Pub Date : 2025-11-01Epub Date: 2025-10-07DOI: 10.1016/j.jedc.2025.105195
Fanny Cartellier , Peter Tankov , Olivier David Zerbib
We show how investors with pro-environmental preferences and who penalize revelations of past environmental controversies impact corporate greenwashing practices. Through a dynamic equilibrium model, we characterize firms' optimal environmental communication, green investments, and greenwashing policies, and we explain the forces driving them. Notably, under a condition that we explicitly characterize, companies greenwash to inflate their environmental rating above their fundamental environmental value, with an effort and impact increasing with investors' pro-environmental preferences. However, investment decisions that penalize greenwashing, policies increasing transparency, and environment-related technological innovation contribute to mitigating corporate greenwashing. We provide empirical support for our results.
{"title":"Can investors curb greenwashing?","authors":"Fanny Cartellier , Peter Tankov , Olivier David Zerbib","doi":"10.1016/j.jedc.2025.105195","DOIUrl":"10.1016/j.jedc.2025.105195","url":null,"abstract":"<div><div>We show how investors with pro-environmental preferences and who penalize revelations of past environmental controversies impact corporate greenwashing practices. Through a dynamic equilibrium model, we characterize firms' optimal environmental communication, green investments, and greenwashing policies, and we explain the forces driving them. Notably, under a condition that we explicitly characterize, companies greenwash to inflate their environmental rating above their fundamental environmental value, with an effort and impact increasing with investors' pro-environmental preferences. However, investment decisions that penalize greenwashing, policies increasing transparency, and environment-related technological innovation contribute to mitigating corporate greenwashing. We provide empirical support for our results.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105195"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145268732","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01Epub Date: 2025-09-15DOI: 10.1016/j.jedc.2025.105181
A. Carvajal , H. Zhou
In an economy with uncertainty and asymmetric information, suppose that some agents learn the relation between fundamentals and prices by observing past market outcomes. They refine their understanding as they become more experienced, but their past “errors” contaminate the information they receive. Does this process converge to the “perfect” understanding of the market that underlies rational expectation equilibria? We address this question in a simplified setting that allows for explicit computation of the learning process: a two-state economy with logarithmic utilities and no background risk. Our first result is that as long as the wealth of the uninformed agents is less than half the aggregate wealth of the economy, the learning process indeed converges to rational expectations. This convergence, however, is non-monotonic, and the market oscillates between phases of excess price volatility and phases of excess volume of trade. The learning process, in addition, is costly for the uninformed agents. We interpret our results as underscoring the fragility of ree: markets operate orderly only when speculation is less significant than fundamental trade.
{"title":"Learning to bet (rationally) with logs","authors":"A. Carvajal , H. Zhou","doi":"10.1016/j.jedc.2025.105181","DOIUrl":"10.1016/j.jedc.2025.105181","url":null,"abstract":"<div><div>In an economy with uncertainty and asymmetric information, suppose that some agents learn the relation between fundamentals and prices by observing past market outcomes. They refine their understanding as they become more experienced, but their past “errors” contaminate the information they receive. Does this process converge to the “perfect” understanding of the market that underlies rational expectation equilibria? We address this question in a simplified setting that allows for explicit computation of the learning process: a two-state economy with logarithmic utilities and no background risk. Our first result is that as long as the wealth of the uninformed agents is less than half the aggregate wealth of the economy, the learning process indeed converges to rational expectations. This convergence, however, is non-monotonic, and the market oscillates between phases of excess price volatility and phases of excess volume of trade. The learning process, in addition, is costly for the uninformed agents. We interpret our results as underscoring the fragility of <span>ree</span>: markets operate orderly only when speculation is less significant than fundamental trade.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105181"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145099131","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01Epub Date: 2025-10-02DOI: 10.1016/j.jedc.2025.105194
Hamilton Galindo Gil , Liu Mendoza Perez
We analyze dollarization hysteresis in emerging economies, linking the persistent demand for foreign currency to past inflation experiences and the perceived risk of returning to high inflation episodes. Using data from 116 emerging economies, we show that dollarization remains high even after disinflation, particularly in countries with histories of extreme inflation. We uncover three stylized facts: (i) high inflation episodes are frequent and severe; (ii) they coincide with sharp currency depreciations, triggering shifts to dollar deposits; and (iii) dollarization persists long after inflation stabilizes. Motivated by these facts, we develop a portfolio-choice model where agents allocate between domestic and dollar deposits. We show that although a hedge demand—associated with the observed correlation between inflation and depreciation in low-inflation economies—plays a role, it is not sufficient to generate a positive allocation to dollar deposits. By incorporating inflation disasters and fear of inflation—persistent pessimism shaped by past instability—we account for dollarization's resilience. Together, risk hedging, disaster risk, and belief heterogeneity explain why dollarization persists in low-inflation emerging economies.
