Dynamics of Endogenous Business Cycles and Exchange Rate Volatility

This paper studies dynamics of endogenous business cycles and exchange rate volatility in a small open economy. Without market imperfections, domestic price and wage adjustments respond sluggishly to disequilibrium situations on real domestic markets while prices on international capital markets adjust instantaneously. The expectation formation mechanism under uncovered interest rate parity (UIP) induces a channel transmitting potential domestic real fluctuations into exchange rate fluctuations and vice versa. The interaction of the expectations feed back with the adjustment mechanism causes exchange rates to exhibit a higher volatility than other prices. The numerical analysis shows examples which confirm the typical empirically observed high volatility of nominal exchange rates compared with that of real/domestic variables.This paper studies dynamics of endogenous business cycles and exchange rate volatility in a small open economy. Without market imperfections, domestic price and wage adjustments respond sluggishly to disequilibrium situations on real domestic markets whil

Rational Expectations and the Stability of Balanced Monetary Development

The expanding/contracting behavior of monetary macroeconomic models is largely driven by government deficits. Their monetary effects on inflation and monetary growth determine the real value of money (or of government debt) in the long run. Only positive stationary (constant) real values of money guarantees stationary positive levels of output and employment in the long run. Within a generalized class of nonlinear monetary macroeconomic models of the AS AD type derived from a microeconomic structure with OLG consumers, such economies generically have no stationary equilibria under perfect foresight/rational expectations when tax revenue is income dependent and endogenous (no lump sum taxes) and when the government follows a stationary spending rule. They usually have two balanced stochastic equilibria, an unstable one with positive levels of employment, output, and positive real value of money plus a stable nonmonetary one under hyperinflation (or a monetary bubble). Under the hypothesis of the model, only the stable ones are empirically observable. The paper shows that these properties are true for a large class of AS-AD models including those with a random budget policy rule whose deficit is zero on average. In contrast, such economies have positive stable balanced stationary equilibria if the government policy has a small strictly positive nonrandom demand component in all cases of uncertainty. Among other things, this confirms the long run effectiveness of deficit spending in random economies under rational expectations known from Keynesian theories. The results are derived using techniques from the theory of random dynamical systems which allows a complete theoretical and numerical analysis of the dynamics of random time series and their stability of the nonlinear stochastic model

Stable Balanced Expansion in Homogeneous Dynamic Models

Böhm V. Stable Balanced Expansion in Homogeneous Dynamic Models. Center for Mathematical Economics Working Papers. Vol 617 Revised Version: May 12,2020. Bielefeld: Center for Mathematical Economics; 2020.This paper establishes conditions for the asymptotic stability of balanced growth paths in dynamic economic models as typical cases of homogeneous dynamical systems. Results for common two-dimensional deterministic and stochastic models are presented and further applications are discussed. According to Solow & Samuelson (1953) balanced growth paths for deterministic economies are induced by so-called Perron-Frobenius solutions defined by an eigenvalue λ > 0 (the growth factor) and by an eigenvector $\bar{x}$ , a fixed point of the system in intensive form. Contraction Lemma A.1 states for continuous deterministic systems that convergence to a balanced path occurs whenever the product λ · M($\bar{x}$) of the eigenvalue λ multiplied with the contractivity 0 < M($\bar{x}$) < 1 of the stable eigenvector $\bar{x}$ of the intensive form is less than one. For λ·M($\bar{x}$) > 1 all unbalanced orbits in the neighborhood of the balanced path diverge in spite of convergence in intensive form. This confirms that convergence to a stable eigenvector of the intensive form is only a necessary condition for convergence in state space. In the stochastic case, the condition for asymptotic stability of balanced growth paths (Theorem B.2) uses results from a stochastic analogue of the Perron-Frobenius Theorem on eigenvalues and eigenvectors. Convergence (divergence) occurs if the expectation of the product λ(ω) · M(ω) is less than (greater than) one, i.e. if the product is mean contractive. This is equivalent to the condition that the sum of the expectations of the logarithmic values of the stochastic growth rate and of the contractivity factor of the intensive form are less than (greater than) zero

