Optimism, pessimism and the unforeseen: Modelling an endogenous business cycle driven by strong beliefs

Indicators of trust, confidence, optimism or sentiment among consumers and/or investors, are published continuously in the mass media. More importantly, these indices seem not only to reflect how the state of the real economy is perceived by private agents, but can also help predict the future course of the business cycle. Moreover, in econometric analyses they have even been found to cause business activity. In this paper, we first make an attempt to clear all of the above mentioned notions and to interpret their economic content. We thus intend to provide a theoretical foundation for how pessimism and optimism, in conjunction with estimation errors committed by private agents, can drive the real economy. Furthermore, the model presented is capable of incorporating the revision of expectations of private agents through Bayesian updating, to create a fully endogenized business cycle. The results achieved in simulation experiments confirm the possibility of constant, rising and declining oscillations in the growth rate of consumption and income. -- Die wirtschaftliche Fachpresse und die Massenmedien berichten kontinuierlich über die Entwicklung von Indikatoren, welche Auskunft geben sollen über das Vertrauen, die Zuversicht, den Optimismus oder schlicht die Gefühlslage bei Konsumenten und/oder Investoren. Dieses Indikatoren scheinen nicht nur die Ansicht der privaten Akteure über den Zustand der Ökonomie widerzuspiegeln, sondern können auch dazu verwendet werden, den Verlauf des Konjunkturzyklus zu prognostizieren. Ökonometrische Analysen haben gezeigt, daß sie in der Lage sind, den Verlauf der wirtschaftlichen Entwicklung zu verursachen. In diesem Beitrag sollen zunäcst eine Reihe der o. a. Begriffe geklärt und ihr ökonomischer Gehalt interpretiert werden. Anschließend unternehmen wir den Versuch, den Gang der wirtschaftlichen Entwicklung im Zyklus durch das Zusammenspiel von Optimismus bzw. Pessimismus einerseits und das Auftreten bestimmter Erwartungsfehler andererseits zu erklären. Das Modell bedient sich eines Bayesianischen Lernprozesses und kreiert einen völlig endogenen Konjunkturzyklus. Numerische Simulationen zeigen, daß durch das Modell konstante, zunehmende sowie abnehmende Oszillationen des Konsum- und des Einkommenswachstums erzeugt werden können.Business Cycles,Rational Beliefs,Bayesian Updating,Consumer Behaviour,Konjunkturzyklus,Rationale Überzeugung,Bayesianisches Lernen,Konsumverhalten

Recent policies for financial market integration in Indonesia

In most developing countries financial markets are still highly fragmented and dualistic (Nunnenkamp 1985, p. 20). This is considered as a hindering factor to economic development. The rationale behind this is the view shared by most economists that a higher level of financial integration c.p. lowers intermediation costs, encourages competition and improves the allocation of loanable funds throughout the economy.

True exposure: The analytics of trade liberalization in a general equilibrium framework

These is an ongoing debate with regard to the Timing and Sequencing of Liberalization in LDC's. The Capital Account or Trade Account First'-Puzzle is tackled with different methodological tools of analysis, ranging from the Political Economy Approach put forward by D. Lai (1987) to the orthodox Price and Resource Movement Analysis by S. Edwards (1986). D. Lai favours a sequencing in which exchange controls are removed first, introducing a free floating exchange rate, and a phased program of trade liberalization should follow. If, instead, trade liberalization is accompanied by a managed exchange rate system requiring capital controls, the real exchange rate will be affected severely by the nominal exchange rates chosen by the government. These choices, in turn, will seldom correspond to the economic requirements as reflected in the balance of payments. When deficits occur, governments may then be tempted to impose new trade controls - thus aborting the trade liberalization (Lai 1987, p. 290). S. Edwards, on the other hand, comes to the conclusion that both types of liberalization, on their own, generate by tendency opposite effects on prices, production, factor allocation and income distribution. As resource movements are not for free, net reallocation costs can be minimized by synchronising the opening of the capital and current accounts. However, given the fact that the capital account tends to adjust faster than the current account, the synchronization of the economic effects of opening both accounts will require that the current account is opened first (Edwards 1986, p. 210).

The New Exchange Rate Policy in the Emerging Market Economies: with Special Emphasis on China

In this paper, we discuss the new aspects of exchange rate policy which can be observed in the emerging market economies and their most likely implications for allocation, distribution and stabilization goals. A special emphasis is put on the Chinese case, where large interventions in the foreign exchange market point at a significant undervaluation of the Renminbi. With many alternatives at choice, Chinese authorities still prefer to peg their currency, by and large, to the US-Dollar. On July 21, 2005 a moderate revaluation and the introduction of a basket peg was announced, but a basket peg strategy is not yet visible in empirical figures. On the background of Germany's experiences of 1969, almost on the eve of the Bretton Woods' system collapse, we model a speculative attack on an undervalued currency in the vein of the Flood-Garber seminal paper from 1984. The contents of the model are reflected against today's reality in China, but also against Germany's experiences in the past century. We come to the conclusion, quite in line with Germany's experience of 1969, that the monetary authorities in China should anticipate such an attack and quickly proceed to a revaluation of the Renminbi. We then propose a sequence of reforms/policies which should be implemented in the aftermath. --Absorption Emerging markets economies,exchange rate policy,speculative attack,first generation models

Is there a policy of optimal wage and income differentiation? A macroeconomic perspective

