88,603 research outputs found
The Futility of Utility: how market dynamics marginalize Adam Smith
Econometrics is based on the nonempiric notion of utility. Prices, dynamics,
and market equilibria are supposed to be derived from utility. Utility is
usually treated by economists as a price potential, other times utility rates
are treated as Lagrangians. Assumptions of integrability of Lagrangians and
dynamics are implicitly and uncritically made. In particular, economists assume
that price is the gradient of utility in equilibrium, but I show that price as
the gradient of utility is an integrability condition for the Hamiltonian
dynamics of an optimization problem in econometric control theory. One
consequence is that, in a nonintegrable dynamical system, price cannot be
expressed as a function of demand or supply variables. Another consequence is
that utility maximization does not describe equiulibrium. I point out that the
maximization of Gibbs entropy would describe equilibrium, if equilibrium could
be achieved, but equilibrium does not describe real markets. To emphasize the
inconsistency of the economists' notion of 'equilibrium', I discuss both
deterministic and stochastic dynamics of excess demand and observe that Adam
Smith's stabilizing hand is not to be found either in deterministic or
stochastic dynamical models of markets, nor in the observed motions of asset
prices. Evidence for stability of prices of assets in free markets simply has
not been found.Comment: 46 pages. accepte
Extreme Walrasian Dynamics: The Gale Example in the Lab
We study the classic Gale (1963) economy using laboratory markets. Tatonnement theory
predicts prices will diverge from an equitable interior equilibrium towards infinity or zero
depending only on initial prices. The inequitable equilibria determined by these dynamics
give all gains from exchange to one side of the market. Our results show surprisingly strong
support for these predictions. In most sessions one side of the market eventually outgains the
other by more than twenty times, leaving the disadvantaged side to trade for mere pennies.
We also find preliminary evidence that these dynamics are sticky, resisting exogenous
interventions designed to reverse their trajectories
Reflections on Modern Macroeconomics: Can We Travel Along a Safer Road?
In this paper we sketch some reflections on the pitfalls and inconsistencies
of the research program - currently dominant among the profession - aimed at
providing microfoundations to macroeconomics along a Walrasian perspective. We
argue that such a methodological approach constitutes an unsatisfactory answer
to a well-posed research question, and that alternative promising routes have
been long mapped out but only recently explored. In particular, we discuss a
recent agent-based, truly non-Walrasian macroeconomic model, and we use it to
envisage new challenges for future research.Comment: Latex2e v1.6; 17 pages with 4 figures; for inclusion in the APFA5
Proceeding
On the emergence of scale-free production networks
We propose a simple dynamical model of the formation of production networks
among monopolistically competitive firms. The model subsumes the standard
general equilibrium approach \`a la Arrow-Debreu but displays a wide set of
potential dynamic behaviors. It robustly reproduces key stylized facts of
firms' demographics. Our main result is that competition between intermediate
good producers generically leads to the emergence of scale-free production
networks.Comment: 31 pages, 15 figure
The Futility of Utility: how market dynamics marginalize Adam Smith
General Equilibrium Theory in econometrics is based on the vague notion of utility. Prices, dynamics, and market equilibria are supposed to be derived from utility. Utility is sometimes treated like a potential, other times like a Lagrangian. Illegal assumptions of integrability of actions and dynamics are usually made. Economists usually assume that price is the gradient of utility in equilibrium, but I observe instead that price as the gradient of utility is an integrability condition for the Hamiltonian dynamics of an optimization problem. I discuss both deterministic and statistical descriptions of the dynamics of excess demand and observe that Adam Smith's stabilizing hand is not to be found either in deterministic or stochastic dynamical models of markets nor in the observed motions of asset prices. Evidence for stability of prices of assets in free markets has not been found.Utility; general equilibrium; nonintegrability; control dynamics; conservation laws; chaos; instability; supply-demand curves; nonequilibrium dynamics
Imperfect Contract Enforcement
We model imperfect contract enforcement when repudiators and their victims default to spot trading. The interaction between the contract and spot markets under improved enforcement can exacerbate repudiation and reduce contract execution, harming all traders. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from contracts found to be unfavorable. Multiple equilibria and multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement is optimal from their side of international markets. The model thus rationalizes the internationally varying patterns of imperfect enforceability observable in survey data.
Liquidity Risk and Monetary Policy
This paper provides a framework to analyse emergency liquidity assistance of central banks on financial markets in response to aggregate and idiosyncratic liquidity shocks. The model combines the microeconomic view of liquidity as the ability to sell assets quickly and at low costs and the macroeconomic view of liquidity as a medium of exchange that influences the aggregate price level of goods. The central bank faces a trade-off between limiting the negative output effects of dramatic asset price declines and more inflation. Furthermore, the anticipation of central bank intervention causes a moral hazard effect with investors. This gives rise to the possibility of an optimal monetary policy under commitment
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