In most of the macroeconomic models, the concept of representative agent is adopted. The aggregate economy is a simple combination of a large amount of these identical agents. Individuals are thought to have no power in influencing the performance of aggregate economy, especially the prices in the market. We argue in this paper that by considering the interactions between agents with tools of differential game theory, the "consistent" equilibrium is different from what we derived before under the framework of Ramsey model. We show that the agents have the incentives to influence the economy. The power of influence is tiny for each one but significant in aggregate.
{"title":"Is Representative Agent a Good Proxy to Individuals: An Example of Ramsey Model","authors":"Lin Liu, Qiang Wang","doi":"10.2139/ssrn.1032010","DOIUrl":"https://doi.org/10.2139/ssrn.1032010","url":null,"abstract":"In most of the macroeconomic models, the concept of representative agent is adopted. The aggregate economy is a simple combination of a large amount of these identical agents. Individuals are thought to have no power in influencing the performance of aggregate economy, especially the prices in the market. We argue in this paper that by considering the interactions between agents with tools of differential game theory, the \"consistent\" equilibrium is different from what we derived before under the framework of Ramsey model. We show that the agents have the incentives to influence the economy. The power of influence is tiny for each one but significant in aggregate.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126298969","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In a recent paper, Duan and Wei (2007) find that the higher the proportion of systematic risk the higher will be the level and the slope of the implied volatility curve. We show that this result can be explained in a variety of continuous - time option pricing models and explicitly point out the transmission mechanisms that lead to an impact of systematic risk on option prices. Most importantly we show that an investor who uses the structurally correct model but ignores the proportion of systematic risk in the underlying would still price options correctly.
{"title":"Systematic Risk and Option Prices","authors":"David Horn, Eva Schneider","doi":"10.2139/ssrn.1031617","DOIUrl":"https://doi.org/10.2139/ssrn.1031617","url":null,"abstract":"In a recent paper, Duan and Wei (2007) find that the higher the proportion of systematic risk the higher will be the level and the slope of the implied volatility curve. We show that this result can be explained in a variety of continuous - time option pricing models and explicitly point out the transmission mechanisms that lead to an impact of systematic risk on option prices. Most importantly we show that an investor who uses the structurally correct model but ignores the proportion of systematic risk in the underlying would still price options correctly.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"55 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124570857","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we undertake an out-of-sample evaluation of the ability of a model to forecast the Swedish Krona’s real and nominal effective exchange rate, using a cointegrating relation between the real exchange rate, relative output, terms of trade and net foreign assets (or alternatively the trade balance). The cointegrating relation is derived from a theoretical model of the New Open Economy Macroeconomics type. The forecasting performance of our estimated vector error correction model is quite good once the dynamics of the model have been augmented with an interest rate differential.
{"title":"Using a New Open Economy Macroeconomics Model to Make Real Nominal Exchange Rate Forecasts","authors":"Peter Sellin","doi":"10.2139/ssrn.1077533","DOIUrl":"https://doi.org/10.2139/ssrn.1077533","url":null,"abstract":"In this paper we undertake an out-of-sample evaluation of the ability of a model to forecast the Swedish Krona’s real and nominal effective exchange rate, using a cointegrating relation between the real exchange rate, relative output, terms of trade and net foreign assets (or alternatively the trade balance). The cointegrating relation is derived from a theoretical model of the New Open Economy Macroeconomics type. The forecasting performance of our estimated vector error correction model is quite good once the dynamics of the model have been augmented with an interest rate differential.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"111 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133685111","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2007-11-05DOI: 10.1111/j.1467-9701.2007.01056.x
Alvaro Angeriz, P. Arestis
This paper deals with what is referred to in the literature as the 'Inflation Targeting Lite' (ITL) countries. These are a category of emerging countries, whose main characteristics are that they are least developed and small economies that pursue IT. They use inflation targeting to define their monetary policy framework, but for a number of reasons they are not in a position to put top priority to IT in relation to other objectives. This paper deals with a set of ITL countries for which consistent data could be gathered, and for which a date for setting inflation targeting could be discerned. The object of the paper is to study the impact of IT on actual inflation and inflation expectations. We utilise intervention analysis to time series on inflation for a number of ITL countries, which have actually implemented IT. In doing so our main concern is to assess whether, due to the IT intervention, there has been a significant change in the trend corresponding to these series and the extent to which inflation rates have actually been 'locked-in' at low levels after the implementation of IT. Two major results emerge. The first is that ITL countries have been successful in 'locking-in' inflation rates. The second is that non-IT countries have also been successful in terms of the 'lock-in' effect. Our overall conclusion, then, is that other factors in addition to IT underpin the apparent success of the control of inflation.
