suggests that welfare improving price directions can be found the whole set of these directions is then constructed

a cautious price adjustment mechanism chaotic behavior abstract it is well known that adjustment processes like tatonnement can show erratic dynamic behavior the prices can make big jumps and vary over a wide range a discrete tatonnement process in a simple two goods economy is studied with only one price adjusted it is shown that the interval in which the price varies can be restricted to a neighborhood of an equilibrium price with big jumps excluded if the relative price adjustment is restricted by a maximal rate of increase or decrease of the price within the interval any type of erratic dynamics remains possible

asset price and wealth dynamics in a financial market with heterogeneous agents abstract this paper considers a discrete time model of a financial market with one risky asset and one risk free asset where the asset price and wealth dynamics are determined by the interaction of two groups of agents fundamentalists and chartists in each period each group allocates its wealth between the risky asset and the safe asset according to myopic expected utility maximization but the two groups have heterogeneous beliefs about the price change over the next period the chartists are trend extrapolators while the fundamentalists expect that the price will return to the fundamental we assume that investors optimal demand for the risky asset depends on wealth as a result of crra utility a market maker is assumed to adjust the market price at the end of each trading period based on excess demand and on changes of the underlying reference price the model results in a nonlinear discrete time dynamical system with growing price and wealth processes but it is reduced to a stationary system in terms of asset returns and wealth shares of the two groups it is shown that the long run market dynamics are highly dependent on the parameters which characterize agents behaviour as well as on the initial condition moreover for wide ranges of the parameters a locally stable fundamental steady state coexists with a stable non fundamental steady state or with a stable closed orbit where only chartists survive in the long run such cases require the numerical and graphical investigation of the basins of attraction other dynamic scenarios include periodic orbits and more complex attractors where in general both types of agents survive in the long run with time varying wealth fractions

animal spirits heterogeneous expectations and the amplification and duration of crises we introduce a simple equilibrium model of a market for loans households lend to firms and form expectations about their loan default probability under heterogeneous expectations with switching between forecasting strategies driven by reinforcement learning even a small fraction of pessimistic traders has a large aggregate effect causing a heterogeneous expectations risk premium i e significantly higher contract rates for loans and significantly lower output our stylized model illustrates how animal spirits and heterogeneous expectations may lead to aconfidence loss and to financial instability amplifying the magnitude of economic crises and slowing down recovery

tax reform results with different demand systems abstract we calculate the marginal welfare costs for a twelve commodity classification of the belgian indirect tax system price elasticities are estimated with rotterdam aids cbs and the linear expenditure system the ranking of the marginal welfare costs is similar when we use unrestricted estimates of the first three systems after the symmetry condition of the slutsky matrix is imposed the differences become more important however they diminish with increasing inequality aversion

second best analysis with markets in disequilibrium public sector pricing in a keynesian regime the paper develops pricing rules for a public sector subject to a budget constraint in an economy where the private sector experiences keynesian unemployment excess supply of labour and of commodities both second best and welfare improving pricing rules are studied it is found that such rules can be defined in operational terms in general they are quite complex involve quantities which are not directly observable reservation wages and prices and require evaluation of income and employment multipliers the general equilibrium approach to second best theory thus involves standard macroeconomic concepts and techniques some discussion of methodological issues and of policy objectives inflation versus unemployment is offered in order to facilitate interpretation the corresponding results for an economy with a competitive private sector are first restated

speculative behaviour and complex asset price dynamics a global analysis this paper analyses the dynamics of a model of a share market consisting of two groups of traders fundamentalists who base their trading decisions on the expectation of a return to the fundamental value of the asset and chartists who base their trading decisions on an analysis of past price trends the model is reduced to a two dimensional map whose global dynamic behaviour is analysed in detail the dynamics are affected by parameters measuring the strength of fundamentalist demand and the speed with which chartists adjust their estimate of the trend to past price changes the parameter space is characterized according to the local stability instability of the equilibrium point as well as the non invertibility of the map the method of critical curves of non invertible maps is used to understand and describe the range of global bifurcations that can occur it is also shown how the knowledge of deterministic dynamics uncovered here can aid in understanding the behaviour of stochastic versions of the model

