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Full-Text Articles in Social and Behavioral Sciences
Knightian Decision Theory, Part Ii: Intertemporal Problems, Truman F. Bewley
Knightian Decision Theory, Part Ii: Intertemporal Problems, Truman F. Bewley
Cowles Foundation Discussion Papers
The theory of choice proposed in “Knightian Decision Theory, Part I” is here applied to intertemporal problems. An analogue of dynamic programming called maxmin programming is developed. Also, it is shown that detailed contingent planning may not be needed in order to achieve maximality, a program being maximal if no other program is preferred to it. In certain circumstances, a maximal program can be achieved by making a finite calculation in each period. This calculation ignores distant future states and could also ignore unlikely contingencies. A decision maker making such calculations would behave much like a satisficer.
Implementational Issues And Computational Performance Solving Applied General Equilibrium Models With Slcp, Thomas Rutherford
Implementational Issues And Computational Performance Solving Applied General Equilibrium Models With Slcp, Thomas Rutherford
Cowles Foundation Discussion Papers
This paper reports on an implementation of Mathiesen’s sequential method for solving applied general equilibrium models. In this approach, the underlying nonlinear complementarity problem is solved by successive linearization. The paper discusses model formulation, implementation and performance. Several test problems and empirical models are used to evaluate efficiency and robustness.
Equilibria In Exchange Economies With A Countable Number Of Agents, Charalambos D. Aliprantis, Donald J. Brown, Owen Burkinshaw
Equilibria In Exchange Economies With A Countable Number Of Agents, Charalambos D. Aliprantis, Donald J. Brown, Owen Burkinshaw
Cowles Foundation Discussion Papers
The existence of equilibria is established in an overlapping generations exchange economy, where each generation lives for two periods and the commodity space is the positive cone of an infinite dimensional Riesz space. In particular, we establish the existence of equilibria in the stochastic overlapping generations model, i.e., we establish the existence of equilibria when the commodity space in each period is L ∞ equipped with the Mackey topology τ( L ∞ , L 1 ).
Distributional Analysis Of Portfolio Choice, Philip H. Dybvig
Distributional Analysis Of Portfolio Choice, Philip H. Dybvig
Cowles Foundation Discussion Papers
We compare trading in a market with receiving some particular consumption bundle, given increasing state-independent preferences and complete markets. The analysis focuses on the distributional price of the particular bundle. The distributional price is the price of the cheapest utility-equivalent bundle sold in the market. The distributional price is determined by the distributional functions of the outside bundle and the state price density. Simple portfolio performance measures illustrate the value of the approach. Unlike CAPM-based measures, these measures are valid even when superior information is the source of superior performance.
Semiparametric Estimation Of Monotonic And Concave Utility Functions: The Discrete Choice Case, Rosa L. Matzkin
Semiparametric Estimation Of Monotonic And Concave Utility Functions: The Discrete Choice Case, Rosa L. Matzkin
Cowles Foundation Discussion Papers
This paper develops a semiparametric method for estimating the nonrandom part V ( ) of a random utility function U ( v ,ω) – V ( v ) + e (ω) from data on discrete choice behavior. Here v and ω are, respectively, vectors of observable and unobservable attributes of an alternative, and e(ω) is the random part of the utility for that alternative. The method is semiparametric because it assumes that the distribution of the random parts is know up to a finite-dimensional parameter θ, while not requiring specification of a parametric form for V ( ). The nonstochastic …
Inference In Econometric Models With Structural Change, Donald W.K. Andrews, Ray C. Fair
Inference In Econometric Models With Structural Change, Donald W.K. Andrews, Ray C. Fair
Cowles Foundation Discussion Papers
This paper extends the classical Chow (1960) test for structural change in linear regression models to a wide variety of nonlinear models, estimated by a variety of different procedures. Wald, Lagrange multiplier-like, and likelihood ratio-like test statistics are introduced. The results allow for heterogeneity and temporal dependence of general unifying results for estimation and testing in nonlinear parametric econometric models.
