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.

Human capital in economic development: from labour productivity to macroeconomic impact

Micro-econometric evidence reveals high private returns to education, most prominently in low-income countries. However, it is disputed to what extent this translates into a macro-economic impact. This paper projects the increase in human capital from higher education in Malawi and uses a dynamic applied general equilibrium model to estimate the resulting macroeconomics impact. This is contingent upon endogenous adjustments, in particular how labour productivity affects competitiveness and if this in turn stimulates exports. Choice among labour market assumptions and trade elasticities results in widely different outcomes. Appraisal of such policies should consider not only the impact on human capital stocks, but also adjustments outside the labour market

Spatial interactions in agent-based modeling

Agent Based Modeling (ABM) has become a widespread approach to model complex interactions. In this chapter after briefly summarizing some features of ABM the different approaches in modeling spatial interactions are discussed. It is stressed that agents can interact either indirectly through a shared environment and/or directly with each other. In such an approach, higher-order variables such as commodity prices, population dynamics or even institutions, are not exogenously specified but instead are seen as the results of interactions. It is highlighted in the chapter that the understanding of patterns emerging from such spatial interaction between agents is a key problem as much as their description through analytical or simulation means. The chapter reviews different approaches for modeling agents' behavior, taking into account either explicit spatial (lattice based) structures or networks. Some emphasis is placed on recent ABM as applied to the description of the dynamics of the geographical distribution of economic activities, - out of equilibrium. The Eurace@Unibi Model, an agent-based macroeconomic model with spatial structure, is used to illustrate the potential of such an approach for spatial policy analysis.Comment: 26 pages, 5 figures, 105 references; a chapter prepared for the book "Complexity and Geographical Economics - Topics and Tools", P. Commendatore, S.S. Kayam and I. Kubin, Eds. (Springer, in press, 2014

The distributional consequences of tax reforms under capital-skill complementarity

This paper analyses wage inequality and the welfare effects of changes in capital and labour income tax rates for different types of agents. To achieve this, we develop a model that allows for capital–skill complementarity given non-uniform distributions of asset holdings and labour skills. We find that capital tax reductions lead to the highest aggregate welfare gains but are skill-biased and thus increase inequality. However, our analysis also shows that the inequality effects of capital tax reductions are lower over the transition period compared with the long run

Sustainable Adjustment of Global Imbalances

This paper uses NIESR’s global econometric model, NiGEM, to analyse possible adjustment paths for the US current account, if its current level of 6 per cent of GDP proves unsustainable. Nominal exchange rate shifts have only a transitory impact on current account balances, so any long-term improvement of the US current account balance would require a real and sustained reduction in domestic absorption, or a rise in foreign absorption. This could be effected through a sequence of exchange rate movements driven by a gradual rise in the risk premium on US assets. This would induce a permanent change in the real exchange rate, and would also reduce domestic absorption in the US due to a rise in real interest rates. Global policy coordination, which involved raising domestic demand in countries such as China and Japan, could speed the process of adjustment and ease the negative impact on the US economy.global imbalances, real exchange rate realignment, risk premia, US current account