complicated endogenous business cycles under gross substitutability abstract in this paper we investigate the global behaviour of the output equilibrium time paths in a two dimensional overlapping generations model with productive investment and capital accumulation where agents behave rationally and markets are competitive we show that equilibrium time paths can converge to complicated chaotic attractors as well as periodic attractors when the substitution effect dominates the income effect everywhere the occurrence of complicated equilibrium paths is guaranteed by homoclinic intersections of the stable and unstable manifolds of the autarkic steady state journal of economic literature classificiation number e32

real exchange rate persistence and the excess return puzzle the case of switzerland versus the us summary the ppp puzzle refers to the wide swings of nominal exchange rates around their long run equilibrium values whereas the excess return puzzle represents the persistent deviation of the domestic foreign interest rate differential from the expected change in the nominal exchange rate using the i 2 cointegrated var model much of the excess return puzzle disappears when an uncertainty premium in the foreign exchange market proxied by the persistent ppp gap is introduced self reinforcing feedback mechanisms seem to cause the persistence in the swiss us parity conditions these results support imperfect knowledge based expectations rather than so called rational expectations

a robust rational route to randomness in a simple asset pricing model abstract we investigate asset pricing dynamics in an adaptive evolutionary asset pricing model with fundamentalists trend followers and a market maker agents can choose between a fundamentalist strategy at positive information cost or choose a trend following strategy for free price adjustment is proportional to the excess demand in the asset market agents asynchronously update their strategy according to realized net profits in the recent past as agents become more sensitive to differences in strategy performance the fundamental steady state becomes unstable and multiple steady states may arise as the traders sensitivity to differences in fitness increases a bifurcation route to chaos sets in due to homoclinic bifurcations of stable and unstable manifolds of the fundamental steady state

the theory of reform and indian indirect taxes abstract given a set of value judgements an initial state and a model of the economy one can ask whether some feasible tax change would increase welfare we do this by defining the marginal cost in terms of welfare of raising an extra rupee from the i th good the inverse optimum problem is the calculation of non negative welfare weights on households which imply that the initial state is optimum if no such welfare weights exist then a pareto improvement is possible we illustrate the concepts and results using data from the indian economy for 1979 1980 directions of tax reform for a number of specific social welfare functions and for pareto improvements are presented

cost overruns and financial risk in the construction of nuclear power reactors a critical appraisal lovering and colleagues attempt to advance understanding of construction cost escalation risks inherent in building nuclear reactors and power plants a laudable goal although we appreciate their focus on capital cost increases and overruns we maintain in this critical appraisal that their study conceptualizes cost issues in a limiting way methodological choices in treating different cost categories by the authors mean that their conclusions are more narrowly applicable than they describe we also argue that their study is factually incorrect in its criticism of the previous peer reviewed literature earlier work for instance has compared historical construction costs for nuclear reactors with other energy sources in many countries and extending over several decades lastly in failing to be transparent about the limitations of their own work lovering et al have recourse to a selective choice of data unbalanced analysis and biased interpretation

heterogeneous speculators endogenous fluctuations and interacting markets a model of stock prices and exchange rates abstract we develop a discrete time model in which the stock markets of two countries are linked via and with the foreign exchange market the foreign exchange market is characterized by nonlinear interactions between technical and fundamental traders such interactions may generate complex dynamics and recurrent switching between bull and bear market phases via a well known pitchfork and period doubling bifurcation path when technical traders become more aggressive the two stock markets are populated by fundamentalists and prices tend to evolve towards stable steady states driven by linear laws of motion a connection between such markets is established by allowing investors to trade abroad and the resulting three dimensional dynamical system is analyzed one goal of our paper is to explore potential spill over effects between foreign exchange and stock markets a second related goal is to study how the bifurcation sequence which characterizes the market with heterogeneous speculators is modified in the presence of interactions with other markets

cost estimates for nuclear power in the uk abstract current uk government support for nuclear power has in part been informed by cost estimates that suggest that electricity from new nuclear power stations will be competitive with alternative low carbon generation options the evidence and analysis presented in this paper suggests that the capital cost estimates for nuclear power that are being used to inform these projections rely on costs escalating over the pre construction and construction phase of the new build programme at a level significantly below those that have been experienced by past us and european programmes this paper applies observed construction time and cost escalation rates to the published estimates of capital costs for new nuclear plant in the uk and calculates the potential impact on levelised cost per unit of electricity produced the results suggest that levelised cost may turn out to be significantly higher than expected which in turn has important implications for policy both in general terms of the potential costs to consumers and more specifically for negotiations around the level of policy support and contractual arrangements offered to individual projects through the proposed contract for difference strike price