Econometric Modeling As Information Aggregation, Ray C. Fair, Robert J. Shiller
Econometric Modeling As Information Aggregation, Ray C. Fair, Robert J. Shiller
Cowles Foundation Discussion Papers
The information contained in the forecasts from two econometric models can be compared by regressing the actual change in the variable forecasted on the two forecasts of the change. We do such comparisons in this paper, where the forecasts are based only on information through the period prior to the first period of the forecast. If a model’s forecast is statistically significant in such a regression, we conclude that the model captures information not in the other model whose forecast is also included in the regression. The models studied include the Fair model, vector autoregressive (VAR) models estimated by ordinary …
Measuring Market Power In U.S. Industry, Matthew D. Shapiro
Measuring Market Power In U.S. Industry, Matthew D. Shapiro
Cowles Foundation Discussion Papers
Non-competitive conduct can be assessed by estimating the size of the markup or Lerner index achieves in a market. The markup implies a price elasticity of demand faced by the representative firm. For a given markup, non-competitive conduct that is insensitive tot he value of the monopoly. To implement this measure, both the firm’s and the market elasticities of demand must be estimated. Hall shows how to estimate the markup, and hence the elasticity faced by the firm, from the cyclical behavior of productivity. To estimate the market elasticity, an instrumental variables procedure exploiting a covariance restriction between productivity shocks …
The Effect Of Economic Events On Votes For President: 1984 Update, Ray C. Fair
The Effect Of Economic Events On Votes For President: 1984 Update, Ray C. Fair
Cowles Foundation Discussion Papers
In previous work I have developed an equation explaining votes for president in the United States that seems to have a remarkable predictive ability. The purpose of this paper is to update this equation through the 1984 election and then use it to predict the 1988 election.
Inefficient Dynamic Portfolio Strategies Or How To Throw Away A Million Dollars In The Stock Market, Philip H. Dybvig
Inefficient Dynamic Portfolio Strategies Or How To Throw Away A Million Dollars In The Stock Market, Philip H. Dybvig
Cowles Foundation Discussion Papers
A number of portfolio strategies followed by practitioners are dominated because they are incompletely diversified over time. The Payoff Distribution Pricing Model is used to compute the cost of following undiversified strategies. Simple numerical examples illustrate the technique, and computer-generated examples provide realistic estimates of the cost of some typical policies using reasonable parameter values. The cost can be substantial and should not be ignored by practitioners. A section on generalizations shows how to extend the analysis to term structure models and other general models of returns.
Game Theory. Models Of Strategic Behavior And Nuclear Deterrence, Martin Shubik
Game Theory. Models Of Strategic Behavior And Nuclear Deterrence, Martin Shubik
Cowles Foundation Discussion Papers
This essay offers an exposition of the potential uses of game theoretic reasoning and mathematical models in the study of the prevention of nuclear war.
Sequential Games Of Resource Extraction: Existence Of Nash Equilibria, Rabah Amir
Sequential Games Of Resource Extraction: Existence Of Nash Equilibria, Rabah Amir
Cowles Foundation Discussion Papers
A general model for noncooperative extraction of common-property resource is considered. The main result is that this sequential game has a Nash equilibrium in stationary strategies. The proof is based on an infinite dimensional fixed-point theorem, and relies crucially on the topology of epi-convergence. A byproduct of the analysis is that Nash equilibrium strategies may be selected such that marginal propensities of consumption are bounded above by one.
The Future Of Social Security: One Economist's Assessment, James Tobin
The Future Of Social Security: One Economist's Assessment, James Tobin
Cowles Foundation Discussion Papers
Three interrelated issues must be faced in assessing the future of OASI. I shall discuss each in turn. Balancing Contributions and Benefits. The overriding long-run issue about OASI is the balance between the tax contributions of the young and the benefits of the old. The system is now geared to scale up benefits automatically so as to maintain the ratio of benefits to contemporaneous wages, the replacement ratio, at its historical level of roughly 40 percent. Payroll tax rates are the residual balancing item in the OASI financial equation. They have been raised steadily for years, and according to current …
Supply Shocks In Macroeconomics, Matthew D. Shapiro
Supply Shocks In Macroeconomics, Matthew D. Shapiro
Cowles Foundation Discussion Papers
Supply shocks played an important role in macroeconomic fluctuations during the 1970’s. Supply shocks are also increasingly important in Keynesian and neo-classical models of the business cycle. This paper is a short survey of these theoretical models. It also discusses the history of supply shocks in recent business cycles.
Spherical Matrix Distributions And Cauchy Quotients, Peter C.B. Phillips
Spherical Matrix Distributions And Cauchy Quotients, Peter C.B. Phillips
Cowles Foundation Discussion Papers
It is shown that matrix quotients of submatrices of a spherical matrix are distributed as matrix Cauchy. This generalizes known results for scalar ratios of independent normal variates. The derivations are simple and make use of the theory of invariant measures on manifolds.
