Moral hazard and nonlinear pricing in a general equilibrium model

The paper analyzes a two period general equilibrium model with individual risk and moral hazard. Each household faces two individual states of nature in the second period. These states solely differ in the household's vector of initial endowments, which is strictly larger in the first state (good state) than in the second state (bad state). In the first period households choose a non-observable action. Higher leveis of action give higher probability of the good state of nature to occur, but lower leveIs of utility. Households have access to an insurance market that allows transfer of income across states of oature. I consider two models of financiaI markets, the price-taking behavior model and the nonlínear pricing modelo In the price-taking behavior model suppliers of insurance have a belief about each household's actíon and take asset prices as given. A variation of standard arguments shows the existence of a rational expectations equilibrium. For a generic set of economies every equilibrium is constraíned sub-optímal: there are commodity prices and a reallocation of financiaI assets satisfying the first period budget constraint such that, at each household's optimal choice given those prices and asset reallocation, markets clear and every household's welfare improves. In the nonlinear pricing model suppliers of insurance behave strategically offering nonlinear pricing contracts to the households. I provide sufficient conditions for the existence of equilibrium and investigate the optimality properties of the modeI. If there is a single commodity then every equilibrium is constrained optimaI. Ir there is more than one commodity, then for a generic set of economies every equilibrium is constrained sub-optimaI.

Are the antiglobalizers right?: the issue of trade without a Walrasian auctioneer

This paper analyzes the determinants of expectational coordination on the perfect foresight equilibrium of an open economy in the class of one-dimensional models where the price is determined by price expectations. In this class of models, we relate autarky expectational stability conditions to regional integration ones, providing an intuitive open economy interpretation ofthe elasticities condition obtained by Guesnerie [11]. There, we show that the degree of structural heterogeneity trades-off the existence of standard efficiency gains -due to the increase in competition (spatial price stabilization)- and coordination upon the welfare enhancing free-trade equilibrium (stabilizing price expectations). This trade-off provides a new rationale for an exogenous price intervention at the international levei. Through the coordinational concern of the authority, trading countries are ab]e to fully reap the bene:fits from trade. We illustrate this point showing that classical measures evaluating ex-ante the desirability of economic integration (net welfare gains) do not always advise integration between two expectationally stable economies.

The impact of price expectations on consumer's behavior in frequently purchased goods markets: empirical evidence and implications

Este trabalho investiga como os padrões de compras de consumidores de bens estocáveis são afetados por suas expectativas de preços. Usando um modelo dinâmico padrão de maximização da utilidade, deriva-se uma expressão analítica para as compras dos consumidores como uma função das suas expectativas em relação aos preços futuros. Em seguida, uma versão mais tratável do modelo é construída, de forma a ilustrar graficamente como os diferentes tipos de expectativas de preços implicam diferentes padrões de compras dos consumidores. Além disso, na aplicação empírica, investigo qual o modelo de expectativas de preços, entre aqueles comumente utilizados na literatura, é consistente com os dados. Por fim, encontra-se suficiente heterogeneidade em expectativa de preços dos consumidores. Mostra-se que famílias de pequeno porte acreditam que os preços seguem um processo de Markov de primeira ordem, enquanto famílias de alta renda são racionais.

Inattention in individual expectations

This paper investigates the expectations formation process of economic agents about inflation rate. Using the Market Expectations System of Central Bank of Brazil, we perceive that agents do not update their forecasts every period and that even agents who update disagree in their predictions. We then focus on the two most popular types of inattention models that have been discussed in the recent literature: sticky-information and noisy-information models. Estimating a hybrid model we find that, although formally fitting the Brazilian data, it happens at the cost of a much higher degree of information rigidity than observed.

Inattention in Individual Expectations

This paper investigates the expectations formation process of economic agents about infl ation rate. Using the Market Expectations System of Central Bank of Brazil, we perceive that agents do not update their forecasts every period and that even agents who update disagree in their predictions. We then focus on the two most popular types of inattention models that have been discussed in the recent literature: sticky-information and noisy-information models. Estimating a hybrid model we fi nd that, although formally fi tting the Brazilian data, it happens at the cost of a much higher degree of information rigidity than observed.

A comment on "Rational learning lead to nash equilibrium" by professors Ehud Kalai and Ehud Lehrer

Kalai and Lebrer (93a, b) have recently show that for the case of infinitely repeated games, a coordination assumption on beliefs and optimal strategies ensures convergence to Nash equilibrium. In this paper, we show that for the case of repeated games with long (but finite) horizon, their condition does not imply approximate Nash equilibrium play. Recently Kalai and Lehrer (93a, b) proved that a coordination assumption on beliefs and optimal strategies, ensures that pIayers of an infinitely repeated game eventually pIay 'E-close" to an E-Nash equilibrium. Their coordination assumption requires that if players believes that certain set of outcomes have positive probability then it must be the case that this set of outcomes have, in fact, positive probability. This coordination assumption is called absolute continuity. For the case of finitely repeated games, the absolute continuity assumption is a quite innocuous assumption that just ensures that pIayers' can revise their priors by Bayes' Law. However, for the case of infinitely repeated games, the absolute continuity assumption is a stronger requirement because it also refers to events that can never be observed in finite time.