{"title":"Dollarization hysteresis, inflation jumps, and fear of inflation","authors":"Hamilton Galindo Gil , Liu Mendoza Perez","doi":"10.1016/j.jedc.2025.105194","DOIUrl":"10.1016/j.jedc.2025.105194","url":null,"abstract":"<div><div>We analyze dollarization hysteresis in emerging economies, linking the persistent demand for foreign currency to past inflation experiences and the perceived risk of returning to high inflation episodes. Using data from 116 emerging economies, we show that dollarization remains high even after disinflation, particularly in countries with histories of extreme inflation. We uncover three stylized facts: (i) high inflation episodes are frequent and severe; (ii) they coincide with sharp currency depreciations, triggering shifts to dollar deposits; and (iii) dollarization persists long after inflation stabilizes. Motivated by these facts, we develop a portfolio-choice model where agents allocate between domestic and dollar deposits. We show that although a hedge demand—associated with the observed correlation between inflation and depreciation in low-inflation economies—plays a role, it is not sufficient to generate a positive allocation to dollar deposits. By incorporating inflation disasters and fear of inflation—persistent pessimism shaped by past instability—we account for dollarization's resilience. Together, risk hedging, disaster risk, and belief heterogeneity explain why dollarization persists in low-inflation emerging economies.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105194"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145268730","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01Epub Date: 2025-10-11DOI: 10.1016/j.jedc.2025.105198
Santiago Forte
This study introduces a nonparametric approach to pricing credit default swaps (CDSs) and other single-name credit-risky securities. This method is notable for its simplicity, estimation speed, and flexibility. That is, it relies exclusively on closed-form solutions, which provide instantaneous results, and allows the user to reproduce any term structure of CDS spreads. I empirically assess its pricing performance by comparing it with an otherwise equivalent semiparametric (piecewise constant default probability) model that requires a series of root-search algorithms and represents the current market convention for marking-to-market CDS contracts. This analysis demonstrates that the new method also implies a reduction in mean percentage absolute pricing errors.
{"title":"A simple nonparametric approach to pricing credit default swaps","authors":"Santiago Forte","doi":"10.1016/j.jedc.2025.105198","DOIUrl":"10.1016/j.jedc.2025.105198","url":null,"abstract":"<div><div>This study introduces a nonparametric approach to pricing credit default swaps (CDSs) and other single-name credit-risky securities. This method is notable for its simplicity, estimation speed, and flexibility. That is, it relies exclusively on closed-form solutions, which provide instantaneous results, and allows the user to reproduce any term structure of CDS spreads. I empirically assess its pricing performance by comparing it with an otherwise equivalent semiparametric (piecewise constant default probability) model that requires a series of root-search algorithms and represents the current market convention for marking-to-market CDS contracts. This analysis demonstrates that the new method also implies a reduction in mean percentage absolute pricing errors.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105198"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145466327","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01Epub Date: 2025-09-19DOI: 10.1016/j.jedc.2025.105184
Sujan Bandyopadhyay , Domenico Ferraro
Workhorse business cycle models struggle to explain the magnitude and persistence of cyclical fluctuations in the labor share of output and employment in the United States. A model with search frictions in the labor market and a technology choice addresses this shortcoming. In this model, the production technology is a constant elasticity of substitution (CES) in the short run, while it converges to Cobb-Douglas in the long run. We calibrate the model using U.S. data and find that the inclusion of a technology choice with adjustment costs significantly enhances the model's ability to propagate productivity shocks, compared to a model with a fixed Cobb-Douglas technology. The calibrated model successfully replicates the overshooting of the labor share in the data.
