Expectation Formation and Endogenous Fluctuations in Aggregate Demand

The paper recognizes that expectations and the process of their formation are subject to standard decision making and are determined as a part of equilibrium. Accordingly, the paper presents a basic framework in which the form of expectation formation is a choice variable. At any point in time rational economic agents decide on the basis of the level of utility what expectation formation technology to use and as a consequence what expectations to hold. As economic decisions are conditioned on expectations holding proper or rational expectations eliminates the possibility of ex ante inefficiencies. The choice of expectation formation technology is not trivial as the paper assumes that information gathering and processing are costly. Consequently, economic agents must make informed decisions with the regard to the quality of expectation formation technologies they wish to use. The paper shows that agents' optimization over expectations not only adds on to realism, but also can carry non trivial implications for the behavior of macroeconomic variables. Specifically, the paper illustrates that endogenous expectation revisions can be a source of permanent oscillations in aggregate demand and can prevent an economy from settling into a steady state. In addition, the paper quantifies intangible notions such as overheating, overborrowing, and output gap. Finally, the paper shows that active policy measures can limit inefficiencies resulting from output fluctuationsBusiness Cycles, Expectation Formation, Costly Information Acquisition.

On Artificial Structural Unemployment

Above market clearing wages are shown to prevail as an outcome of a game in which employers possess and employees lack the ability to coordinate. It is established in a monopolistically competitive framework that it may be optimal for individual firms to coordinate and restrict entry of indirect competitors and thus increase profits by paying above market clearing wages as the higher wage bill need not outweigh the increase in profits due to entry restriction. Resulting unemployment is shown to be socially costly. The paper notes that a tax on revenue of the incumbent firms can be welfare improvingUnemployment, Coordination

Tree-level contributions to B -> Xs gamma

Weak radiative decay B -> X_s gamma is known to be a loop-generated process. However, it does receive tree-level contributions from CKM-suppressed b -> u ubar s gamma transitions. In the present paper, we evaluate such contributions together with similar ones from the QCD penguin operators. For a low value of the photon energy cutoff E_0 ~ m_b/20 that has often been used in the literature, they can enhance the inclusive branching ratio by more than 10%. For E_0 = 1.6 GeV or higher, the effect does not exceed 0.4%, which is due to phase-space suppression. Our perturbative results contain collinear logarithms that depend on the light quark masses m_q (q=u,d,s). We have allowed m_b/m_q to vary from 10 to 50, which corresponds to values of m_q that are typical for the constituent quark masses. Such a rough method of estimation may be improved in the future with the help of fragmentation functions once the considered effects begin to matter in the overall error budget for BR(B -> X_s gamma).Comment: v3: Corrected factors of 2 in the subdominant T_3 contributions. Minor changes in the numerical results (Table II