{"title":"Assessing the Performance of Inflation Targeting Lite Countries","authors":"Alvaro Angeriz, P. Arestis","doi":"10.1111/j.1467-9701.2007.01056.x","DOIUrl":"https://doi.org/10.1111/j.1467-9701.2007.01056.x","url":null,"abstract":"This paper deals with what is referred to in the literature as the 'Inflation Targeting Lite' (ITL) countries. These are a category of emerging countries, whose main characteristics are that they are least developed and small economies that pursue IT. They use inflation targeting to define their monetary policy framework, but for a number of reasons they are not in a position to put top priority to IT in relation to other objectives. This paper deals with a set of ITL countries for which consistent data could be gathered, and for which a date for setting inflation targeting could be discerned. The object of the paper is to study the impact of IT on actual inflation and inflation expectations. We utilise intervention analysis to time series on inflation for a number of ITL countries, which have actually implemented IT. In doing so our main concern is to assess whether, due to the IT intervention, there has been a significant change in the trend corresponding to these series and the extent to which inflation rates have actually been 'locked-in' at low levels after the implementation of IT. Two major results emerge. The first is that ITL countries have been successful in 'locking-in' inflation rates. The second is that non-IT countries have also been successful in terms of the 'lock-in' effect. Our overall conclusion, then, is that other factors in addition to IT underpin the apparent success of the control of inflation.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115956297","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2007-11-05DOI: 10.1111/j.1468-0106.2007.00369.x
H. Ohta, Hironobu Nakagawa, Yong Wang
When speculation causes share prices to fluctuate, even the best speculators may do 'hardly better than the comprehensive common-stock averages' (Samuelson). We further demonstrate in this paper that non-speculators can indeed benefit, in terms of both utility and wealth, from speculative price fluctuations by choosing their portfolio optimally. In particular, we show both how much and how fast non-speculators' wealth can accumulate, presumably at speculators' expenses, over periods of price fluctuations. We also show a seemingly paradoxical outcome where a rational individual would rejoice more when stock prices fall than when they rise by the same (absolute) amounts. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd
{"title":"Economics of Stock-Price Vibrations: Riding Speculative Waves Without Speculation","authors":"H. Ohta, Hironobu Nakagawa, Yong Wang","doi":"10.1111/j.1468-0106.2007.00369.x","DOIUrl":"https://doi.org/10.1111/j.1468-0106.2007.00369.x","url":null,"abstract":"When speculation causes share prices to fluctuate, even the best speculators may do 'hardly better than the comprehensive common-stock averages' (Samuelson). We further demonstrate in this paper that non-speculators can indeed benefit, in terms of both utility and wealth, from speculative price fluctuations by choosing their portfolio optimally. In particular, we show both how much and how fast non-speculators' wealth can accumulate, presumably at speculators' expenses, over periods of price fluctuations. We also show a seemingly paradoxical outcome where a rational individual would rejoice more when stock prices fall than when they rise by the same (absolute) amounts. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122292751","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Like other macroeconomic variables, residential investment has become much less volatile since the mid-1980s (recent experience notwithstanding.) This paper explores the role of structural change in this decline. Since the early 1980s there have been many changes in the underlying structure of the economy, including those in the mortgage market which have made it easier to acquire a home. We examine how these changes affect residential investment volatility in a life-cycle model consistent with micro evidence on housing choices. We find that a decline in the rate of household formation, increased delay in marriage, and an increase in the cross-sectional variance of earnings drive the decline in volatility. Our findings provide support for the view that the “Great Moderation” in aggregate fluctuations is not just due to smaller aggregate shocks, but is driven at least in part by structural change.
{"title":"First-Time Home Buyers and Residential Investment Volatility","authors":"Jonas D. M. Fisher, M. Gervais","doi":"10.2139/ssrn.1083724","DOIUrl":"https://doi.org/10.2139/ssrn.1083724","url":null,"abstract":"Like other macroeconomic variables, residential investment has become much less volatile since the mid-1980s (recent experience notwithstanding.) This paper explores the role of structural change in this decline. Since the early 1980s there have been many changes in the underlying structure of the economy, including those in the mortgage market which have made it easier to acquire a home. We examine how these changes affect residential investment volatility in a life-cycle model consistent with micro evidence on housing choices. We find that a decline in the rate of household formation, increased delay in marriage, and an increase in the cross-sectional variance of earnings drive the decline in volatility. Our findings provide support for the view that the “Great Moderation” in aggregate fluctuations is not just due to smaller aggregate shocks, but is driven at least in part by structural change.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"238 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123040080","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators. The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks." At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees -- some explicit and others implicit. Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.
