Bubbles, collateral and monetary equilibrium

Consider an economy where infinite-lived agents trade assets collateralized by durable goods. We obtain results that rule out bubbles when the additional endowments of durable goods are uniformly bounded away from zero, regardless of whether the asset’s net supply is positive or zero. However, bubbles may occur, even for state-price processes that generate finite present value of aggregate wealth. First, under complete markets, if the net supply is being endogenously reduced to zero as a result of collateral repossession. Secondly, under incomplete markets, for a persistent positive net supply, under the general conditions guaranteeing existence of equilibrium. Examples of monetary equilibria are provided.

A general-equilibrium closed-form solution to the welfare costs of inflation (Forthcoming, Revista Brasileira de Economia)

This work presents closed-form solutions to Lucasís (2000) generalequilibrium expression for the welfare costs of ináation, as well as to the di§erence between the general-equlibrium measure and Baileyís (1956) partial-equilibrium measure. In Lucasís original work only numerical solutions are provided.

Equilibrium theory with asymmetric information and infinitely many states

Radner (1968) proved the existence of a competitive equilibrium for differential information economies with finitely many states. We extend this result to economies with infinitely many states of nature.

Monetary equilibrium with decentralized trade and learning

This paper analyzes the stability of monetary regimes in an economy where fiat money is endogenously created by the government, information about its value is imperfect, and learning is decentralized. We show that monetary stability depends crucially on the speed of information transmission in the economy. Our model generates a dynamic on the acceptability of fiat money that resembles historical accounts of the rise and eventual collapse of overissued paper money. It also provides an explanation of the fact that, despite its obvious advantages, the widespread use of fiat money is only a recent development.

Three principles of competitive nonlinear pricing

We make three contributions to the theory of contracting under asymmetric information. First, we establish a competitive analog to the revelation principIe which we call the implementation principIe. This principIe provides a complete characterization of all incentive compatible, indirect contracting mechanisms in terms of contract catalogs (or menus), and allows us to conclude that in competi tive contracting situations, firms in choosing their contracting strategies can restrict attention, without loss of generality, to contract catalogs. Second, we establish a competi tive taxation principIe. This principIe, a refinement of the implementation principIe, provides a complete characterization of all implementable nonlinear pricing schedules in terms of product-price catalogs and allows us to reduce any game played over nonlinear pricing schedules to a strategically equivalent game played over product-price catalogs. Third, using the competitive taxation principIe and a recent result due to Reny (1999) on the existence of Nash equilibria in discontinuous games, we demonstrate the existence of a N ash equilibrium for the mixed extension of the nonlinear pricing game.

Endogenous collateral: arbitrage and equilibrium without bounded short sales

We study the implications of the absence of arbitrage in an two period economy where default is allowed and assets are secured by collateral choosen by the borrowers. We show that non arbitrage sale prices of assets are submartingales, whereas non arbitrage purchase prices of the derivatives (secured by the pool of collaterals) are supermartingales. We use these non arbitrage conditions to establish existence of equilibrium, without imposing bounds on short sales. The nonconvexity of the budget set is overcome by considering a continuum of agents. Our results are particularly relevant for the collateralized mortgage obligations(CMO) markets.

A note on learning chaotic sunspot equilibrium

In this paper we prove convergence to chaotic sunspot equilibrium through two learning rules used in the bounded rationality literature. The rst one shows the convergence of the actual dynamics generated by simple adaptive learning rules to a probability distribution that is close to the stationary measure of the sunspot equilibrium; since this stationary measure is absolutely continuous it results in a robust convergence to the stochastic equilibrium. The second one is based on the E-stability criterion for testing stability of rational expectations equilibrium, we show that the conditional probability distribution de ned by the sunspot equilibrium is expectational stable under a reasonable updating rule of this parameter. We also report some numerical simulations of the processes proposed.

Essays on the general equilibrium effects of barriers to trade on economic growth, foreign trade and the location of economic activity in Brazil

This work presents a fully operational interstate CGE model implemented for the Brazilian economy that tries to quantify both the role of barriers to trade on economic growth and foreign trade performance and how the distribution of the economic activity may change as the country opens up to foreign trade. Among the distinctive features embedded in the model, modeling of external scale economies, port efficiency and land-maritime transport costs provides an innovative way of dealing explicitly with theoretical issues related to integrated regional systems. In order to illustrate the role played by the quality of infrastructure and geography on the country‟s foreign and interregional trade performance, a set of simulations is presented where barriers to trade are significantly reduced. The relative importance of trade policy, port efficiency and land-maritime transport costs for the country trade relations and regional growth is then detailed and quantified, considering both short run as well as long run scenarios. A final set of simulations shed some light on the effects of liberal trade policies on regional inequality, where the manufacturing sector in the state of São Paulo, taken as the core of industrial activity in the country, is subjected to different levels of external economies of scale. Short-run core-periphery effects are then traced out suggesting the prevalence of agglomeration forces over diversion forces could rather exacerbate regional inequality as import barriers are removed up to a certain level. Further removals can reverse this balance in favor of diversion forces, implying de-concentration of economic activity. In the long run, factor mobility allows a better characterization of the balance between agglomeration and diversion forces among regions. Regional dispersion effects are then clearly traced-out, suggesting horizontal liberal trade policies to benefit both the poorest regions in the country as well as the state of São Paulo. This long run dispersion pattern, on one hand seems to unravel the fragility of simple theoretical results from recent New Economic Geography models, once they get confronted with more complex spatially heterogeneous (real) systems. On the other hand, it seems to capture the literature‟s main insight: the possible role of horizontal liberal trade policies as diversion forces leading to a more homogeneous pattern of interregional economic growth.