In this paper, we address the question of optimal wage and income dispersion in a growing economy. If already in the two-persons-case we have to deal with the fact of different marginal products of labor, there are two solutions in principle. Either two different wages are paid (at unanimous hours of working) according to these differences, or the good worker would have to work longer than the bad worker so as to equilibrate their marginal products (paying the same wage per hour). In the following parts of the paper, we limit our scope to the issue of wage/income, avoiding dealing with working hours differentiation. Furthermore, we argue on the macroeconomic level. Assuming a log-normal distribution of incomes, we determine the optimal degree of inequality and rate of per capita income growth from a model which integrates Okun's law with a social welfare function (with the Gini coefficient and the per capita growth rate as arguments) and a trade off relationship between equity and per capita growth. It is shown that modern industrial economies tend to have an "egalitarian bias" being most likely responsible for a considerable part of European unemployment. -- Gibt es eine optimale Streuung von Löhnen und Einkommen in einer wachsenden Wirtschaft? Bereits im Zwei-Personen-Fall fordern abweichende Grenzproduktivitäten der Arbeit Lösungen, wobei entweder die Löhne bei gleichen Arbeitszeiten entsprechend differenziert werden oder der bessere Arbeiter bei unverändertem Einheitslohn umso viel länger arbeitet, bis es zu einem Ausgleich der Grenzproduktivitäten kommt. Auf makroökonomischer Ebene läßt sich eine optimale Schiefe der Einkommensverteilung begründen, wenn auf (1) eine soziale Wohlfahrtsfunktion, (2) auf Okun's Law und (3) eine log-normale Verteilung der Einkommen zurückgegriffen wird. Wir unterstellen dabei (zunächst abschnittsweise) eine Trade-Off-Beziehung zwischen der Pro-Kopf-Wachstumsrate des Einkommens und der Einkommensgleichverteilung. Es zeigt sich, daß demokratische Industriegesellschaften tendenziell einen "egalitären Bias" aufweisen, der mitverantwortlich für die hohe Unterbeschäftigung in Europa sein dürfte.Income Distribution,Economic Growth,Labor Economics,Unemployment,Okun's law,Personelle Einkommensverteilung,Wirtschaftswachstum,Okun's Law,Arbeitsmarktökonomik

A further view on current account, capital account and Target2 balances: Assessing the effect on capital structure and economic welfare

In this paper, we first present the state and the development of the European capital and current account imbalances. We demonstrate how large the heterogeneity among European countries is and that clustering here different types of countries is possible, but that it leads to different groupings than what has been labeled the PIGS or better GIPS countries on the one side and the GLNF countries on the other side. The same applies when it comes to cluster countries according to the debt ratio criterion. Hereafter, we put forward our own description of the mentioned ECB implicit financing scheme(s), among other things extending and complementing the recent base money market (supply and demand) analysis given by H.-W. Sinn and T. Wollmershäuser (2011). The core of the paper consists in a modified model of the New Austrian School of Economics - in the tradition of F. A. v. Hayek (1929, 1931) and in the vein of R. M. Garrison (2002) - which enables us to discuss the current distortions introduced by the Target2 credit channel into the capital markets of selected EMU countries and to detect its most important economic consequences. This part of the paper ends with a static welfare evaluation. Finally, we come up with some conclusions and suggestions for economic policy. --Target2 balances,current account deficits,ECB monetary policy,New Austrian Economics

Money, Capital Markets and Welfare: An Analysis of the Effects of Target2 Balances

Schulden; Finanzmarktkrise; Target Zone; Schuldenkrise; Europäische Wirtschafts- und Währungsunion

The demand for money by private firms in a regulated economy: Theoretical underpinnings and empirical evidence for Germany 1960 - 1998

Based on a cash-in-advance approach, this paper investigates theoretically the determinants of money holdings of firms under the conditions of a highly regulated labor market and analyses empirically the demand for money of German businesses during the period 1960-1998. As a result of our theoretical analysis the demand for cash balances by firms for shadow market activities depends among other things positively on the expected wage wedge. The empirical results show that the coefficient of the wage wegde has a positive sign in the long-run cointegrating relationship and is statistically significant positive in the short-run dynamics of the error correction model. -- Auf der Grundlage eines Cash-in-advance-Ansatzes untersucht der vorliegende Beitrag die Bestimmungsgründe der Geldnachfrage von deutschen Unternehmen (1960-1998) - vor dem Hintergrund eines hoch regulierten Arbeitsmarktes. Das theoretische Modell ergibt, daß Unternehmen Kasse für Aktivitäten auf dem Markt für Schwarzarbeit unterhalten und zwar um so mehr, je größer die Kluft zwischen den Bruttoarbeitskosten und den Nettolöhnen (wage wedge) ist. Der Koeffizient der wage wedge weist ein positives Vorzeichen in der Kointegrationsbeziehung auf und ist statistisch signifikant positiv in der kurzfristigen Dynamik des Fehler-Korrektur-Modells.Money Demand by Firms,Wage Wedge,Cash-in-Advance Model,Cointegration,Error-Correction,Geldnachfrage von Unternehmen,Cash-in-advance-Modell,Kointegration,FehlerKorrektur-Modell,Lohnzusatzkosten

Economics of Enhanced Livestock Production

Production Economics,

Stabilizing the rouble: Is there a case for a new Fisher rule?

The management of the exchange rate by the Russian authorities obviously lacks both effectiveness and efficiency. “Black Tuesday” has vividly shown how vulnerable the rouble is to speculative attacks. In this article, a “classical” proposal is evoked and is discussed as an alternative to the present exchange-rate policy from the sustainability point of view