Are Cyclical Fluctuations In Productivity Due More To Supply Shocks Or Demand Shocks?, Matthew D. Shapiro
Are Cyclical Fluctuations In Productivity Due More To Supply Shocks Or Demand Shocks?, Matthew D. Shapiro
Cowles Foundation Discussion Papers
Measured productivity is strongly procyclical. Real business cycle theories suggest that actual fluctuations in productivity are the source of fluctuations in aggregate output. Keynesian theories maintain that fluctuations in aggregate output come from shocks to aggregate demand. Keynesian theories appeal to labor hoarding or off the production function behavior to explain the procyclicality of productivity. If observed productivity shocks are true productivity shocks, a function of factor prices should covary exactly with productivity. In annual data for United States industries, that function of factor prices and conventionally-measured productivity move together very closely. Moreover, their difference is uncorrelated with aggregate output.
Ultimate Sources Of Aggregate Variability, Robert J. Shiller
Ultimate Sources Of Aggregate Variability, Robert J. Shiller
Cowles Foundation Discussion Papers
What, ultimately, is different from quarter to quarter or year to year that accounts for the fact that macroeconomic variables change over these intervals? That is, which are the biggest ultimate sources, in terms we may say of tastes, technology, endowments, government policy, industrial organization, labor-management relations, speculative behavior, or the like, that change to cause this variability? There are a bewildering variety of claims in the literature for such ultimate sources. Far fewer efforts have been made to give a breakdown of the variance of macroeconomic aggregates by Pigou (1929) and Fair (1987). The nature of the evidence for …
Sources Of Output And Price Variability In A Macroeconometric Model, Ray C. Fair
Sources Of Output And Price Variability In A Macroeconometric Model, Ray C. Fair
Cowles Foundation Discussion Papers
Existence of equilibrium is proved for an exchange strategic market game with complete markets. An example of equilibrium with inconsistent prices is given.
Financial Intermediaries, James Tobin
Financial Intermediaries, James Tobin
Cowles Foundation Discussion Papers
This is an essay on Financial Intermediaries written for the New Palgrave . It includes sections on national wealth, financial markets, assets, risk and regulation.
Optimal Choice Of Monetary Policy Instruments In A Macroeconometric Model, Ray C. Fair
Optimal Choice Of Monetary Policy Instruments In A Macroeconometric Model, Ray C. Fair
Cowles Foundation Discussion Papers
It has been nearly twenty years since Poole (1970) wrote his classic article on the optimal choice of monetary policy instruments in a stochastic IS-LM model. Poole assumed that the monetary authority (henceforth called the Fed) can control the interest rate or the money supply exactly. These are the two “instruments” of monetary policy. If the aim is to minimize the squared deviation of real output from its target value, Poole showed that the choice of the optimal instrument depends on the variance of the error term in the IS function, the variance of the error term in the LM …
Statistical Inference In Regressions With Integrated Processes: Part 2, Joon Y. Park, Peter C.B. Phillips
Statistical Inference In Regressions With Integrated Processes: Part 2, Joon Y. Park, Peter C.B. Phillips
Cowles Foundation Discussion Papers
This paper continues the theoretical investigation of Park and Phillips [7]. We develop an asymptotic theory of regression for multivariate linear models that accommodates integrated processes of different orders, nonzero means, drifts, time trends and cointegrated regressors. The framework of analysis is general but has a common architecture that helps to simplify and codify what would otherwise be a myriad of isolated results. A good deal of earlier research by the authors and by others comes within the new framework. Special models of some importance are considered in detail, such as VAR systems with multiple lags and cointegrated variants.
Conditional And Unconditional Statistical Independence, Peter C.B. Phillips
Conditional And Unconditional Statistical Independence, Peter C.B. Phillips
Cowles Foundation Discussion Papers
Conditional independence almost everywhere in the space of the conditioning variates does not imply unconditional independence, although it may well imply unconditional independence of certain functions of the variables. An example that is important in linear regression theory is discussed in detail. This involves orthogonal projections on random linear manifolds, which are conditionally independent but not unconditionally independent under normality. Necessary and sufficient conditions are obtained under which conditional independence does imply unconditional independence.