Exogenous expectations on endogenous uncertainty: recursive equilibrium and survival

This paper analyses general equilibrium models with finite heterogeneous agents having exogenous expectations on endogenous uncertainty. It is shown that there exists a recursive equilibrium with the state space consisting of the past aggregate portfolio distribution and the current state of the nature and that it implements the sequential equilibrium. We establish conditions under which the recursive equilibrium is continuous. Moreover, we use the continuous recursive relation of the aggregate variables to prove that if the economy has two types of agents, the one who commits persistent mistakes on the expectation rules of the future endogenous variables is driven out of the market by the others with correct anticipations of the variables, that is, the rational expectations agents.

The n-dimensional bailey-divisia measure as a general-equilibrium measure of the welfare costs of inflation

This paper shows that in economies with several monies the Bailey-Divisia multidimensional consumers surplus formula may emerge as an exact general-equilibrium measure of the welfare costs of in ation, provided that preferences are quasilinear.

Essays in recursive equilibrium and market selection hypothesis

Este trabalho consiste em estudar modelos incluindo agentes com informação completa e incompleta sobre o ambiente econômico. Prova-se a existência de equilíbrio em que esses dois agentes coexistem e sob, algumas condições, obtêm-se que esse equilíbrio é recursivo e contínuo, ou seja, pode ser implementado por uma função contínua de transição que relaciona as variáveis de equilíbrio entre dois períodos consecutivos. Mostra-se, sob algumas hipóteses, que em equilíbrios recursivos contínuos, os agentes que cometem erros persistentes nas antecipações dos preços de equilíbrio são eliminados do mercado. Finalmente, exibimos diversos exemplos numéricos, no caso de mercados incompletos e informação completa, em que os agentes com expectativas racionais são eliminados do mercado. Usam-se métodos numéricos alternativos que possibilitam computar um equilíbrio em modelos com agentes heterogêneos.

Tax filing choices for the household under separable spheres bargaining

If household choices can be rationalized by the maximization of a well defined utility function, allowing spouses to file individually or jointly is equivalent to offering the envelope of the two tax schedules. If, instead, household ’preferences’ are constantly being redefined through bargaining, the option to file separately may affect outcomes even if it is never chosen. We use Lundberg and Pollak’s (1993) separate spheres bargaining model to assess the impact of filing options on the outcomes of primary and secondary earners. Threat points of the household’s bargain are given for each spouse by the utility that he or she attains as a follower of a counter-factual off-equilibrium Stackelberg game played by the couple. For a benchmark tax system which treats a couple’s average taxable income as if it were that of a single individual, we prove that if choices are not at kinks, allowing couples to choose whether to file jointly or individually usually benefits the secondary earner. In our numeric exercises this is also the case when choices are at kinks as well. These findings are, however, quite sensitive to the details of the tax system, as made evident by the examination of an alternative tax system.

Approximate recursive equilibrium with minimal state space

This paper shows existence of approximate recursive equilibrium with minimal state space in an environment of incomplete markets. We prove that the approximate recursive equilibrium implements an approximate sequential equilibrium which is always close to a Magill and Quinzii equilibrium without short sales for arbitrarily small errors. This implies that the competitive equilibrium can be implemented by using forecast statistics with minimal state space provided that agents will reduce errors in their estimates in the long run. We have also developed an alternative algorithm to compute the approximate recursive equilibrium with incomplete markets and heterogeneous agents through a procedure of iterating functional equations and without using the rst order conditions of optimality.

Empirical measures,learning and sunspot equilibrium

In this paper we construct sunspot equilibria that arrise from chaotic deterministic dynamics. These equilibria are robust and therefore observables. We prove that they may be learned by a sim pie rule based on the histograms or past state variables. This work gives the theoretical justification or deterministic models that might compete with stochastic models to explain real data.

Bailey's measure of the welfare costs of infiation as a general-equilibrium measure

Lucas (2000) has ShO\nl t hat Baile,\"'s formula for t hc \\'elfare costs of inflatioIl caIl bc rcgardpd as an approximation to t hc gcneral-equilibriuIll IllCaSllH'S \\"hich emerge from thc Sidrauski anrl the shopping-time models, In this paper \\'c shm\' that Baile~"s mcaSllrc can bc cxactly obtairlf'd in tllf' Siclrauski geIleral-equilibri1lIn framp\\'ork under the assUIllption of quasilinpar prefpreIlC'cs, The rpslllt. based on ",heter or not \\'Palt h pffpcts are incorporatccl into t hp analysis, is also helpful in darif\'ing \\'hy Lucas' Illeasurp clerin'd from the Siclrauski model turns 01lt to be aIl upper bOllIlcl to Bailp~"s, T,,'o eXaInplcs arp used to illustratc t he main C'ondusions,