On price uncertainty, nominal assets and uninsurable idiosyncratic risks

The paper discusses a way in which price uncertainty may affect the extent of idiosyncratic, uninsurable risks in an incomplete markets economy with nominal assets and thereby affect output and welfare. Although the returns on these assets are constant and riskfree in nominal terms, price uncertainty causes their real returns to be stochastic. This affects the ability of households to diversify their idiosyncratic risks using these assets and consequently the extent of uninsurable risks in the economy. The paper establishes a relationship between the volume of trade in nominal assets, the stochastic characteristics of the price shocks and the covariance between the price and idiosyncratic shocks.

Adaptive fuzzy system for 3-D vision

An adaptive fuzzy system using the concept of the Adaptive Resonance Theory (ART) type neural network architecture and incorporating fuzzy c-means (FCM) system equations for reclassification of cluster centers was developed. The Adaptive Fuzzy Leader Clustering (AFLC) architecture is a hybrid neural-fuzzy system which learns on-line in a stable and efficient manner. The system uses a control structure similar to that found in the Adaptive Resonance Theory (ART-1) network to identify the cluster centers initially. The initial classification of an input takes place in a two stage process; a simple competitive stage and a distance metric comparison stage. The cluster prototypes are then incrementally updated by relocating the centroid positions from Fuzzy c-Means (FCM) system equations for the centroids and the membership values. The operational characteristics of AFLC and the critical parameters involved in its operation are discussed. The performance of the AFLC algorithm is presented through application of the algorithm to the Anderson Iris data, and laser-luminescent fingerprint image data. The AFLC algorithm successfully classifies features extracted from real data, discrete or continuous, indicating the potential strength of this new clustering algorithm in analyzing complex data sets. The hybrid neuro-fuzzy AFLC algorithm will enhance analysis of a number of difficult recognition and control problems involved with Tethered Satellite Systems and on-orbit space shuttle attitude controller

"China in the Global Economy"

China occupies a unique position among developing countries. Its success in achieving relative stability in the financial sector since the institution of reforms in 1979 has given way to relative instability since the beginning of the current global financial crisis. Over the last few years, China has been on a path of capital account opening that has drawn larger inflows of capital from abroad, both foreign-direct and portfolio investment. Of late, a surge in these inflows has introduced problems for the monetary authorities in continuing with an autonomous monetary policy in China, especially with large additions to official reserves, the latter in a bid to avoid further appreciation of the country’s domestic currency. Like other developing countries, China today faces the “impossible trilemma” of managing the exchange rate with near-complete capital mobility and an autonomous monetary policy. Facing problems in devising and sustaining this policy, China has been using expansionary fiscal policy to tackle the impact of shrinking export demand. The recent drive on the part of Chinese authorities to boost real demand in the countryside and to revamp the domestic market shows a promise far different from that of the financial rescue packages in many advanced nations. The close integration of China with the world economy over the last two decades has raised concerns from different quarters that relate both to (1) the possible effects of the recent global downturn on China and (2) the second-round effects of a downturn in China for the rest of world.Trade Surplus; Official Reserves; Impossible Trillemma; Integration; Capital Account Opening; Financial Crisis; State-owned Enterprises; Stock Markets; Volatility

Asset prices and capital accumulation in a monetary economy with incomplete markets

The paper studies asset prices and capital accumulation in a monetary economy with non-diversifiable idiosyncratic risks (incomplete markets). A government issued unbacked currency is introduced into agent's preferences in a dynamic GEI (General Equilibrium with Incomplete market) model with CARA preferences and normal disturbances. Closed form expressions for equlibrium allocations and prices are derived under finite and infinite horizons. The paper addresses several monetary issues. In particular, money is shown to be neutral but not superneutral at the steady state. The rate of inflation is shown to adversely affect the steady state capital stock under some situations. Finally the Friedman rule is shown to be non-optimal for some economies.

