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Full-Text Articles in Economics
Mmt And Policy Assignment In An Open Economy Context: Simplicity Is Useful, Oversimpliflication Not So Much, Arslan Razmi
Mmt And Policy Assignment In An Open Economy Context: Simplicity Is Useful, Oversimpliflication Not So Much, Arslan Razmi
Economics Department Working Paper Series
Modern Monetary Theory (MMT) has recently received significant attention in academic and policy circles. Critics question the sustainability of MMT-prescribed approaches to fiscal and monetary policy, especially over extended periods of time, in the presence of international financial markets, and for developing country governments that borrow in foreign currency. I formalize some of these arguments using a dynamic, open economy, Tobin-Markowitz portfolio balance environment that takes into account: (1) the role of expectations in the foreign exchange market and the feedback mechanisms between these and the exchange rate and inflation, and (2) interactions between the current account, debt accumulation, and …
The Influence Of Learning And Price-Level Targeting On Central Bank Forward Guidance, Stephen J. Cole
The Influence Of Learning And Price-Level Targeting On Central Bank Forward Guidance, Stephen J. Cole
Economics Faculty Research and Publications
This paper examines how the effectiveness of central bank forward guidance depends on two key channels: the expectations formation process and the monetary policy regime. The results show that rational expectations relative to an adaptive learning rule amplifies the positive benefits a price-level targeting central bank creates for forward guidance. Specifically, forward guidance generates greater amounts of output and inflation under a price-level than inflation targeting monetary policy regime, but rational expectations overstates these positive benefits compared to adaptive learning. The different responses of expectations between rational expectations and adaptive learning to forward guidance are driving this performance gap. Thus, …
(Wp 2020-03) The Effect Of Central Bank Credibility On Forward Guidance In An Estimated New Keynesian Model, Stephen J. Cole, Enrique Martínez-García
(Wp 2020-03) The Effect Of Central Bank Credibility On Forward Guidance In An Estimated New Keynesian Model, Stephen J. Cole, Enrique Martínez-García
Economics Working Papers
This paper examines the effectiveness of forward guidance in an estimated New Keynesian model with imperfect central bank credibility. We estimate credibility for the U.S. Federal Reserve with Bayesian methods exploiting survey data on interest rate expectations from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimate of Federal Reserve credibility in terms of for- ward guidance announcements is relatively high, which indicates a degree of forward guidance effectiveness, but still one that is below the fully credible case. Hence, anticipation effects are attenuated and, accordingly, output and inflation do not respond as favorably to …
(Wp 2016-02) The Limits Of Central Bank Forward Guidance Under Learning, Stephen J. Cole
(Wp 2016-02) The Limits Of Central Bank Forward Guidance Under Learning, Stephen J. Cole
Economics Working Papers
Central bank forward guidance emerged as a pertinent tool for monetary policymakers since the Great Recession. Nevertheless, the effects of forward guidance remain unclear. This paper investigates the effectiveness of forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. Agents forecast future macroeconomic variables via either the rational expectations hypothesis or a more plausible theory of expectations formation called adaptive learning. A standard Dynamic Stochastic General Equilibrium (DSGE) model is extended to include the financial accelerator mechanism. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning …
Promises And Expectations, Florian Ederer, Alexander Stremitzer
Promises And Expectations, Florian Ederer, Alexander Stremitzer
Cowles Foundation Discussion Papers
We investigate why people keep their promises in the absence of external enforcement mechanisms and reputational effects. In a controlled laboratory experiment we show that exogenous variation of second-order expectations (promisors’ expectations about promisees’ expectations that the promise will be kept) leads to a significant change in promisor behavior. We provide clean evidence that a promisor’s aversion to disappointing a promisee’s expectation leads her to keep her promise. We propose a simple theory of lexicographic promise keeping that is supported by our results and nests the findings of previous contributions as special cases.
Promises And Expectations, Florian Ederer, Alexander Stremitzer
Promises And Expectations, Florian Ederer, Alexander Stremitzer
Cowles Foundation Discussion Papers
We investigate why people keep their promises in the absence of external enforcement mechanisms and reputational effects. In a controlled laboratory experiment we show that exogenous variation of second-order expectations (promisors’ expectations about promisees’ expectations) leads to a significant change in promisor behavior. We provide evidence that a promisor’s aversion to disappointing a promisee’s expectation leads her to behave more generously. We propose and estimate a simple model of conditional guilt aversion that is supported by our results and nests the findings of previous contributions as special cases.
(Ir)Rational Exuberance: Optimism, Ambiguity And Risk, Anat Bracha, Donald J. Brown
(Ir)Rational Exuberance: Optimism, Ambiguity And Risk, Anat Bracha, Donald J. Brown
Cowles Foundation Discussion Papers
The equilibrium prices in asset markets, as stated by Keynes (1930): “…will be fixed at the point at which the sales of the bears and the purchases of the bulls are balanced.” We propose a descriptive theory of finance explicating Keynes’ claim that the prices of assets today equilibrate the optimism and pessimism of bulls and bears regarding the payoffs of assets tomorrow. This equilibration of optimistic and pessimistic beliefs of investors is a consequence of investors maximizing Keynesian utilities subject to budget constraints defined by market prices and investor’s income. The set of Keynesian utilities is a new class …
2013-2 The Fisher Relation In The Great Depression And The Great Recession, David Laidler
2013-2 The Fisher Relation In The Great Depression And The Great Recession, David Laidler
Economic Policy Research Institute. EPRI Working Papers
No abstract provided.
