Can Migrants save Greece from Ageing? A Computable General Equilibrium Approach using G-AMOS.

The population of Greece is projected to age in the course of the next three decades. This paper combines demographic projections with a multi-period economic Computable General Equilibrium (CGE) modelling framework to assess the macroeconomic impact of these future demographic trends. The simulation strategy adopted in Lisenkova et. al. (2008) is also employed here. The size and age composition of the population in the future depends on current and future values of demographic parameters such as the fertility, mortality rates and the level of annual net migration. We use FIV-FIV software in order to project population changes for 30 years. Total population and working age population changes are introduced to the GAMOS modelling framework calibrated for the Greek economy for the year 2004. Positive net migration is able to cancel the negative impacts of an ageing population that would otherwise occur as a result of the shrinking of the labour force. The policy implication is that a viable, long-lasting migration policy should be implemented, while the importance of policies that could increase fertility should also be considered.

Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty

The paper studies the interaction between cyclical uncertainty and investment in a stochastic real option framework where demand shifts stochastically between three different states, each with different rates of drift and volatility. In our setting the shifts are governed by a three-state Markov switching model with constant transition probabilities. The magnitude of the link between cyclical uncertainty and investment is quantified using simulations of the model. The chief implication of the model is that recessions and financial turmoil are important catalysts for waiting. In other words, our model shows that macroeconomic risk acts as an important deterrent to investments.

Experimental evidence of a sunk–cost paradox: a study of pricing behavior in Bertrand–Edgeworth duopoly

A well–known implication of microeconomic theory is that sunk costs should have no effect on decision making. We test this hypothesis with a human–subjects experiment. Students recruited from graduate business courses, with an average of over six years of work experience, played the role of firms in a repeated price–setting duopoly game in which both firms had identical capacity constraints and costs, including a sunk cost that varied across experimental sessions over six different values. We find, contrary to the prediction of microeconomic theory, that subjects’ pricing decisions show sizable differences across treatments. The effect of the sunk cost is non–monotonic: as it increases from low to medium levels, average prices decrease, but as it increases from medium to high levels, average prices increase. These effects are not apparent initially, but develop quickly and persist throughout the game. Cachon and Camerer’s (1996) loss avoidance is consistent with both effects, while cost–based pricing predicts only the latter effect, and is inconsistent with the former.

Payoff levels, loss avoidance, and equilibrium selection in the Stag Hunt: an experimental study

Game theorists typically assume that changing a game’s payoff levels—by adding the same constant to, or subtracting it from, all payoffs—should not affect behavior. While this invariance is an implication of the theory when payoffs mirror expected utilities, it is an empirical question when the “payoffs” are actually money amounts. In particular, if individuals treat monetary gains and losses differently, then payoff–level changes may matter when they result in positive payoffs becoming negative, or vice versa. We report the results of a human–subjects experiment designed to test for two types of loss avoidance: certain–loss avoidance (avoiding a strategy leading to a sure loss, in favor of an alternative that might lead to a gain) and possible–loss avoidance (avoiding a strategy leading to a possible loss, in favor of an alternative that leads to a sure gain). Subjects in the experiment play three versions of Stag Hunt, which are identical up to the level of payoffs, under a variety of treatments. We find differences in behavior across the three versions of Stag Hunt; these differences are hard to detect in the first round of play, but grow over time. When significant, the differences we find are in the direction predicted by certain– and possible–loss avoidance. Our results carry implications for games with multiple equilibria, and for theories that attempt to select among equilibria in such games.

Forward Looking and Myopic Regional Computable General Equilibrium Models. How Significant is the Distinction?

We present a stylized intertemporal forward-looking model able that accommodates key regional economic features, an area where the literature is not well developed. The main difference, from the standard applications, is the role of saving and its implication for the balance of payments. Though maintaining dynamic forward-looking behaviour for agents, the rate of private saving is exogenously determined and so no neoclassical financial adjustment is needed. Also, we focus on the similarities and the differences between myopic and forward-looking models, highlighting the divergences among the main adjustment equations and the resulting simulation outcomes.

Fiscal Sustainability in a New Keynesian Model

Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady-state debt to follow a random walk. Leith and Wren-Lewis (2012) consider the nature of the timeinconsistency involved in such a policy and its implication for discretionary policy-making. We show that governments are tempted, given inflationary expectations, to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We demonstrate that this temptation is only eliminated if following shocks, the new steady-state debt is equal to the original (efficient) debt level even though there is no explicit debt target in the government’s objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt-stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policies, but can be significant for discretionary policy. Finally, we assess the credibility of commitment policy by considering a quasi-commitment policy which allows for different probabilities of reneging on past promises. This on-line Appendix extends the results of this paper.

Fiscal Sustainability in a New Keynesian Model

Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady-state debt to follow a random walk. Leith and Wren-Lewis (2012) consider the nature of the timeinconsistency involved in such a policy and its implication for discretionary policy-making. We show that governments are tempted, given inflationary expectations, to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We demonstrate that this temptation is only eliminated if following shocks, the new steady-state debt is equal to the original (efficient) debt level even though there is no explicit debt target in the government’s objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt-stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policies, but can be significant for discretionary policy. Finally, we assess the credibility of commitment policy by considering a quasi-commitment policy which allows for different probabilities of reneging on past promises. This on-line Appendix extends the results of this paper.

A Consistent Nonparametric Bootstrap Test of Exogeneity

This paper proposes a novel way of testing exogeneity of an explanatory variable without any parametric assumptions in the presence of a "conditional" instrumental variable. A testable implication is derived that if an explanatory variable is endogenous, the conditional distribution of the outcome given the endogenous variable is not independent of its instrumental variable(s). The test rejects the null hypothesis with probability one if the explanatory variable is endogenous and it detects alternatives converging to the null at a rate n..1=2:We propose a consistent nonparametric bootstrap test to implement this testable implication. We show that the proposed bootstrap test can be asymptotically justi.ed in the sense that it produces asymptotically correct size under the null of exogeneity, and it has unit power asymptotically. Our nonparametric test can be applied to the cases in which the outcome is generated by an additively non-separable structural relation or in which the outcome is discrete, which has not been studied in the literature.

'Modern' Phillips Curves and the Implications For The Statistical Process of Inflation

'Modern' theories of the Phillips curve imply that inflation is an integrated, or near integrated process. This paper explains this implication and why these 'modern' theories are logically inconsistent with what is commonly known about the statistical process of inflation.