{"title":"New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability","authors":"D. Gray, Z. Bodie, R. C. Merton","doi":"10.3386/W13607","DOIUrl":"https://doi.org/10.3386/W13607","url":null,"abstract":"This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators. The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external \"shocks.\" At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees -- some explicit and others implicit. Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well-suited to capturing such \"non-linearities\" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127857380","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Aaron N. Mehrotra, T. Peltonen, Alvaro Santos Rivera
We model provincial inflation in China during the reform period. In particular, we are interested in the ability of the hybrid New Keynesian Phillips Curve (NKPC) to capture the inflation process at the provincial level. The study highlights differences in inflation formation and shows that the NKPC provides a reasonable description of the inflation process only for the coastal provinces. A probit analysis suggests that the forward-looking inflation component and the output gap are important inflation drivers in provinces that have advanced most in marketisation of the economy and have most likely experienced excess demand pressures. These results have implications for the relative effectiveness of monetary policy across the Chinese provinces.
{"title":"Modelling Inflation in China - A Regional Perspective","authors":"Aaron N. Mehrotra, T. Peltonen, Alvaro Santos Rivera","doi":"10.2139/ssrn.1010629","DOIUrl":"https://doi.org/10.2139/ssrn.1010629","url":null,"abstract":"We model provincial inflation in China during the reform period. In particular, we are interested in the ability of the hybrid New Keynesian Phillips Curve (NKPC) to capture the inflation process at the provincial level. The study highlights differences in inflation formation and shows that the NKPC provides a reasonable description of the inflation process only for the coastal provinces. A probit analysis suggests that the forward-looking inflation component and the output gap are important inflation drivers in provinces that have advanced most in marketisation of the economy and have most likely experienced excess demand pressures. These results have implications for the relative effectiveness of monetary policy across the Chinese provinces.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116901929","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2007-11-01DOI: 10.1111/J.1467-937X.2008.00494.X
G. Lorenzoni
This paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks. In particular, it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post. Even though, from a first-best perspective the equilibrium always displays under-borrowing, from a second-best point of view excessive borrowing can arise. The inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market. This generates a pecuniary externality that is not internalized in private contracts. The model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis.
{"title":"Inefficient Credit Booms","authors":"G. Lorenzoni","doi":"10.1111/J.1467-937X.2008.00494.X","DOIUrl":"https://doi.org/10.1111/J.1467-937X.2008.00494.X","url":null,"abstract":"This paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks. In particular, it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post. Even though, from a first-best perspective the equilibrium always displays under-borrowing, from a second-best point of view excessive borrowing can arise. The inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market. This generates a pecuniary externality that is not internalized in private contracts. The model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"213 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123067661","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2007-11-01DOI: 10.5089/9781451868210.001
Mauro Mecagni, R. Atoyan, D. Hofman, D. Tzanninis
This paper examines the duration of capital account crises. We develop a new index to identify both the start and the end of these crises. Applying the index to a sample of 18 crisis episodes, we derive stylized facts on crisis duration and review the economic and financial circumstances that prevailed at the dusk of crises, a relatively unexplored area. We use the econometric technique of duration analysis to gauge the relative importance of various factors affecting the probability of exiting a crisis. We find that initial and external conditions are key determinants. But fiscal and monetary policies can also help shorten crisis duration.
{"title":"The Duration of Capital Account Crises - An Empirical Analysis","authors":"Mauro Mecagni, R. Atoyan, D. Hofman, D. Tzanninis","doi":"10.5089/9781451868210.001","DOIUrl":"https://doi.org/10.5089/9781451868210.001","url":null,"abstract":"This paper examines the duration of capital account crises. We develop a new index to identify both the start and the end of these crises. Applying the index to a sample of 18 crisis episodes, we derive stylized facts on crisis duration and review the economic and financial circumstances that prevailed at the dusk of crises, a relatively unexplored area. We use the econometric technique of duration analysis to gauge the relative importance of various factors affecting the probability of exiting a crisis. We find that initial and external conditions are key determinants. But fiscal and monetary policies can also help shorten crisis duration.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116061008","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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