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Rational Expectations (rational + expectation)
Terms modified by Rational Expectations Selected AbstractsSolving, Estimating, and Selecting Nonlinear Dynamic Models Without the Curse of DimensionalityECONOMETRICA, Issue 2 2010Viktor Winschel We present a comprehensive framework for Bayesian estimation of structural nonlinear dynamic economic models on sparse grids to overcome the curse of dimensionality for approximations. We apply sparse grids to a global polynomial approximation of the model solution, to the quadrature of integrals arising as rational expectations, and to three new nonlinear state space filters which speed up the sequential importance resampling particle filter. The posterior of the structural parameters is estimated by a new Metropolis,Hastings algorithm with mixing parallel sequences. The parallel extension improves the global maximization property of the algorithm, simplifies the parameterization for an appropriate acceptance ratio, and allows a simple implementation of the estimation on parallel computers. Finally, we provide all algorithms in the open source software JBendge for the solution and estimation of a general class of models. [source] Do Markets Favor Agents able to Make Accurate Predictions?ECONOMETRICA, Issue 6 2000Alvaro Sandroni Blume and Easley (1992) show that if agents' have the same savings rule, those who maximize the expected logarithm of next period's outcomes will eventually hold all wealth (i.e. are ,most prosperous'). However, if no agent adopts this rule then the most prosperous are not necessarily those who make the most accurate predictions. Thus, agents who make inaccurate predictions need not be driven out of the market. In this paper, it is shown that, among agents who have the same intertemporal discount factor (and who choose savings endogenously), the most prosperous are those who make accurate predictions. Hence, convergence to rational expectations obtains because agents who make inaccurate predictions are driven out of the market. [source] Smooth Transition Models and Arbitrage ConsistencyECONOMICA, Issue 287 2005David A. Peel Slow adjustment of real exchange rate towards equilibrium in linear models has long puzzled researchers, stimulating the adoption of nonlinear models. The exponential smooth transition model has been particularly successful, providing faster adjustment speeds. This paper discusses some of its theoretical limitations, for example that expectations are adaptive. We propose a new nonlinear model conceptually superior to the ESTAR model since it is consistent with rational expectations. One of its advantages is that it can be solved and estimated by nonlinear least squares. Using monthly post-1973 real exchange rate data, we show that the model implies even faster speeds of adjustment. [source] Using Taylor Rules to Understand European Central Bank Monetary PolicyGERMAN ECONOMIC REVIEW, Issue 3 2007Stephan Sauer Taylor rule; European Central Bank; real-time data Abstract. Over the last decade, the simple instrument policy rule developed by Taylor has become a popular tool for evaluating the monetary policy of central banks. As an extensive empirical analysis of the European Central Bank's (ECB) past behaviour still seems to be in its infancy, we estimate several instrument policy reaction functions for the ECB to shed some light on actual monetary policy in the euro area under the presidency of Wim Duisenberg and answer questions like whether the ECB has actually followed a stabilizing or a destabilizing rule so far. Looking at contemporaneous Taylor rules, the evidence presented suggests that the ECB is accommodating changes in inflation and hence follows a destabilizing policy. However, this impression seems to be largely due to the lack of a forward-looking perspective in such specifications. Either assuming rational expectations and using a forward-looking specification, or using expectations as derived from surveys result in Taylor rules that do imply a stabilizing role of the ECB. The use of real-time industrial production data does not seem to play such a significant role as in the case of the United States. [source] The (Ir)Relevance of Militarized Interstate Disputes for International TradeINTERNATIONAL STUDIES QUARTERLY, Issue 1 2002Quan Li Do military disputes between two states suppress trade between their firms? Both liberals and realists suggest that conflict occurrence reduces bilateral trade. However, using a rational expectation argument, Morrow (1999) proposes that conflict occurrence and trade should be uncorrelated statistically. Empirical evidence to date both supports expectations and appears contradictory and inconclusive. We offer a theory that reconciles, encompasses, and extends the competing arguments, explaining the empirical inconsistency. By incorporating rational expectations and uncertainty into the profit calculus of trading firms, the theory identifies the conditions under which various properties of a conflict (onset, duration, and severity) should and should not reduce bilateral trade ex ante and ex post. We test the ex post effects in two datasets that cover either a wider range of countries or a longer time period than previous quantitative studies. Both an unexpected MID onset and the unexpectedness of a MID onset reduce bilateral trade substantially ex post. Preliminary tests suggest that MID duration and severity also affect bilateral trade ex post. We conclude by discussing the implications of our research. [source] Autoregressive conditional