Journal of Economic Dynamics & Control最新文献

We propose a two-country model with heterogeneous beliefs to understand dynamics of nominal exchange rate. Facing a shock to monetary policy, disagreement between domestic and foreign investors shifts the relative wealth of investors – an essential part of the stochastic discount factor in our model – which then moves the foreign exchange rate. Calibrated to U.S. and U.K. data, our model reveals that dispersion in beliefs predicts the future spot exchange rate, associates with the cross-section of currency risk premia, and comoves with the time-varying volatility in currency returns. Furthermore, our model suggests that domestic investors would hold fewer foreign currency-denominated bonds in countries with greater disagreements on monetary policy.

Our study examines the long-run evolutionary outcome emerging in scenarios where two populations engage in a demand game with three potential splits. These populations differ in the sample sizes used when best responding to retrieved information from the past. Our findings reveal the existence of a threshold in the setting's fairness (i.e., the fairness of unfair splits) such that, below the threshold (i.e., in an unfair setting), the emerging convention is the fair one, while above the threshold (i.e., in a fair setting), the emerging convention is unfair, favoring the agents with the longer sample size. The threshold gets lower as the difference in the sample sizes increases.

We develop a dynamic model where heterogeneous firms take investment decisions depending on their beliefs on future carbon prices. A policy-maker announces a forward-looking carbon price schedule but can decide to default on its plans if perceived transition risks are high. We show that weak policy commitment, especially when combined with ambitious mitigation announcements, can trap the economy into a vicious circle of credibility loss, carbon-intensive investments and increasing risk perceptions, ultimately leading to a failure of the transition. The presence of behavioural frictions and heterogeneity - both in capital investment choices and in the assessment of the policy-maker's credibility - has strong non-linear effects on the transition dynamics and the emergence of ‘high-carbon traps’. We identify analytical conditions leading to a successful transition and provide a numerical application for the EU economy.

In two-strategy coordination games with distinct payoff- and risk-dominant equilibria, existing results show that the inefficient risk-dominant equilibrium is uniquely selected under many evolutionary dynamics. In the above class of coordination games, we study the effect of introducing a bilingual strategy that is compatible with both of the existing strategies. An agent playing the bilingual strategy incurs an additional adoption cost but never miscoordinates with any other agent. We show that if the adoption cost of the bilingual strategy is low, then the efficient payoff-dominant equilibrium can be uniquely selected under many evolutionary dynamics.

Using a corporate risk management model, we show that the investment risk sharing features of defined benefit corporate pensions help explain their aggressive investment policies as well as their diminishing popularity over time. For reasonable parameter values, the model successfully captures key empirical patterns including pension asset allocation and the relations among pension investment risk, corporate bankruptcy probability, and pension funding. Consistent with the observed trend, we find that switching from defined-benefit plans to defined-contribution plans enhances risk transfer and reduces firms' pension funding costs.

The rapid expansion of the global cryptocurrency market raises the question of whether there are stable relationships between the prices of representative cryptocurrencies and economic indicators capturing expectations of future monetary policy. Multivariate time-series analysis reveals a single but significant cointegrating relationship between cryptocurrencies and the US term spread. This evidence allows us to explore cointegration-based control analysis of the data, which results in direct policy implications for the implementation of monetary policy allowing for the growing influence of digital assets. Structural breaks due to Tesla terminating the use of Bitcoin for car sales and the US inflation shock in 2022 must be handled, maintaining the stability of the relationship between cryptocurrencies and the term spread.

Reforming social security can improve efficiency and reduce future fiscal strain, emerging with the rising old-age longevity. However, it generates transitory fiscal cost and reduces insurance against income risk, which is embedded in current US social security. We show that if that transitory fiscal cost is financed through increased capital income taxation, the efficiency gains can be amplified sufficiently to outweigh the costs of the reform. Our result stems from the Ramsey rule: rising old-age longevity makes capital less responsive to tax hikes. We reconcile our results with the existing literature. Our results are of policy relevance for many advanced economies which currently feature redistributive and increasingly unbalanced social security due to rising old-age longevity.

What are the effects of unconventional monetary policy interventions on the economy? Empirical studies utilizing traditional SVAR models consistently report expansionary effects on output and prices while considering only a small number of variables. This paper is the first to present both narrative and empirical evidence indicating that these models are susceptible to policy foresight, as central banks frequently announce their unconventional policies months in advance. To address policy foresight, we estimate a Bayesian FAVAR model with an extended set of information for the Euro Area. Consistent with the existing literature, we find that an unconventional monetary policy shock boosts economic activity by increasing industrial production and reducing the unemployment rate. Notably, our estimated effects are both larger and more persistent compared to previous findings. Furthermore, the shock decreases interest rates, interest rate spreads, and government bond yields, leading to an improvement in financial conditions. In a noteworthy departure from previous research, we find significant uncertainty regarding the impacts on consumer and producer prices, highlighting the need for further research.

Recent evidence suggests that agents may base their forecasts for macroeconomic variables mainly on their personal life experiences. We connect this behavior to the concept of constant-gain learning (CGL) in macroeconomics. Our approach incorporates both heterogeneity in the life cycle via the perpetual youth model and learning from experience (LfE) into a linear expectations model where agents are born and die with some probability every period. For LfE, agents employ a decreasing-gain learning (DGL) model using data only from their own lifetimes. While agents are using DGL individually, we show that in the aggregate, expectations follow an approach related to CGL, where the gain is now tied to the probabilities of birth and death. We provide a precise characterization of the relationship between CGL and our model of perpetual youth learning (PYL) and show that PYL can well approximate CGL while pinning down the gain parameter with demographic data. Calibrating the model to U.S. demographics leads to gain parameters similar to those found in the literature. Further, variation in birth and death rates across countries and time periods can help explain the empirical time-variation in gains. Finally, we show that our approach is robust to alternative ways of modeling individual agent learning.

In this paper, we study the effect of the gamma positioning of dynamic hedgers on market quality through simulations. In our zero-intelligence model, the presence of dynamic hedgers enhances market liquidity under normal conditions. However, positive gamma helps sustain liquidity in stressed scenarios, while negative gamma depletes it. We find that an increase in the net gamma positioning of dynamic hedgers reduces volatility and increases market stability, whereas a negative gamma positioning increases volatility and makes the market more prone to failure. Price discovery typically worsens when dynamic hedgers become more prevalent, regardless of the sign of their positioning. Our findings imply that steering the net gamma position of dynamic hedgers can be considered a policy instrument to improve market quality, especially for instruments with low liquidity or low traded volume.