Efficient Bargaining in a Dynamic Macroeconomic Model

This paper analyzes the implications of bilateral bargaining over wages and employment between a producer and a union representing a finite number of identical workers in a monetary macroeconomic model of the AS AD type with government activity. Wages and aggregate employment levels are set according to an efficient (Nash) bargaining agreement while the commodity market is cleared in a competitive way. It is shown that, for each level of union power, measured by the share it obtains of the total production surplus, efficient bargaining implies no efficiency loss in production. However, due to the price feedback from the commodity market and to income-induced demand effects, all temporary equilibria with a positive labor share are not Nash bargaining-efficient with respect to the set of feasible temporary equilibrium allocations. The dynamic evolution of money balances, prices, and wages is analyzed being driven primarily by government budget deficits and expectations by consumers. It is shown that for each fixed level of union power, the features of the dynamics under perfect foresight are structurally identical to those of the same economy under competitive wage and price setting, i.e. for small levels of government demand, there exist two balanced paths generically, one of which with high employment and production is always unstable while the other one may be stable or unstable

The Future of Human Health, Longevity, and Health Costs

We investigate the future of human longevity, morbidity and health costs in a novel, multi-period OLG model with endogenous medical R&D and endogenous survival. Our calibrated model implies substantial future increases in longevity that are associated with both reductions in morbidity and a rising health expenditure share in GDP. Extending health care rationing has potentially sizable effects on morbidity and longevity, with dramatic welfare losses particularly for future generations

The Dynamics of Balanced Expansion in Monetary Economies with Sovereign Debt

Böhm V. The Dynamics of Balanced Expansion in Monetary Economies with Sovereign Debt. Center for Mathematical Economics Working Papers. Vol 602. Bielefeld: Center for Mathematical Economics; 2018.The paper examines the role of fiscal and monetary policy on the dynamics of monetary expansion in a macroeconomy. Its microeconomic structure defined by producers with neoclassical production functions, heterogeneous OLG consumers, and a stationary fiscal and monetary policy induces a consistent dynamic closed macroeconomic model of the AS-AD type. Existence and uniqueness of a temporary competitive monetary equilibrium are shown in a two-market economy (determining prices, wages, output, and employment) under a standard set of neoclassical conditions on production, consumer preferences, fiscal and monetary parameters. Comparative statics on prices, wages, and allocations for all levels of the state variables: money balances, debt, and expectations are shown. The dynamic development of temporary equilibria is defined by orbits of a dynamical system generated by three mappings of the one-step (recursive) time change, one for each state variable. The paper defines and describes explicitly the forecasting rules for prices as functions (so-called perfect predictors) which induce perfect foresight along orbits of the economy. It establishes sufficient conditions for their existence and uniqueness and provides a constructive characterization of perfect predictors for the AS-AD economy. Given existence of a globally perfect predictor, perfect foresight holds along all orbits of the economy. The results show that constant intertemporal allocations are uniquely gener- ated by orbits of balanced expansion of both money balances and public debt. Generically, depending on parameters, there exist two or no balanced paths while stationary equilibria with zero inflation exist only on a small (non-open) set of parameters. For a benchmark case (defined by isoelastic utility and production functions) perfect foresight dynamics exist globally and are monotonic (no cycles). There exist at most two balanced paths one of which is always unstable. Their existence and stability are influenced in a decisive way by fiscal and monetary parameters determining steady state inflation rates, allocations, as well as bounds for sustainable debt-to-GDP ratios

Surveillance of mRNP composition during translation termination regulates gene expression via nonsense-mediated mRNA decay

