Dynamic Integration of Value Information into a Common Probability Currency as a Theory for Flexible Decision Making

Decisions involve two fundamental problems, selecting goals and generating actions to pursue those goals. While simple decisions involve choosing a goal and pursuing it, humans evolved to survive in hostile dynamic environments where goal availability and value can change with time and previous actions, entangling goal decisions with action selection. Recent studies suggest the brain generates concurrent action-plans for competing goals, using online information to bias the competition until a single goal is pursued. This creates a challenging problem of integrating information across diverse types, including both the dynamic value of the goal and the costs of action. We model the computations underlying dynamic decision-making with disparate value types, using the probability of getting the highest pay-off with the least effort as a common currency that supports goal competition. This framework predicts many aspects of decision behavior that have eluded a common explanation

The Theory of Transformation Pressure - a New Perspective on Growth and Economic Policy

The theory of transformation pressure offers a uniquely Swedish perspective on the "productivity slowdown" of the 1970s and 1980s. One example of this theory can be found in an influential argument from the early 1990s which states that devaluations of the Swedish currency lessened the external pressure on manufacturing and led to a delay in structural change and rationalisations. The theory generalises the idea that productivity growth in firms is stimulated by intense competition, cost pressures and low or qualified demand. The main challenge faced by such a theory is to explain why it seems that an immediate threat is needed to get a productive response from firms. The theory presented here assumes either genuine uncertainty, irrational behaviour or that firms become more creative when they are put under real pressure. Productivity growth is not always promoted by tight external circumstances. Growth may be maximised if pressure in each period is moderate or if periods with strong pressure are followed by periods of financial and technical consolidation.Transformation Pressure; Competition; X-inefficiencies; Innovations; Productivity; Growth; Rationality; Uncertainty; R&D Investments

Cognitive Constraints and Reversibility of International Economic Institutions. The Case of the European Monetary System

This paper builds on the case study of the birth and death of the fixed exchange rate system in Western Europe, prior to the launch of the Euro. The analysis of this case aims to highlight how "new" international economic institutions may suffer the processes of "preference reversals" and thereby implode. De facto, the paper focuses on the cognitive factors that are deemed to have played an important role in determining the originating decision-making processes in favour of a system of fixed exchange rates and, then, in determining the abandonment of that system. After briefly explaining events such as the "currency snake" and the "European Monetary System" (EMS), the paper highlights how processes of this nature are conditional on the extent of the limits of rationality of the decision-making agents, with the consequence of producing cognitive imbalances. These imbalances are determined by the "fuzziness" with which agents evaluate not only opposing objectives, in particular those of employment and the balance of payments, but especially objectives achievable in an intertemporal dimension (Walliser, 2008: ch. 4). In fact, we illustrate how the actual inflationary differentials between the countries concerned determine the imbalances in the balances of payments. We also highlight how the policies to bring inflation under control can determine changes in the electorate in the preferences defined in the area of economic policies. The collapse of the monetary snake and the European Monetary System is representative of such a change in preferences. The conceptual framework of analysis used is that of temporary equilibria.

A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: The Canada-United States Relationship in the Context of Free Trade.

This paper asks a simple question: Did Wilfred Laurier’s dream of free trade with the United States, when it came to fruition in 1989, also impact on foreign direct investment (FDI) into Canada by US multinationals? This paper argues that the customary static econometric approach found in the FDI literature, along with the assumption that policy changes influence only the intercept term, are inadequate to address the question. Instead we introduce an innovative dynamic framework to support the testing of hypotheses on behavioural changes in the variables using a structural break framework. A key conclusion is that prior to signing the free trade agreement US FDI responded only to current growth in the Canadian economy, in a unitary fashion, and current exchange rate shifts. This can be described as a static relationship. The implementation of the free trade agreements between Canada and the USA increased the responsiveness of US FDI to growth in the Canadian economy by a factor greater than two. Furthermore, dynamics are found in the form of a lagged effect for changes in the growth in the Canadian economy and interest rate differentials. These conclusions challenge the dominant view, including that in official policy circles, that the free trade agreement had no impact on US firms’ FDI decisions in Canada. Note: Previous versions of this paper were entitled: “A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: Did Canada Benefit From the Free Trade Agreements with the United States?”Canada-United States, foreign direct investment, empirical relationship

Optimum currency area theory: A selective review

The first part of this paper is a review of significant papers in the vast literature on optimum currency area (OCA) theory. The author focuses on the main classical contributions, then considers modern treatment of OCA theory. The second part considers empirical literature on the types of geographical areas that might constitute optimum currency areas, particularly with respect to asymmetry and symmetry of shocks.

