Special issue of the Journal of Global Optimization on Applications to Economics

A forthcoming special issue of Journal of Global Optimization contains a number of articles that may be interesting to economic theorists. Table of Contents: A.M. Bagirov and A.M. Rubinov Global optimization of marginal functions with applications to economic equilibrium K. Cechlarova, M. Dahm and V. Lacko Efficiency and stability in a discrete model of country formation I.V. Evstigneev and S.D. Flam Sharing Nonconvex Costs M.E. Jerrell and W.A. Campione Global optimization of econometric functions R. John The concave nontransitive consumer C. Le Van, F.H. Page, Jr. and M.H. Wooders Arbitrage and Equilibrium in Economies with Externalities G.G. Malcolm and B.S. Mordukhovich Pareto optimality in nonconvex economies with infinite-dimensional commodity spaces A. Soubeyran and H. Stahn Price Behaviors on Networks: Some General Results for Two-way Networks A. Villar On the efficiency of market equilibrium in production economies

A Summary of the Bank of Canada Conference on Fixed-Income Markets, 3-4 May 2006

The Bank of Canada's interest in fixed-income markets spans several of its functional areas of responsibility, including monetary policy, funds management, and financial system stability and efficiency. For that reason, the 2006 conference brought together top academics and central bankers from around the world to discuss leading-edge work in the field of fixed-income research. The papers and discussions cover such topics as the efficiency of fixed-income markets, price formation, the determinants of the yield curve, and volatility modelling. This article provides a short summary of each conference paper and the ensuing discussion.

Early Warning Indicators of Crisis Incidence: Evidence from a Panel of 40 Developed Countries

We provide a critical review of the literature on early warning indicators of economics crises and propose methods to overcome several pitfalls of the previous contributions. We use a quarterly panel of 40 EU and OECD countries for the period 1970–2010. As the response variable, we construct a continuous index of crisis incidence capturing the real costs for the economy. As the potential warning indicators, we evaluate a wide range of variables, selected according to the previous literature and our own considerations. For each potential indicator we determine the optimal lead employing panel vector autoregression, then we select useful indicators employing Bayesian model averaging. We re-estimate the resulting specification by system GMM to account for potential endogeneity of some indicators. Subsequently, to allow for country heterogeneity, we evaluate the random coefficients estimator and illustrate the stability among endogenous clusters. Our results suggest that global variables rank among the most useful early warning indicators. In addition, housing prices emerge consistently as an important domestic source of risk.Early warning indicators, Bayesian model averaging, panel VAR, dynamic panel, macro-prudential policies.

Early Warning Indicators of Economic Crises: Evidence from a Panel of 40 Developed Countries

Using a panel of 40 EU and OECD countries for the period 1970-2010 we construct an early warning system. The system consists of a discrete and a continuous model. In the discrete model, we collect an extensive database of various types of economic crises called CDEC 40-40 and examine potential leading indicators. In the continuous model, we construct an index of real crisis incidence as the response variable. We determine the optimal lead employing panel vector autoregression for each potential indicator, and then select useful indicators employing Bayesian model averaging. We re-estimate the resulting specification by system GMM and, to allow for country heterogeneity, additionally evaluate the random coefficients estimator and divide countries into clusters. Our results suggest that global variables are among the most useful early warning indicators. In addition, housing prices emerge consistently as an important source of risk. Finally, we simulate the past effectiveness of several policy instruments and conclude that some central bank tools (for example, reserves) could be useful in mitigating crisis incidence.Bayesian model averaging, dynamic panel, early warning indicators, macroprudential policies, panel VAR.

The Stabilizing Role of Global Alliances in the Dynamics of Coalition Forming

Coalition forming is investigated among countries, which are coupled with short range interactions, under the influence of external fields produced by the existence of global alliances. The model rests on the natural model of coalition forming inspired from Statistical Physics, where instabilities are a consequence of decentralized maximization of the individual benefits of actors within their long horizon of rationality as the ability to envision a way through intermediate loosing states, to a better configuration. The effects of those external incentives on the interactions between countries and the eventual stabilization of coalitions are studied. The results shed a new light on the understanding of the complex phenomena of stabilization and fragmentation in the coalition dynamics and on the possibility to design stable coalitions. In addition to the formal implementation of the model, the phenomena is illustrated through some historical cases of conflicts in Western Europe.Comment: 19 pages, 12 figure