{"title":"Persistence of labor share fluctuations and overshooting","authors":"Sujan Bandyopadhyay , Domenico Ferraro","doi":"10.1016/j.jedc.2025.105184","DOIUrl":"10.1016/j.jedc.2025.105184","url":null,"abstract":"<div><div>Workhorse business cycle models struggle to explain the magnitude and persistence of cyclical fluctuations in the labor share of output and employment in the United States. A model with search frictions in the labor market and a technology choice addresses this shortcoming. In this model, the production technology is a constant elasticity of substitution (CES) in the short run, while it converges to Cobb-Douglas in the long run. We calibrate the model using U.S. data and find that the inclusion of a technology choice with adjustment costs significantly enhances the model's ability to propagate productivity shocks, compared to a model with a fixed Cobb-Douglas technology. The calibrated model successfully replicates the overshooting of the labor share in the data.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105184"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145120574","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01Epub Date: 2025-10-20DOI: 10.1016/j.jedc.2025.105200
Volker Hahn, Annika Schürle
We develop an overlapping-generations model with sticky wages and prices to study the socially optimal inflation rate in the long term. While sticky prices and firms’ productivity growth would yield a positive optimal inflation rate, we show that sticky wages, in combination with empirically plausible changes in productivity over workers’ lives, make moderate deflation optimal. We also study intergenerational conflicts and show that younger voters gain from lower inflation, whereas older voters prefer higher inflation.
{"title":"How does inflation affect different age groups?","authors":"Volker Hahn, Annika Schürle","doi":"10.1016/j.jedc.2025.105200","DOIUrl":"10.1016/j.jedc.2025.105200","url":null,"abstract":"<div><div>We develop an overlapping-generations model with sticky wages and prices to study the socially optimal inflation rate in the long term. While sticky prices and firms’ productivity growth would yield a positive optimal inflation rate, we show that sticky wages, in combination with empirically plausible changes in productivity over workers’ lives, make moderate deflation optimal. We also study intergenerational conflicts and show that younger voters gain from lower inflation, whereas older voters prefer higher inflation.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105200"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145417535","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01Epub Date: 2025-09-26DOI: 10.1016/j.jedc.2025.105185
Rüdiger Bachmann , Christian Bayer , Martin Kornejew
This paper examines how households adjusted their consumption behavior in response to COVID-19 infection risk during the early phase of the pandemic and without consumption lockdowns. We use a monthly consumption survey specifically designed by the German Statistical Office, covering the second wave of COVID-19 infections from September to November 2020. Households reduced their consumption expenditures on durable goods and social activities by 24 percent and 36 percent, respectively, in response to one hundred additional infections per one hundred thousand inhabitants per week. The effect was concentrated among the elderly, whose mortality risk from COVID-19 infection was arguably the highest.
{"title":"Pandemic consumption","authors":"Rüdiger Bachmann , Christian Bayer , Martin Kornejew","doi":"10.1016/j.jedc.2025.105185","DOIUrl":"10.1016/j.jedc.2025.105185","url":null,"abstract":"<div><div>This paper examines how households adjusted their consumption behavior in response to COVID-19 infection risk during the early phase of the pandemic and without consumption lockdowns. We use a monthly consumption survey specifically designed by the German Statistical Office, covering the second wave of COVID-19 infections from September to November 2020. Households reduced their consumption expenditures on durable goods and social activities by 24 percent and 36 percent, respectively, in response to one hundred additional infections per one hundred thousand inhabitants per week. The effect was concentrated among the elderly, whose mortality risk from COVID-19 infection was arguably the highest.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105185"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145268734","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We identify a minimal set of components to generate price stickiness by a laboratory experiment on an oligopolistic price setting game. Our design involves repeated aggregate shocks to the market but features no uncertainty in their timing and magnitude, no real-nominal distinction, or no need to compute the best response to the prices of the other subjects. We find persistent price stickiness when prices are strategic complements and fully anticipated shocks lower the equilibrium price. By exploring the causes of the observed downward stickiness, we find that it stems from strategic uncertainty regarding beliefs about others' prices, compounded by strategic complementarity and an asymmetric payoff structure.