Discricionariedade vs. comprometimento: a análise de regras ótimas num contexto de regime de metas de inflação

O objetivo desta dissertação é analisar as regras de condução da política monetária em modelos em que os agentes formam suas expectativas de forma racional (forward looking models), no contexto do regime de metas de inflação. As soluções ótimas de pré - comprometimento e discricionária são derivadas e aplicadas a um modelo macroeconômico para a economia brasileira e os resultados são também comparados com os obtidos pela adoção da regra de Taylor. A análise do comportamento do modelo sob diferentes regras é feita através da construção da fronteira do trede-oit da variância do hiato do produto e da inflação e da análise dinâmica frente a ocorrência de choques. A discussão referente à análise dinâmica do modelo é estendida para o caso onde a persistência dos choques é variada.

Decision making naturalized: the interweaving of the unconscious, the emotional and the rational in decisions taken in a contigent world

Dadas as limitações e inadequações presentes, tanto no arquétipo do tomador de decisão como um agente racional, adotado nas teorias econômicas e gerenciais, quanto no estereótipo de um ser transcendental, tão presente na vida prosaica, se faz necessário substituí-los por uma nova perspectiva: onde o tomador de decisão é um animal emocional, frágil diante do acaso, e fruto de um processo evolutivo.

Low expectations, low demand : when should the government intervene?

Este trabalho estuda o impacto de diferentes políticas que procuram mitigar falhas de coordenação em um ambiente macroeconômico. Abordamos questões relativas ao timing dos estímulos econômicos. Quando o governo deveria começar a incentivar a economia? Deveria gastar mais para prevenir crises ou para tirar a economia da recessão quando os fundamentos estão melhorando? Como o estímulo deve alterar a complementaridade estratégica? Para responder a estas perguntas, construímos um modelo macroeconômico dinâmico com concorrência monopolística e decisões de investimento sequenciais. Aplicando resultados da literatura teórica de jogos dinâmicos com fricções, selecionamos um único equilíbrio neste modelo, nos dando um instrumental tratável para a análise de políticas. Nossos resultados sugerem que o governo não deveria viesar incentivos nem para a prevenção de crises nem para resgatar a economia quando esta já está em crise.

Economic recovery from the Argentine great depression : institutions, expectations, and the change of macroeconomic regime

This work explores how Argentina overcame the Great Depression and asks whether active macroeconomic interventions made any contribution to the recovery. In particular, we study Argentine macroeconomic policy as it deviated from gold-standard orthodoxy after the final suspension of convertibility in 1929. As elsewhere, fiscal policy in Argentina was conservative, and had little power to smooth output. Monetary policy became heterodox after 1929. The first and most important stage of institutional change took place with the switch from a metallic monetary regime to a fiduciary regime in 1931; the Caja de Conversión (Conversion Office, a currency board) began rediscounting as a means to sterilize gold outflows and avoid deflationary pressures, thus breaking from orthodox "mIes of the game." However, the actual injections of liquidity were small' and were not enough to fully offset the incipient monetary contractions: the "Keynes" effect was weak or negative. Rather, recovery derived from changes in beliefs and expectations surrounding the shift in the monetary and exchange-rate regime,and the delinking of gold flows and the money base. Agents perceivod a new regime, as shown by the path of consumption, investment, and estimated ex ante real interest rates: the "Mundell" effect was dominant. Notably, this change of regime predated a later, and supposedly more significant, stage of institutional reform, namely the creation of the central bank in 1935. Still, the extent of intervention was weak, and insufficient to fully offset externaI shocks to prices and money. Argentine macropolicy was heterodox in terms of the change of regime, but still conservative in terms of the tentative scope of the measures taken .

Inflation persistence and flexible prices

The inability of rational expectation models with money supply rules to deliver inflation persistence following a transitory deviation of money growth from trend is due to the rapid adjustment of the price level to expected events. The observation of persistent inflation in macroeconomic data leads many economists to believe that prices adjust sluggishly and/or expectations must not be rational. Inflation persistence in U.S. data can be characterized by a vector autocorrelation function relating inflation and deviations of output from trend. In the vector autocorrelation function both inflation and output are highly persistent and there are significant positive dynamic cross-correlations relating inflation and output. This paper shows that a flexible-price general equilibrium business cycle model with money and a central bank using a Taylor rule can account for these patterns. There are no sticky prices and no liquidity effects. Agents decisions in a period are taken only after all shocks are observed. The monetary policy rule transforms output persistence into inflation persistence and creates positive cross-correlations between inflation and output.

Demand expectations and the timing of stimulus policies

This paper proposes a simple macroeconomic model with staggered investment decisions. The model captures the dynamic coordination problem arising from demand externalities and fixed costs of investment. In times of low economic activity, a firm faces low demand and hence has less incentives for investing, which reinforces firms’ expectations of low demand. In the unique equilibrium of the model, demand expectations are pinned down by fundamentals and history. Owing to the beliefs that arise in equilibrium, there is no special reason for stimulus at times of low economic activity.