Improving Stability Prediction in Peripheral Milling of Al7075T6

Chatter is an old enemy to machinists but, even today, is far from being defeated. Current requirements around aerospace components call for stronger and thinner workpieces which are more prone to vibrations. This study presents the stability analysis for a single degree of freedom down-milling operation in a thin-walled workpiece. The stability charts were computed by means of the enhanced multistage homotopy perturbation (EMHP) method, which includes the helix angle but also, most importantly, the runout and cutting speed effects. Our experimental validation shows the importance of this kind of analysis through a comparison with a common analysis without them, especially when machining aluminum alloys. The proposed analysis demands more computation time, since it includes the calculation of cutting forces for each combination of axial depth of cut and spindle speed. This EMHP algorithm is compared with the semi-discretization, Chebyshev collocation, and full-discretization methods in terms of convergence and computation efficiency, and ultimately proves to be the most efficient method among the ones studied.The authors wish to acknowledge the financial support received from HAZITEK program, from the Department of Economic Development and Infrastructures of the Basque Government and from FEDER funds. Additional support was provided by the Tecnologico de Monterrey, through the Research Group in Nanomaterials and Devices Design

A Dynamic CGE Model: An Application of R&D- Based Endogenous Growth Model Theory

An R&D based endogenous growth - applied general equilibrium model is developed from an underlying analytical model which combines Romer's capital variety with Grossman and Helpman's multi-sector open economy model. The transitional dynamics of the analytical model are derived. For numerical implementation, a time discrete empirical model, with an Armington structure, is fit to East Asian data of the social accounting matrix variety. Simulations of trade reform are performed and their static and dynamic effects compared. The transition paths of the state variables are found to have a half-life of five to six periods. A solution of the Social Planner's problem, and interventions which seek to obtain this outcome from the decentralized model are also obtained'.Applied General Equilibrium, Trade, Growth, International Relations/Trade, F11, 031, 041,

Cooperation, Stability and Self-Enforcement in International Environmental Agreements: A Conceptual Discussion

In essence, any international environmental agreement (IEA) implies cooperation of a form or another. The paper seeks for logical foundations of this. It first deals with how the need for cooperation derives from the public good aspect of the externalities involved, as well as with where the source of cooperation lies in cooperative game theory. In either case, the quest for efficiency is claimed to be at the root of cooperation. Next, cooperation is considered from the point of view of stability. After recalling the two competing concepts of stability in use in the IEA literature, new insights on the nature of the gamma core in general are given as well as of the Chander-Tulkens solution within the gamma core. Free riding is also evaluated in relation with the alternative forms of stability under scrutiny. Finally, it is asked whether with the often mentioned virtue of “self enforcement” any conceptual gain is achieved, different from what is meant by efficiency and stability. A skeptical answer is offered, as a reply to Barrett’s (2003) attempt at giving the notion a specific content.International Environmental Agreements, Cooperation, Stability, Self-enforcement

Advances in Negotiation Theory: Bargaining, Coalitions and Fairness

Bargaining is ubiquitous in real-life. It is a major dimension of political and business activities. It appears at the international level, when governments negotiate on matters ranging from economic issues (such as the removal of trade barriers), to global security (such as fighting against terrorism) to environmental and related issues (e.g. climate change control). What factors determine the outcome of negotiations such as those mentioned above? What strategies can help reach an agreement? How should the parties involved divide the gains from cooperation? With whom will one make alliances? This paper addresses these questions by focusing on a non-cooperative approach to negotiations, which is particularly relevant for the study of international negotiations. By reviewing non-cooperative bargaining theory, non-cooperative coalition theory, and the theory of fair division, this paper will try to identify the connection among these different facets of the same problem in an attempt to facilitate the progress towards a unified framework.Negotiation theory, Bargaining, Coalitions, Fairness, Agreements

Testing near-rationality using detailed survey data

This paper considers the evidence of “near-rationality,” as described by Akerlof, Dickens, and Perry (2000). Using detailed surveys of household inflation expectations for the United States and Sweden, we find that the data are generally unsupportive of the near-rationality hypothesis. However, we document that household inflation expectations tend to settle around discrete and largely fixed “focal points,” suggesting that both U.S. and Swedish households gauge inflation prospects in rather broad, qualitative terms. Moreover, the combination of a low-inflation environment and an inflation target in Sweden has been accompanied by a disproportionately high proportion of Swedish households expecting no inflation. However, a similar low inflation trend in the United States, which does not have an explicit inflation target, reveals no such rise in the proportion of households expecting no inflation. This observation suggests that the way the central bank communicates its inflation objective may influence inflation expectations independently of the inflation trend it actually pursues.Inflation (Finance) ; Rational expectations (Economic theory)