{"title":"Price stickiness and strategic uncertainty: An experimental study","authors":"Yukihiko Funaki , Kohei Kawamura , Kozo Ueda , Nobuyuki Uto","doi":"10.1016/j.jedc.2025.105186","DOIUrl":"10.1016/j.jedc.2025.105186","url":null,"abstract":"<div><div>We identify a minimal set of components to generate price stickiness by a laboratory experiment on an oligopolistic price setting game. Our design involves repeated aggregate shocks to the market but features no uncertainty in their timing and magnitude, no real-nominal distinction, or no need to compute the best response to the prices of the other subjects. We find persistent price stickiness when prices are strategic complements and fully anticipated shocks lower the equilibrium price. By exploring the causes of the observed downward stickiness, we find that it stems from strategic uncertainty regarding beliefs about others' prices, compounded by strategic complementarity and an asymmetric payoff structure.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105186"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145222663","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a theoretical dynamic trading model with heterogeneous agents to examine how introducing a dark pool—running in parallel to a traditional lit exchange organized as a limit order market—primarily affects execution risk and price settings, and how these changes, in turn, influence the welfare of different trader types. Our model’s computational simulations show that the addition of a dark pool reduces liquidity on the traditional lit exchange. This liquidity reduction is evidenced by longer order execution times and a wider effective spread in the traditional lit exchange, driven by the migration of trading activity to the dark pool. We also identify two opposing channels that influence traders’ performance: the execution delay channel and the price improvement channel. Regarding the execution delay channel, dark orders lead to longer execution times for impatient traders (who seek to trade quickly) and shorter execution times for speculators (who wait for favorable execution prices relative to the asset’s fundamental value). This is because dark orders generally have longer (shorter) execution times than market (limit) orders. Regarding the price improvement channel, dark orders offer more favorable prices for impatient traders than market orders, while dark orders can result in less advantageous pricing for speculators. This is because dark orders are typically executed at the midquote of the bid and ask prices from the limit order market. Ultimately, the effect on execution risk, price improvement, and welfare for both impatient traders and speculators depends on which of these two opposing channels prevails.
{"title":"Execution risk and price improvement under dark pools","authors":"Alejandro Bernales , Daniel Ladley , Evangelos Litos , Marcela Valenzuela","doi":"10.1016/j.jedc.2025.105163","DOIUrl":"10.1016/j.jedc.2025.105163","url":null,"abstract":"<div><div>We develop a theoretical dynamic trading model with heterogeneous agents to examine how introducing a dark pool—running in parallel to a traditional lit exchange organized as a limit order market—primarily affects execution risk and price settings, and how these changes, in turn, influence the welfare of different trader types. Our model’s computational simulations show that the addition of a dark pool reduces liquidity on the traditional lit exchange. This liquidity reduction is evidenced by longer order execution times and a wider effective spread in the traditional lit exchange, driven by the migration of trading activity to the dark pool. We also identify two opposing channels that influence traders’ performance: the execution delay channel and the price improvement channel. Regarding the execution delay channel, dark orders lead to longer execution times for impatient traders (who seek to trade quickly) and shorter execution times for speculators (who wait for favorable execution prices relative to the asset’s fundamental value). This is because dark orders generally have longer (shorter) execution times than market (limit) orders. Regarding the price improvement channel, dark orders offer more favorable prices for impatient traders than market orders, while dark orders can result in less advantageous pricing for speculators. This is because dark orders are typically executed at the midquote of the bid and ask prices from the limit order market. Ultimately, the effect on execution risk, price improvement, and welfare for both impatient traders and speculators depends on which of these two opposing channels prevails.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105163"},"PeriodicalIF":2.3,"publicationDate":"2025-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144886056","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-10-01Epub Date: 2025-09-15DOI: 10.1016/j.jedc.2025.105182
Tirupam Goel
Should there be few large or several small banks? Large banks benefit from scale economies, but their default can be systemic. This paper develops a macroeconomic model with heterogeneous banks to study the efficiency versus financial-stability trade-off. Scale economies and default losses are calibrated using micro-data. Unlike representative bank models, a novel banking-dynamics channel of regulation emerges – the endogenous response in banks' size-distribution matters for welfare. Capital regulation that equalizes leverage, default rate, or expected loss across banks fails to account for the size-dependent trade-off. Optimal regulation is size-dependent, features a hump-shaped welfare response, and induces more medium-sized banks.
{"title":"Efficient or systemic banks: Can regulation strike a deal?","authors":"Tirupam Goel","doi":"10.1016/j.jedc.2025.105182","DOIUrl":"10.1016/j.jedc.2025.105182","url":null,"abstract":"<div><div>Should there be few large or several small banks? Large banks benefit from scale economies, but their default can be systemic. This paper develops a macroeconomic model with heterogeneous banks to study the efficiency versus financial-stability trade-off. Scale economies and default losses are calibrated using micro-data. Unlike representative bank models, a novel banking-dynamics channel of regulation emerges – the endogenous response in banks' size-distribution matters for welfare. Capital regulation that equalizes leverage, default rate, or expected loss across banks fails to account for the size-dependent trade-off. Optimal regulation is size-dependent, features a hump-shaped welfare response, and induces more medium-sized banks.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105182"},"PeriodicalIF":2.3,"publicationDate":"2025-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145099745","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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