Positivity and bubbles in overlapping generations models

Bubbles, such as money, cannot be valued in efficient equilibria in overlapping generations models (a borderline case aside). Analysts frequently attribute this result to the fact that if bubbles were valued, the bubble must eventually exceed the endowment of the young. This implies negative consumption by the young, invalidating the equilibrium path. This argument is misleading because it depends on the assumption that negative consumption is infeasible. But negative consumption is admissible under some utility functions, raising questions about the generality of the argument. To investigate this, we characterize equilibrium in an overlapping generations model with negative exponential utility, which allows negative consumption. We show that if the endowment allocation is Pareto optimal, equilibrium paths incorporating valued money at some date eventually reach a point at which the equilibrium path has no continuation.

Expected utility: a defense

In recent papers Matthew Rabin and Richard H. Thaler have argued that expected utility theory generates implausible predictions about individuals' attitudes toward small vs. large risks. Specifically, these authors argued that expected utility theory, plus the assertion that individuals reject small risks that are actuarially unfavorable, implies that agents should reject large risks which in fact they would accept. In this paper we question the presumption that the small risks are in fact rejected: they have risk-return characteristics that are superior to those of the daily returns on common stocks, which individuals generally find acceptable.

Bubbles and the Intertemporal Government Budget Constraint

Recent years have seen a protracted debate on the "fiscal theory of the price level". This doctrine is based on the intertemporal government budget constraint, which says that the real value of the government debt equals the discounted value of future government surpluses. It is observed that the intertemporal government budget constraint consists of the proposition that government debt management defines a portfolio strategy that has no bubble. Therefore the intertemporal government budget constraint is satisfied in models in which bubbles can be ruled out, and it fails in settings in which bubbles can occur in equilibrium.bubbles

Mutual deposit insurance

Deposit insurance

Capital market efficiency: an update

Capital market

Liquidity and fire sales

A “fire sale” occurs when the owner of a good offers it for sale at a price strictly below the price that some buyers would willingly pay for the good. He does so because the advantage of the quick sale made possible by the lower price outweighs the higher price that other potential buyers would pay, given the likely delay in locating these buyers in the latter case. Fire sales can occur only in illiquid markets. This paper generalizes earlier treatments of illiquid markets by assuming that the asset can be offered for sale at any time, rather than only after its owner loses his capacity to operate it profitably. Also, it specifies that profitability follows a random walk.Liquidity (Economics) ; Econometric models

Mortgage default and mortgage valuation

We study optimal exercise by mortgage borrowers of the option to default. Also, we use an equilibrium valuation model incorporating default to show how mortgage yields and lender recovery rates on defaulted mortgages depend on initial loan-to-value ratios when borrowers default optimally. The analysis treats both the frictionless case and the case in which borrowers and/or lenders incur deadweight costs upon default. The model is calibrated using data on California mortgages. We find that the model's principal testable implication for default and mortgage pricing—that default rates and yield spreads will be higher for high loan-to-value mortgages—is borne out empirically.Mortgage loans ; Mortgage loans - California ; Default (Finance)

The Doha Round Declaration on Cotton: A Catalyst for Poverty Reduction in Africa?

Cotton plays a strategic role in the development policies and poverty reduction programs of a number of African countries. Several African countries have introduced reforms in the cotton sector to improve its quality and competitiveness. The impact of these reforms has to date been virtually nullified by the fact that certain WTO Members continue to apply support measures and subsidies that distort global market prices. These are the arguments behind the Cotton Initiative raised in 2003 in the World Trade Organization (WTO) by Benin, Burkina Faso, Chad and Mali, which reflects the position of the African Group countries until the Sixth WTO Ministerial Conference in Hong Kong recently. In this conference two important policy changes were agreed in international trade of cotton. First, all forms of export subsidies for cotton will be eliminated by developed countries in 2006. Second, developed countries will give duty and quota free access for cotton exports from the least-developed countries (LDCs). This paper uses a computable general equilibrium (CGE) model of the Zambian economy with a three fold purpose: (a) to study the impact of the Doha Round agreement on the cotton sector in Zambia, (b) to analyze the reality of the Doha agreement versus the African countries' cotton initiative during the WTO Hong Kong conference, and (c) to contribute to the analysis of further agricultural trade liberalization and its implications for poor countries. The results show the extent of the benefits of implementation of both, the Doha WTO Round and the African Countries Proposal in Zambia. We quantify the impacts of both policy initiatives on the Zambian cotton sector (production, exports, prices), and agrarian population welfare. The results show that the positive effects of the Cotton Initiative in Zambia are higher than the Doha Round polices benefits.International Relations/Trade,

A General Equilibrium Analysis of Foreign and Domestic Demand Shocks Arising from Mad Cow Disease in the United States

The discovery of the first case of mad cow disease in the United States in 2003 reverberated across the beef and cattle industry. This study employs a general equilibrium model to analyze the potential economic effects of mad cow disease on the beef, cattle, and other meat industries under three scenarios, ranging form most favorable to most pessimistic. The scenario with 90% foreign demand decline and 10% domestic demand reduction generates results consistent with the actual outcomes after the mad cow disease outbreak. Only if domestic demand declines significantly will the economic hardship in the U.S. beef and cattle industry be very large.demand decline, economic effects, mad cow disease, International Relations/Trade, Livestock Production/Industries,