Fear of floating and fear of pegging: An empirical anaysis of de facto exchange rate regimes in developing countries

This paper uses a panel probit model with simultaneous equations to explain the joint determination of de facto and de jure exchange rate regimes in developing countries since 1980. We also derive an ordered-choice panel probit model to explain the causes of discrepancies between the two regime choices. Both models are estimated using simulation-based maximum likelihood methodsl. The results of the simultaneous equations model suggest that the two regime choices are dependent of each other and exhibit considerable state dependence. The ordered probit model provides evidence that regime discrepancies reflect an error-correction mechanism, and the discrepancies are persistent over time. --de facto exchange rate regimes,developing countries,simultaneous equations model,simulated maximum likelihood

Beggar Thy Neighbour Exchange Rate Regime Misadvice  from Misapplications of Mundell (1961) and the Remedy

Economists invoke Mundell (1961) in arguing for the general policy of   a flexible exchange rate regime as a means of restoring equilibria   after shocks. But there is a discrepancy between the intent of the   general policy and attempts at its implementation as identified by   specific changes in exchange rates.  When we assemble the set of   specific changes called for by distinct economists operating as   advocates for individual countries, these are uniformly in the form   of beggar-thy-neighbour advice – ie travesties of objectively   identifying disequilibria and a menace to international cooperation   and peace.  This paper traces the unintended travesties to problems   of complexity and uncertainty, problems that implicitly are assumed   absent in Mundell (1961) rendering the situation so simple that   equilibria are transparent.  The problems remained essentially   unaddressed when economists extended Mundell (1961) via expected   utility theory since this theory also ignores the impossibility of   maximising and the complexities of central bankers, private firms and   others in doing the evaluation stage in reaching decisions.  The   problems can be overcome by modelling within SKAT, the Stages of   Knowledge Ahead Theory.  This paper points to experimental evidence   in support of the view that under all sorts of disequilibrating   shocks, currency unions outperform flexible currencies by eliminating   the inefficiencies generated by exchange rate uncertainty.optimal currency area; exchange rate regime; certainty effects;   policy; beggar-thy-neighbour; SKAT the Stages of Knowledge Ahead Theory; complexity; equilibrium; small world; shocks; expenditure-switching shocks; supply-side shocks; demand shocks; experiment, safety, international competitiveness.

Optimum currency area theory: A selective review

The first part of this paper is a review of significant papers in the vast literature on optimum currency area (OCA) theory. The author focuses on the main classical contributions, then considers modern treatment of OCA theory. The second part considers empirical literature on the types of geographical areas that might constitute optimum currency areas, particularly with respect to asymmetry and symmetry of shocks.

The Effects of euro Adoption on the Slovak Economy

In this study we assess the effects of euro adoption from an economic perspective. The benefits and disadvantages of Slovak entry to the euro area were discussed already when the euro adoption strategy was adopted. This analysis utilizes the latest information, using the set euro adoption date and the chosen euro adoption scenario. We attempt to quantify the most important effects, so that the costs and benefits can be compared. The costs and risks related to the euro area entry will depend on economic conditions and policies. Therefore we analyze the economic policies, which should support euro adoption, the issues of optimal timing of euro area entry and the impacts of euro adoption on citizens, businesses and the state administration.

Transformation Pressure and Growth - a Missing Link in Macroeconomics

Economists and politicians in Sweden stated in the early 1990s that devaluations of the country's currency had lessened the external pressure on manufacturing and led to a delay in structural change and rationalizations. The theory of transformation pressure generalizes the idea that productivity growth in firms is promoted by intense competition, cost pushes and low product demand. The main challenge faced by such a theory is to explain why it seems that an immediate threat is needed to get a productive response from firms. Three separate explanations are presented here emphasizing either the value of waiting to get more information about potential threats, the irrational tendency to ignore threats until they show up or the stimulation of individual creativity when firms are put under real pressure. But productivity growth is not always promoted by tight external circumstances. Growth may be maximized if pressure in each period is moderate or if periods with strong pressure are followed by periods of financial and technical consolidation, scale advantages and lesser needs to spend resources on rationalization in order to survive.Transformation pressure; Competition; X-inefficiency; Innovations; Productivity; Growth; Irrationality; Uncertainty; R&D investments