The Role Of Expectations: An Application To Internal Migration, Robert Baumann, Justin Svec, Francis Sanzari
The Role Of Expectations: An Application To Internal Migration, Robert Baumann, Justin Svec, Francis Sanzari
Economics Department Working Papers
This paper examines the impact of unemployment on migration. In a theoretical model, we show that unemployment, per se, does not affect migration. Rather, migration only occurs when unemployment shocks force residents to update their expectations of the area's unemployment rate. Once these expectations change, migration reallocates labor to bring the economy back to equilibrium. To test this theory, we devise an empirical strategy using state level data in the U.S. from 2000 to 2010, we find strong empirical evidence that unemployment shocks outside of expectations have a far greater impact on migration than unemployment shocks that are within expectations.
Uncertainty And Identity: A Post Keynesian Approach, John B. Davis
Uncertainty And Identity: A Post Keynesian Approach, John B. Davis
Economics Faculty Research and Publications
Marshall’s asset equilibrium model provides a way of
explaining the identity of entrepreneurs. Keynes adopted this model but
transformed it when he emphasized the short-period and volatile
character of long-term expectations. This entails a view of entrepreneur
identity in which radical uncertainty plays a central role. This in turn
deepens the post Keynesian view of uncertainty as ontological in that
entrepreneurs’ survival plays into their behavior. This paper explores
this role-based view of individual identity and uses the analysis to
comment on Keynes’s ideas for the socialization of investment and
euthanasia of the rentier in the last chapter of The …
Overlapping Generations Models Of General Equilibrium, John Geanakoplos
Overlapping Generations Models Of General Equilibrium, John Geanakoplos
Cowles Foundation Discussion Papers
The OLG model of Allais and Samuelson retains the methodological assumptions of agent optimization and market clearing from the Arrow-Debreu model, yet its equilibrium set has different properties: Pareto inefficiency, indeterminacy, positive valuation of money, and a golden rule equilibrium in which the rate of interest is equal to population growth (independent of impatience). These properties are shown to derive not from market incompleteness, but from lack of market clearing “at infinity;” they can be eliminated with land or uniform impatience. The OLG model is used to analyze bubbles, social security, demographic effects on stock returns, the foundations of monetary …
Valuation Ratios And The Long-Run Stock Market Outlook: An Update, John Y. Campbell, Robert J. Shiller
Valuation Ratios And The Long-Run Stock Market Outlook: An Update, John Y. Campbell, Robert J. Shiller
Cowles Foundation Discussion Papers
The use of price–earnings ratios and dividend-price ratios as forecasting variables for the stock market is examined using aggregate annual US data 1871 to 2000 and aggregate quarterly data for twelve countries since 1970. Various simple efficient-markets models of financial markets imply that these ratios should be useful in forecasting future dividend growth, future earnings growth, or future productivity growth. We conclude that, overall, the ratios do poorly in forecasting any of these. Rather, the ratios appear to be useful primarily in forecasting future stock price changes, contrary to the simple efficient-markets models. This paper is an update of our …
Expanding The Scope Of Expectations Data Collection: The U.S. And Japanese Stock Markets, Robert J. Shiller, Fumiko Kon-Ya, Yoshiro Tsutsui
Expanding The Scope Of Expectations Data Collection: The U.S. And Japanese Stock Markets, Robert J. Shiller, Fumiko Kon-Ya, Yoshiro Tsutsui
Cowles Foundation Discussion Papers
A pilot effort was undertaken to experiment with a method of collecting parallel time series data for expectations and popular models and theories of institutional stock market participants in the United States and Japan 1989-91, covering the period before and after the dramatic and sudden halving of Japanese stock prices. Substantial variability within countries through time in the responses and dramatic differences across countries in expectations (even expectations for the same country) were found. There are significant research opportunities in expanded data collection along these lines.
Inflationary Expectations And Price Setting Behavior, Ray C. Fair
Inflationary Expectations And Price Setting Behavior, Ray C. Fair
Cowles Foundation Discussion Papers
This paper tests for the existence of expectational effects in very disaggregate price equations. Price equations are estimated using monthly data for each of 40 products. The dynamic specification of the equations is also tested, including whether the equations should be specified in level form or in change form. Two expectational hypotheses are used, one in which expectations of the aggregate price level and one in which expectations are rational. Under the first hypothesis the lag length is estimated along with the other parameters, and under the second hypothesis the lead length is estimated along with the other parameters. The …
The Use Of Expected Future Variables In Macroeconometric Models, Ray C. Fair
The Use Of Expected Future Variables In Macroeconometric Models, Ray C. Fair
Cowles Foundation Discussion Papers
A more sophisticated expectational hypothesis than is traditionally used in the specification of macroeconometric models is tested in this paper. Economic agents are assumed to use a vector of variables Z t in forming their expectations for periods t + 1 and beyond. These expectations may or may not be rational in the Muth sense. The results provide some evidence in favor of the more sophisticated hypothesis, but they are not strong enough to allow much weight to be put on the hypothesis as yet. The evidence in favor of the hypothesis is strongest for households’ response to future wages …