heteroscedasticity in commodity spot pricesJOURNAL OF APPLIED ECONOMETRICS, Issue 2 2001Stacie Beck Muth's (1961) rational expectations model of commodity markets implies that inventory carryover creates ARCH processes in prices. The model also indicates that the expected price variance is an explanatory variable in price regressions. Hypotheses were tested on price data of twenty commodities using a variation of Engle et al. (1987) ARCH,M technique. An ARCH process was found in storable and not in non-storable commodity data, as expected. However, changes in expected price variance have no significant impact on price. Copyright © 2001 John Wiley & Sons, Ltd. [source] The Great Capitol Hill Baby Sitting Co-op: Anecdote or Evidence for the Optimum Quantity of Money?JOURNAL OF MONEY, CREDIT AND BANKING, Issue 6 2007THORSTEN HENS microeconomic foundation of money; optimum quantity of money; experimental monetary economics This paper studies a centralized market with idiosyncratic uncertainty and money as a medium of exchange from a theoretical as well as an experimental perspective. In our model, prices are fixed and markets are cleared by rationing. We prove the existence of stationary monetary equilibria and of an optimum quantity of money. The rational solution of our model, which is based on the assumption of individual rationality and rational expectations, is compared with actual behavior in a laboratory experiment. The theoretical results are strongly supported by this experiment. [source] AS-AD REVISITED: OVERSHOOTING ADJUSTMENT DYNAMICS UNDER NAÏVE EXPECTATIONSMETROECONOMICA, Issue 4 2008Harald Badinger ABSTRACT We analyse the adjustment dynamics from a short-term to a medium-term equilibrium in a standard AS-AD model à la Blanchard (2006, Macroeconomics, 4th edn, Prentice-Hall, Upper Saddle River, NJ) for an open economy with fixed and flexible exchange rates. An explicit analysis suggests the local stability of the medium-term equilibrium. However, an overshooting adjustment dynamics is possible for the exchange rate, a result that directly relates to the famous Dornbusch (1976, Journal of Political Economy, 84, pp. 1161,1176) analysis. In contrast to the latter, in the Blanchard framework it is obtained without assuming rational expectations and without relying upon saddle-path stability. [source] OPTIMAL DISCOUNTING IN CONTROL PROBLEMS THAT SPAN MULTIPLE GENERATIONSNATURAL RESOURCE MODELING, Issue 3 2005FRANK CALIENDO ABSTRACT. The principal contribution of this paper is the linking together of separate control problems across multiple generations using the bequest motive, intergenerational altruism, rational expectations, and solution boundary conditions. We demonstrate that discounting at the market rate of interest is an endogenous characteristic of a general equilibrium, optimal control problem that spans multiple generations. Within the confines of our model, we prove that it is optimal to discount at the market rate of interest the social benefits to distant generations from immediate clean up at toxic waste sites if the current generation that bears the cleanup cost is perfectly altruistic towards future generations. Also, we show that this result holds for alternative assumptions regarding pure time preference. Moreover, the result holds regardless of whether selfish interim generations attempt to undo the provisions made for distant generations. In our distortion-free deterministic model, the evidence for intergenerational discounting at the market rate of interest is compelling. [source] Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model,OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 4 2010David Aristei Abstract In this paper we test the existence of forward-looking behaviour in a multivariate model for alcohol and tobacco consumption. The theoretical framework, based on a dynamic adjustment cost model with forward-looking behaviour, is enhanced to include the intertemporal interactions between the two goods. The analysis of the within-period preferences completes the intertemporal model, allowing to evaluate the static substitutability/complementarity relationships. The empirical strategy consists in a two-step estimation procedure. In a first stage, we obtain the parameters of the demand system, while in a second stage Euler equations are estimated. Results, based on a cohort data set constructed from a series of cross-sections of the Italian Household Budget Survey, reveal a significant complementarity relationship between alcohol and tobacco. Estimation of the Euler equations does not lead to rejection of the hypothesis of intertemporal dependence, providing evidence for a forward-looking behaviour in alcohol and tobacco consumption. Moreover, we find significant intertemporal interactions that support the adjustment cost setting in a multivariate model with rational expectations. [source] On the Epidemiological Microfoundations of Sticky Information,OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 5 2009Ricardo Nunes Abstract We estimate and compare two models in which households periodically update their expectations. The first model assumes that households update their expectations towards survey measures. In the second model, households update their expectations towards rational expectations (RE). While the literature has used these specifications indistinguishably, we argue that there are important differences. The two models imply different updating probabilities, and the data seem to prefer the second one. We then analyse the properties of both models in