"The Global Crisis and the Remedial Actions: A Nonmainstream Perspective"

The global financial crisis has now spread across multiple countries and sectors, affecting both financial and real spheres in the advanced as well as the developing economies. This has been caused by policies based on "rational expectation" models that advocate deregulated finance, with facilities for easy credit and derivatives, along with globalized exposures for financial institutions. The financial crisis has combined with long-term structural changes in the real economy that trend toward underconsumption, generating contractionary effects therein and contributing to further instabilities in the financial sector. The responses so far from US monetary authorities have not been effective, especially in dealing with issues of unemployment and low real growth in the United States, or in other countries. Nor have these been of much use in the context of the lost monetary and fiscal autonomy in both developing countries and the eurozone, especially with the debt-related distress in the latter. Solutions to the current maladies in the global economy include strict control of financial speculation and the institution of an "employer of last resort" policy, both at the initiative of the state.Global Crisis; Expectations; Underconsumption; Ponzi; Labor Flexibility

Risk Sharing through Labor Contracts - Risk Aversion, Market Incompleteness and Employment

Labor contracts are a way of sharing idiosyncratic production risks between entrepreneurs and workers, especially when such risks are too complex for contingent contracts to be written on them. So it is important to understand how equilibrium employment and wages are affected by risk re-lated factors, such as risk aversion of entrepreneurs and workers, risk sharing opportunities in the economy etc. The paper develops a general equilibrium model with several sectors of production which are subject to idiosyncratic productivity shocks, two inputs - labor and capital - and stock markets which diversify sectoral risks but not completely. We prove the existence of equilibrium for this general model. The model is then parameterized by CRRAutility functions. We prove that the equilibriumemployment levels vary inversely with the coefficient of relative risk aversion of agents under certain conditions. Numerical simulations show that over a range of the coefficient employment levels are higher when markets are complete than when they are not. A substantive implication of the comparative static results is that a low paying, productively less efficient alter-native to working for private firms may be desirable as an insurance instrument.

"The Meltdown of the Global Economy: A Keynes-Minsky Episode?"

The enormity and pervasiveness of the global economic crisis that began in 2008 makes it relevant to analyze the circumstances that can explain this catastrophe. This will also provide clues to the appropriate remedial measures needed to prevent future occurrences of similar developments. The paper begins with some theoretical concerns relating to factors that could trigger a similar crisis. The first of these concerns relates to the deregulated financial institutions and the growing uncertainty that can be witnessed in these liberalized financial markets. The second relates to financial engineering with innovations in these markets, simultaneously providing cushions against risks while generating flows of liquidity that remain beyond the conventional sources of bank credit. Interpreting the role of uncertainty, one can observe the connections between investment and finance, both of which are subject to changes in the state of expectations. The initial formulation can be traced back to John Maynard Keynes’s General Theory (1936), where liquidity preference is linked to asset prices and new investments. The Keynesian analysis of the impact of uncertainty related expectations was reformulated in 1986 by Hyman P. Minsky, who introduced the possibility of sourcing external finance through debt, which further adds to the impact of uncertainty. Minsky's characterization of deregulated financial markets considers the newfangled sources of nonbank credit, especially with the involvement of banks in the securities market under the universal banking model. As for the institutional arrangements that provide for profits on transactions, financial assets bought and sold in the primary market as initial public offerings of stocks are usually transacted later, in the secondary market, where these are no longer backed by physical assets. In the upswing, finance creates a myriad of financial claims and liabilities, and thus becomes increasingly remote from the real economy, while innovations to hedge and insulate assets continue to proliferate in the financial market, especially in the presence of uncertainty. The paper dwells on an account of the pattern of the financial crisis and its spread in the United States. This is appended by a stylized account of the turn of events in terms of a theoretical model that highlights the role of uncertainty in the process.Uncertainty; Speculation; Hedging; Ponzi; Securitization; Financial Fragility