Eukaryotic gene expression consists of a series of events mediating the information flow from DNA via mRNA to protein. Cellular surveillance mechanisms exist to detect and eliminate erroneous mRNA in order to prevent the production of incorrect transcripts. Nonsense-mediated mRNA decay (NMD) targets mRNA for degradation, which terminate translation prematurely or incorrectly. Thereby, NMD prevents the synthesis of unfunctional or harmful peptides. Besides this quality control function, NMD also regulates the levels of many full-length protein encoding mRNA. The messenger ribonucleoprotein (mRNP) architecture downstream of the stop codon is the main determinant for the initiation of the NMD pathway. Exon-junction complexes (EJCs) and long 3′ untranslated regions (UTRs) are known stimulators of NMD. EJCs are central components of the gene expression pathway and are deposited upon splicing on the mRNA. The exact mechanism how these mRNP elements induce NMD is unclear. Moreover, the series of molecular events ultimately leading to the degradation of the mRNA, as well as the precise interplay of NMD factors during this process, are not well defined. In this cumulative work, several important steps in the NMD pathway were investigated. I could show that that for NMD suppression, an interaction cascade involving the eukaryotic release factor 3 (eRF3), the cytoplasmic poly(A) binding protein (PABPC1) and the cap-binding EIF4F complex component eIF4G is required. This suggests that efficient ribosome recycling is important for the normal termination of translation, which in turn prohibits the activation of NMD. To gain insight into the mode of EJC assembly during splicing, CWC22, an essential splicing component, was identified as the critical EJC loading factor. Remarkable differences were observed when comparing long 3′ UTRs and EJCs as NMD-inducing elements. These differences involved not only the efficiency of mRNA degradation, the mode of NMD activation, but also the requirements of NMD factors. These results indicate that EJCs are highly evolved mRNP markers, which utilize a specific mechanism to achieve efficient degradation of the target mRNA. In contrast, long 3′ UTRs influence the mRNP composition around the stop codon, thus impairing regular translation termination and leading to infrequent and less efficient mRNA degradation. In conclusion, this work illuminates multiple aspects of mammalian NMD and highlights the important missing pieces of information, which are to be uncovered by future research

Inventories and money balances in a dynamic model with rationing

Böhm V. Inventories and money balances in a dynamic model with rationing. CARESS Working Paper. Philadelphia: University of Pennsylvania; 1982

The El Farol problem revisited

Böhm V. The El Farol problem revisited. Center for Mathematical Economics Working Papers. Vol 536. Bielefeld: Center for Mathematical Economics; 2015.The so-called El Farol problem describes a prototypical situation of interacting agents making binary choices to participate in a non-cooperative environment or to stay by themselves and choosing an outside option. In a much cited paper Arthur (1994) argues that persistent non-converging sequences of rates of participation with permanent forecasting errors occur due to the non-existence of a prediction model for agents to forecast the attendance appropriately to induce stable rational expectations solutions. From this he concludes the need for agents to use boundedly rational rules. This note shows that in a large class of such models the failure of agents to find rational prediction rules which stabilize is not due to a non-existence of perfect rules, but rather to the failure of agents to identify the correct class of predictors from which the perfect ones can be chosen. What appears as a need to search for boundedly rational predictors originates from the non existence of stable confirming self-referential orbits induced by predictors selected from the wrong class. Specifically, it is shown that, within a specified class of the model and due to a structural non-convexity (or discontinuity), symmetric Nash equilibria of the associated static game may fail to exist generically depending on the utility level of the outside option. If they exist, they may induce the least desired outcome while, generically, asymmetric equilibria are uniquely determined by a positive maximal rate of attendance. The sequential setting turns the static game into a dynamic economic law of the Cobweb type for which there always exist nontrivial ǫ−perfect predictors implementing ǫ−perfect steady states as stable outcomes. If zero participation is a Nash equilibrium of the game there exists a unique perfect predictor implementing the trivial equilibrium as a stable steady state. In general, Nash equilibria of the one-shot game are among the ǫ−perfect foresight steady states of the dynamic model. If agents randomize over indifferent decisions the induced random Cobweb law together with recursive predictors becomes an iterated function system (IFS). There exist unbiased predictors with associated stable stationary solutions for appropriate randomizations supporting nonzero asymmetric equilibria which are not mixed Nash equilibria of the one-shot game. However, the least desired outcome remains as the unique stable stationary outcome for ǫ = 0 if it is a Nash equilibrium of the static game

Does Public Education Expansion Lead to Trickle-Down Growth?

The paper revisits the debate on trickle-down growth in view of the widely discussed evolution of the earnings and income distribution that followed a massive expansion of higher education. We propose a dynamic general equilibrium model to dynamically evaluate whether economic growth triggered by an increase in public education expenditure on behalf of those with high learning ability eventually trickles down to low-ability workers and serves them better than redistributive transfers. Our results suggest that, in the shorter run, low-skilled workers lose. They are better off from promoting equally sized redistributive transfers. In the longer run, however, low-skilled workers eventually benefit more from the education policy. Interestingly, although the expansion of education leads to sustained increases in the skill premium, income inequality follows an inverted U-shaped evolution