Statistical Inference In Regressions With Integrated Processes: Part 1, Joon Y. Park, Peter C.B. Phillips
Statistical Inference In Regressions With Integrated Processes: Part 1, Joon Y. Park, Peter C.B. Phillips
Cowles Foundation Discussion Papers
This paper develops a multivariate regression theory for integrated processes which simplifies and extends much earlier work. Our framework allows for both stochastic and certain deterministic regressors, vector autoregressions and regressors with drift. The main focus of the paper is statistical inference. The presence of nuisance parameters in the asymptotic distributions of regression F -tests is explored and new transformations are introduced to deal with these dependencies. Some specializations of our theory are considered in detail. In models with strictly exogenous regressors we demonstrate the validity of conventional asymptotic theory for appropriately constructed Wald tests. These tests provide a simple …
Interest Rate And Exchange Rate Determination, Ray C. Fair
Interest Rate And Exchange Rate Determination, Ray C. Fair
Cowles Foundation Discussion Papers
It is well known that modeling exchange rates is difficult. Meese and Rogoff’s (1983) results show that a random walk model performs as well as or better than a variety of structural models, where the forecasts from the structural models are based on the actual values of the future explanatory variables. Because of these and other results, the view has become fairly widespread that structural models of exchange rates are not very good. There is, however, somewhat of a dichotomy in the literature between those who deal with small models, where the focus is almost exclusively on exchange rates, and …
International Evidence On The Demand For Money, Ray C. Fair
International Evidence On The Demand For Money, Ray C. Fair
Cowles Foundation Discussion Papers
One of the current questions in the literature on the demand for money is whether the adjustment of actual to desired money holdings is in nominal or real terms. This paper describes a simple procedure that can be used to test the nominal against the real hypothesis. The test is carried out for 27 countries. The paper also tests the structural stability of the demand for money equations and the correctness of the dynamic specification.
A Strategic Market Game With Complete Markets, Rabah Amir, Siddhartha Sahi, Martin Shubik
A Strategic Market Game With Complete Markets, Rabah Amir, Siddhartha Sahi, Martin Shubik
Cowles Foundation Discussion Papers
Existence of equilibrium is proved for an exchange strategic market game with complete markets. An example of equilibrium with inconsistent prices is given.
The Dividend-Price Ratio And Expectations Of Future Dividends And Discount Factors, John Y. Campbell, Robert J. Shiller
The Dividend-Price Ratio And Expectations Of Future Dividends And Discount Factors, John Y. Campbell, Robert J. Shiller
Cowles Foundation Discussion Papers
A linearization of a rational expectations present value model for corporate stock prices produces a simple relation between the log dividend-price ratio and mathematical expectations of future log real dividend changes and future real discount rates. This relation can be tested using vector autoregressive methods. Three versions of the linearized model, differing in the measure of discount rates, are tested for United States time series 1981-1986: versions using real interest rate data. The results yield a metric to judge the relative importance of real dividend growth, measured real discount rates and unexplained factors in determining the dividend-price ratio.
A Game Theoretic Approach To The Theory Of Money And Financial Institutions, Martin Shubik
A Game Theoretic Approach To The Theory Of Money And Financial Institutions, Martin Shubik
Cowles Foundation Discussion Papers
This is a sketch of a game theoretic and gaming approach to the development of an appropriate microeconomic theory of money and financial institutions. The phrase “money and financial institutions” is used to stress that a theory of money alone cannot be fruitfully constructed in an institutional vacuum. The monetary and financial system of an economy are part of the socio-politico-economic control mechanism used by every state to connect the economy with the polity and society. This neural network provides the administrative means to collect taxes, direct investment, provide public goods, trade. The money measures provide a crude but serviceable …
Knightian Decision Theory: Part 1, Truman F. Bewley
Knightian Decision Theory: Part 1, Truman F. Bewley
Cowles Foundation Discussion Papers
A theory of choice under uncertainty is proposed which removes the completeness assumption from the Anscombe-Aumann formulation of Savage’s theory and introduces an inertia assumption. The inertia assumption is that there is such a thing as the status quo and an alternative is accepted only if it is preferred to the status quo. This theory is one way of giving rigorous expression to Frank Knight’s distinction between risk and uncertainty.
Forecasting The Depression: Harvard Versus Yale, Ray C. Fair, Matthew D. Shapiro, Kathryn M. Dominguez
Forecasting The Depression: Harvard Versus Yale, Ray C. Fair, Matthew D. Shapiro, Kathryn M. Dominguez
Cowles Foundation Discussion Papers
Was the Depression forecastable? After the Crash, how long did it take contemporary economic forecasters to realize how severe the downturn was going to be? How long should it have taken them to come to this realization? These questions are addressed by studying the predictions of the Harvard Economic Service and Yale’s Irving Fisher during 1929 and the early 1930’s. The data assembled by the Harvard and Yale forecasters are subjected to modern statistical analysis to learn whether their verbal pronouncements were consistent with the data. We find that both the Harvard and Yale forecasters were systematically too optimistic, yet …