managing rational routes to randomness abstract within the seminal cobweb model of brock and hommes firms adapt their price expectations by a profit based switching behavior between free naive expectations and costly rational expectations brock and hommes demonstrate that fixed point dynamics may turn into increasingly complex dynamics as the firms intensity of choice increases we show that policy makers are able to manage such rational routes to randomness by adjusting profit taxes in particular policy makers should increase decrease profit taxes if destabilizing expectations generate higher lower profits than stabilizing expectations to alter the composition of applied expectation rules and thereby to promote market stability our results are not restricted to cobweb models a huge body of literature demonstrates that rational routes to randomness may emerge in many different markets

on the transition from local regular to global irregular fluctuations abstract we present a general framework for understanding the transition from local regular to global irregular chaotic behaviour of nonlinear dynamical models in discrete time the fundamental mechanism is the unfolding of quadratic tangencies between the stable and the unstable manifolds of periodic saddle points to illustrate the relevance of the presented methods for analysing globally a class of dynamic economic models we apply them to the infinite horizon model of woodford 1988 j economic theory 40 128 137 amended by grandmont et al 1998 j economic theory 80 to account for capital labour substitution so as to explain the appearance of irregular fluctuations through homoclinic bifurcations when parameter values are far away from local bifurcation points

stability and complex dynamics in a discrete tâtonnement model abstract in this paper we study the dynamics of discrete price adjustment processes we show that gross substitutability leads to a kind of stability of the process it guarantees that all prices converge to some bounded region that contains the unique equilibrium price the dynamics inside this region is by no means trivial we demonstrate that as the speed of adjustment increases the process undergoes several bifurcations and the dynamics may become quite complex our approach differs from other literature on t tonnement processes in that our systems are not necessarily one dimensional

a discrete and symmetric price adjustment process on the simplex abstract we study the t tonnement process in an exchange economy with three commodities and three agents we argue that for the multiplicative t tonnement process the simplex is a natural normalization rule we analyse the influence of symmetry in preferences and endowments on the dynamics of the t tonnement process depending on this symmetry there are different bifurcation routes to chaos in particular coexisting attractors may emerge when the symmetric equilibrium price vector becomes unstable this coexistence of attractors is robust in the sense that it also exists for close by asymmetric t tonnement processes

when speculators meet suppliers positive versus negative feedback in experimental housing markets abstract asset markets like stock markets are characterized by positive feedback through speculative demand but the supply of housing is endogenous and adds negative feedback to the housing market we design an experimental housing market and study how the strength of the negative feedback i e the price elasticity of supply affects market stability in the absence of endogenous housing supply the experimental markets exhibit large bubbles and crashes because speculators coordinate on trend following expectations when the positive feedback through speculative demand is offset by the negative feedback of elastic housing supply the market stabilizes and prices converge to fundamental value individual expectations and aggregate market outcome are well described by the heuristics switching model our results suggest that negative feedback policies may stabilize speculative asset bubbles

speculative markets and the effectiveness of price limits abstract the aim of this paper is to study the effectiveness of price limits in speculative markets we construct a nonlinear stochastic asset pricing model in which traders rely on technical and fundamental analysis to determine their orders the dynamics of the model mimic stylized facts such as the emergence of bubbles excess volatility fat tails for returns or volatility clustering quite well using this model as a laboratory we find that price limits have the potential to reduce both volatility and deviations from fundamentals the more traders lend themselves to trend extrapolating behavior the better price limits work

taking stock a rigorous modelling of animal spirits in macroeconomics this paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro dynamic models that can capture some of its crucial aspects in a rigorous way two approaches are considered the discrete choice and the transition probability approach where individual agents face a binary decision and choose one of them with a certain probability these assessments are adjusted upward or downward in response to what the agents observe which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits on the whole the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework

assessment of the actual sustainability of nuclear fission power this paper uses 19 criteria to assess whether nuclear fission power can be a part of sustainable development this yes or no qualitative evaluation is due prior to ongoing marketability assessment and promotion of nuclear power by for example the iaea the iea and the uk government the criteria are classified into five groups planet results demonstrate that the incompatibility of nuclear expansion with electricity efficiency and full renewable power deployment largely overshadows the carbon free steam generation of nuclear fission prosperity analyses show that including rolled off costs and risks would raise bills to heights difficult to quantify due to doubts long term invisibility and irreversibility risks may be catastrophic and are not insurable while weaponry proliferation adds a further dimension people analyses reveal that some nuclear power is affordable for present generations when many costs remain unpaid however developing countries cannot afford the capital costs and technology intensity and catastrophes wreak havoc on national economies singling out exposed communities losing their habitats politics assessments demonstrate that nuclear technocracy dominates the scene in many countries the technocrats heavily influence policy makers the media and celebrities speaking out in favor of nuclear we identify the need for an independent global agency and for independent national nuclear regulatory institutions to safeguard the public interest

