The Stagnation Regime of the New Keynesian Model and Current US Policy

In Evans, Guse, and Honkapohja (2008) the intended steady state is locally but not globally stable under adaptive learning, and unstable deflationary paths can arise after large pessimistic shocks to expectations. In the current paper a modified model is presented that includes a locally stable stagnation regime as a possible outcome arising from large expectation shocks. Policy implications are examined. Sufficiently large temporary increases in government spending can dislodge the economy from the stagnation regime and restore the natural stabilizing dynamics. More specific policy proposals are presented and discussed.

The EMU sovereign-debt crisis: fundamentals, expectations and contagion

In a research project conducted while visiting the DG-ECFIN in June 2010, we provided a detailed empirical investigation of the EMU sovereign-debt crisis up to February 2010.

When Do We Learn to Cooperate? The Role of Social Learning in Social Dilemmas

In this paper, I look at the interaction between social learning and cooperative behavior. I model this using a social dilemma game with publicly observed sequential actions and asymmetric information about pay offs. I find that some informed agents in this model act, individually and without collusion, to conceal the privately optimal action. Because the privately optimal action is socially costly the behavior of informed agents can lead to a Pareto improvement in a social dilemma. In my model I show that it is possible to get cooperative behavior if information is restricted to a small but non-zero proportion of the population. Moreover, such cooperative behavior occurs in a finite setting where it is public knowledge which agent will act last. The proportion of cooperative agents within the population can be made arbitrarily close to 1 by increasing the finite number of agents playing the game. Finally, I show that under a broad set of conditions that it is a Pareto improvement on a corner value, in the ex-ante welfare sense, for an interior proportion of the population to be informed.

Estimating United States Phillips Curves With Expectations Consistent With The Statistical Process Of Inflation

‘Modern’ Phillips curve theories predict inflation is an integrated, or near integrated, process. However, inflation appears bounded above and below in developed economies and so cannot be ‘truly’ integrated and more likely stationary around a shifting mean. If agents believe inflation is integrated as in the ‘modern’ theories then they are making systematic errors concerning the statistical process of inflation. An alternative theory of the Phillips curve is developed that is consistent with the ‘true’ statistical process of inflation. It is demonstrated that United States inflation data is consistent with the alternative theory but not with the existing ‘modern’ theories.

Expectations Traps and Coordination Failures with Discretionary Policymaking

Discretionary policymakers cannot manage private-sector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. To utilize the explanatory power of models with multiple equilibria it is first necessary to understand how an economy arrives to a particular equilibrium. In this paper we employ notions of learnability and self-enforceability to motivate and identify equilibria of particular interest. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our methods for identifying equilibria of interest. Importantly, unless the Pareto-preferred equilibrium is learnable by private agents, we find little reason to expect coordination on that equilibrium.

Rational Expectations Dynamics: A Methodological Critique

This paper analyses RE macromodels from the methodological perspective. It proposes a particular property, robustness, which should be considered a necessary feature of scienti cally valid models in economics, but which is absent from many RE macromodels. To restore this property many macroeconomists resort to detailed and implausible assumptions, which take their models a long way from simple Rational Expectations. The paper draws attention to the problems inherent in the technique of local linearisation and concludes by proposing the use of nonlinear models, analysed globally.

Unilateral Emissions Mitigation, Spillovers, and Global Learning

What's the role of unilateral measures in global climate change mitigation in a post-Durban, post 2012 global policy regime? We argue that under conditions of preference heterogeneity, unilateral emissions mitigation at a subnational level may exist even when a nation is unwilling to commit to emission cuts. As the fraction of individuals unilaterally cutting emissions in a global strongly connected network of countries evolves over time, learning the costs of cutting emissions can result in the adoption of such activities globally and we establish that this will indeed happen under certain assumptions. We analyze the features of a policy proposal that could accelerate convergence to a low carbon world in the presence of global learning.

What is the Causal Effect of Information and Learning about a Public Good on Willingness to Pay?

In this study we elicit agents’ prior information set regarding a public good, exogenously give information treatments to survey respondents and subsequently elicit willingness to pay for the good and posterior information sets. The design of this field experiment allows us to perform theoretically motivated hypothesis testing between different updating rules: non-informative updating, Bayesian updating, and incomplete updating. We find causal evidence that agents imperfectly update their information sets. We also field causal evidence that the amount of additional information provided to subjects relative to their pre-existing information levels can affect stated WTP in ways consistent overload from too much learning. This result raises important (though familiar) issues for the use of stated preference methods in policy analysis.