Complementarities in information acquisition with short-term trades

In a financial market where agents trade for short-term profit and where news can increase the uncertainty of the public belief, there are strategic complementarities in the acquisition of private information and, if the cost of information is sufficiently small, a continuum of equilibrium strategies. Imperfect observation of past prices reduces the continuum of Nash equilibria to a Strongly Rational-Expectations Equilibrium. In that equilibrium, there are two sharply different regimes for the evolution of the price, the volume of trade, and information acquisition.Endogenous information, short-term gain, microstructure, strategic complementarity, multiple equilibria, Strongly Rational-Expectations Equilibrium, trading frenzies

Strategic complementarity of information acquisition in a financial market with discrete demand shocks

A simple model of financial market with rational learning and without friction is presented in which the value of private information increases with the mass of informed individuals, contrary to the property presented by Grossman and Stiglitz (1980). The key assumption is the possibility of independent discrete shocks on the fundamental value and on an exogenous demand.endogenous information ; strategic complementarity ; financial markets ; aggregation of information

Taxation of financial intermediation : measurement principles and application to five African countries

The purpose of this study is to set out a practical method for analyzing how inflation, interest ceilings, reserve requirements and like impositions have had tax-like effects and how they can be compared with explicit taxes. Using this method estimates of the varying magnitudes of the total taxation of financial intermediation in five African economies during recent years are computed. The paper explores the macroeconomic and fiscal dynamics which have contributed to the use of heavy taxation on the financial sector in certain countries and for certain periods. The likely impact of these taxes on efficiency is also examined.Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies,Public Sector Economics&Finance,Insurance&Risk Mitigation

Collective decision making in cohesive flocks

Most of us must have been fascinated by the eye catching displays of collectively moving animals. Schools of fish can move in a rather orderly fashion and then change direction amazingly abruptly. There are a huge number of further examples both from the living and the non-living world for phenomena during which the many interacting, permanently moving units seem to arrive at a common behavioural pattern taking place in a short time. As a paradigm of this type of phenomena we consider the problem of how birds arrive at a decision resulting in their synchronized landing. We introduce a simple model to interpret this process. Collective motion prior to landing is modelled using a simple self-propelled particle (SPP) system with a new kind of boundary condition, while the tendency and the sudden propagation of the intention of landing is introduced through rules analogous to the random field Ising model in an external field. We show that our approach is capable of capturing the most relevant features of collective decision making in a system of units with a variance of individual intentions and being under an increasing level of pressure to switch states. We find that as a function of the few parameters of our model the collective switching from the flying to the landing state is indeed much sharper than the distribution of the individual landing intentions. The transition is accompanied by a number of interesting features discussed in this report

Debt policy under constraints between Philip II, the Cortes and Genoese bankers

The large public debt was created in 16th century Castile. A new view of its fiscal system is presented. The main part of the debt was in perpetual redeemable annuities and its credibility was enhanced by decentralized funding through taxes administered by cities that represented the Realm in the Cortes. Accumulation of short-term debt would be refinanced by long-term debt. Short-term debt crises occurred when the service of the long-term debt reached the revenues of the taxes that funded the domestic long-term debt. They were resolved after protracted negotiations in the Cortes by tax increases and interest rate reductionsDebt funding, Sovereign loan defaults, Financial crises, Parliaments

Strategic complementarity of information acquisition in a financial market with discrete demand shocks

A simple model of financial market with rational learning and without friction is presented in which the value of private information increases with the mass of informed individuals, contrary to the property presented by Grossman and Stiglitz (1980). The key assumption is the possibility of independent discrete shocks on the fundamental value and on an exogenous demand

On the Infinite Welfare Cost of Inflation and Other Second Order Effects

The optimal inflation rate is analyzed in a simple model of intertemporal general equilibrium where agents have an operative bequest motive and taxation is distortionary. Monetary balances are used as a productive input, and agents have perfect foresight. The optimal value of the permanent inflation rate can be approximated by a simple formula. The case in which the growth of aggregate income exceeds the social discount rate is unlikely to be important, and the optimal value of the permanent inflation rate depends on the existence of a short-run trade-off between unemployment and inflation

A General Equilibrium Expression of the Paradox of Thrift

A model is presented which is derived from some observations of Keynes on the nature of capital. The allocation of investment is analyzed in two economies with random demand shocks which are identical except for the types of markets. In the first, the combination of an asset and forward markets realizes the complete set of markets. In the second, the forward markets are replaced by spot markets. Consumers and entrepreneurs are rational and markets clear. A clear definition of the paradox of thrift is proposed and its existence is proven. The substitution of spot markets for forward markets generates fluctuations of the aggregate variables. The equilibrium with fluctuations is not always a constrained Pareto optimum