terms of mean expectations, median expectations, and a measure of disagreement among households. The model with periodical updates towards RE also seems to fit the data better along these dimensions. [source] Weak Identification of Forward-looking Models in Monetary Economics,OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 2004Sophocles Mavroeidis Abstract Recently, single-equation estimation by the generalized method of moments (GMM) has become popular in the monetary economics literature, for estimating forward-looking models with rational expectations. We discuss a method for analysing the empirical identification of such models that exploits their dynamic structure and the assumption of rational expectations. This allows us to judge the reliability of the resulting GMM estimation and inference and reveals the potential sources of weak identification. With reference to the New Keynesian Phillips curve of Galí and Gertler [Journal of Monetary Economics (1999) Vol. 44, 195] and the forward-looking Taylor rules of Clarida, Galí and Gertler [Quarterly Journal of Economics (2000) Vol. 115, 147], we demonstrate that the usual ,weak instruments' problem can arise naturally, when the predictable variation in inflation is small relative to unpredictable future shocks (news). Hence, we conclude that those models are less reliably estimated over periods when inflation has been under effective policy control. [source] Investor Rationality: Evidence from U.K. Property Capitalization RatesREAL ESTATE ECONOMICS, Issue 2 2005Patric H. Hendershott Recent analyses have suggested the irrationality of Australian and U.S. office property investors in that they have failed to raise capitalization rates sufficiently at rental cyclical peaks to account for the obvious mean reversion in real rents and thus have significantly overvalued properties. In this article, we present a model of capitalization rates and explain U.K. office and retail cap rates in an error correction framework. We demonstrate that our proxies for expected real rental growth do, in fact, forecast future real growth and that cap rates reflect rational expectations of mean reversion in future real cash flows. Moreover, property cap rates are linked to the equity capitalization rate (dividend/price ratio) and expected real dividend growth in the expected manner. [source] Product Market Competition, Insider Trading, and Stock Market EfficiencyTHE JOURNAL OF FINANCE, Issue 1 2010JOEL PERESS ABSTRACT How does competition in firms' product markets influence their behavior in equity markets? Do product market imperfections spread to equity markets? We examine these questions in a noisy rational expectations model in which firms operate under monopolistic competition while their shares trade in perfectly competitive markets. Firms use their monopoly power to pass on shocks to customers, thereby insulating their profits. This encourages stock trading, expedites the capitalization of private information into stock prices and improves the allocation of capital. Several implications are derived and tested. [source] Inflation Targeting, Exchange Rate Volatility and International Policy CoordinationTHE MANCHESTER SCHOOL, Issue 4 2002Fernando Alexandre In a linear rational expectations two,country model, using an aggregate demand, aggregate supply framework, we analyse the effects of the adoption of an inflation,targeting regime on exchange rate volatility and the possible scope for policy coordination. This analysis is conducted using optimized interest rate policy rules within a calibrated model. Rules for interest rates that respond either to exchange rates or to portfolio shocks give improved performance and permit gains from international coordination. Optimized Taylor rules perform relatively well. [source] Batch process and transfer decisions in foreign market: a real options modelAPPLIED STOCHASTIC MODELS IN BUSINESS AND INDUSTRY, Issue 2 2003Chin-Tsai Lin Abstract This investigation extends the constant elasticity of substitution (CES) batch process production model of Lin et al. (J. Management syst. 2002; 9: 173) for an uncertain exchange rate by considering an export-oriented manufacturer who can decide to switch freely between domestic and foreign locations. The export-oriented manufacturer is risk averse and has rational expectations. As the entry cost declines, the export-oriented manufacturer's entry trigger for the CES production function increases for transferring from a domestic and to a foreign location. Additionally, the manufacturer's exit trigger for CES production function increases for transferring from a foreign and to a domestic location. Moreover, the exit cost resembles the entry cost. Copyright © 2002 John Wiley & Sons, Ltd. [source] EXCHANGE RATE STABILISATION, LEARNING AND THE TAYLOR PRINCIPLEAUSTRALIAN ECONOMIC PAPERS, Issue 2 2007Article first published online: 30 MAY 200, HEINZ-PETER SPAHN The paper explores whether central banks can keep their interest rates independent from given foreign rates, and to what extent interest policies designed to stabilise nominal exchange rate changes can be applied instead of, or in addition to, the traditional interest rate response to inflation gaps. This modification of a Taylor Rule is analysed in a simple macro model with some New Keynesian features. Information is imperfect; agents cannot build rational expectations but try to learn ,true' market relations. Results show that the Taylor Principle can be generalised in an open economy with flexible exchange rates. [source] | ||||||||||||||||||||||