statistical dynamics and economics abstract it is shown in this paper how complex economic dynamics can be characterized using the statistical or distributional theory of dynamical systems the basic concepts of the latter are summarized then applications to supply and demand adjustments in competitive markets aggregate business fluctuations and economic growth in the very long run are briefly reviewed

formation of rationally heterogeneous expectations this paper models expectation formation by taking into account that agents may produce heterogeneous expectations because of informational frictions and differing levels of a capacity to process information we show that there are two general classes of steady states within this framework those where strictly dominated forecasting rules vanish and those heterogeneous states where a positive proportion of agents uses a more costly perfect foresight we demonstrate that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly and do not exhibit identical performance in the long run

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

the price dynamics of common trading strategies a deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices this paper uses a market maker based method of price formation to study the price dynamics induced by several commonly used financial trading strategies showing how they amplify noise induce structure in prices and cause phenomena such as excess and clustered volatility

endogenous fluctuations under evolutionary pressure in cournot competition abstract an evolutionary game theoretic model of cournot competition is investigated individuals choose from a finite set of different behavioral rules each rule specifies the quantity to be produced in the current period as a function of past quantities using more sophisticated rules may require extra information costs based upon realized payoffs the fractions of the population choosing a certain behavioral rule are updated according to the replicator equation with noise the long run behavior of the evolutionary system consisting of the population dynamics coupled with the quantity dynamics of the cournot game may be complicated and endogenous fluctuations may arise we consider a typical example where firms can choose between two rules the nash rule and the best reply rule we show that a homoclinic tangency between the stable and unstable manifold of the equilibrium occurs as evolutionary pressure increases implying bifurcation routes to complicated dynamics and strange attractors

when panic makes you blind a chaotic route to systemic risk abstract we present an analytical model to study the role of expectation feedbacks and overlapping portfolios on systemic stability of financial systems building on corsi et al 2016 we model a set of financial institutions having value at risk capital requirements and investing in a portfolio of risky assets whose prices evolve stochastically in time and are endogenously driven by the trading decisions of financial institutions assuming that they use adaptive expectations of risk we show that the evolution of the system is described by a slow fast random dynamical system which can be studied analytically in some regimes the model shows how the risk expectations play a central role in determining the systemic stability of the financial system and how wrong risk expectations may create panic induced reduction or over optimistic expansion of balance sheets specifically when investors are myopic in estimating the risk the fixed point equilibrium of the system breaks into leverage cycles and financial variables display a bifurcation cascade eventually leading to chaos we discuss the role of financial policy and the effects of some market frictions as the cost of diversification and financial transaction taxes in determining the stability of the system in the presence of adaptive expectations of risk

the behavioral economics of currency unions economic integration and monetary policy we analyze different behavioral models of expectation formation in a multi country new keynesian currency union model our analyses yield the following robust results first economic integration is of crucial importance for the stability of the economic dynamics in a currency union second when the economic dynamics are unstable more activist monetary policy does not lead to stable economic dynamics these findings have natural counterparts in the rational expectations version of the model there economic integration is crucial for the determinacy of the equilibrium and when the equilibrium is indeterminate more activist monetary policy does not lead to a determinate equilibrium in an application to euro area data we find that the behavioral macroeconomic model outperforms its rational counterpart in terms of prediction performance

income inequality consumption credit and credit risk in a data driven agent based model abstract the issue of income inequality occupies a prominent position in the research agenda of academic and policy circles alike especially after the crisis of 2008 due to its potential causal link with the development of credit bubbles and therefore the emergence of financial crises this paper examines the long run effect of income inequality on consumption consumer credit and non performing loans through the means of a data driven agent based model the data driven nature of the model enhances its ability to match historical series and thus makes it suitable for policy simulations tailored for specific economies the analysis indicates that higher income inequality has a detrimental impact on consumption and is associated with lower volumes of consumer credit however the ratio of non performing loans as a share of total loans seems to be independent of income inequality

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