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

On the possibility of artificial uncertainty in the leader-follower game

In this paper we study equilibrium dynamics in a simple duopoly game. We show that the beliefs about the structure of the game influence the actual dynamics. Furthermore, we argue that beliefs induced dynamics can be complex and can in equilibrium be consistent with the underlying beliefs. We illustrate that the beliefs can be consistent even if the underlying beliefs do not correspond to the objective truth.(original abstract)In this paper we study equilibrium dynamics in a simple duopoly game. We show that the beliefs about the structure of the game influence the actual dynamics. Furthermore, we argue that beliefs induced dynamics can be complex and can in equilibrium be consistent with the underlying beliefs. We illustrate that the beliefs can be consistent even if the underlying beliefs do not correspond to the objective truth.(original abstract

Bipolar spectrum features in obese individuals

Aim. The relationships between obesity and bipolar spectrum disorders (BSD) are unclear. Thus, the aim of our study were to approximate the prevalence of soft bipolar features in patients seeking treatment for obesity. Methods. We performed a nested case-control study (cases: 90 patients with the mean BMI=38.1±7.0 [range: 30.1–62.5]; controls: 70 healthy volunteers with the mean BMI=21.6±2.1 [range: 18.5–24.9]). The participants were screened for the BSD symptoms with the Mood Disorder Questionnaire. Results. Patients with obesity were significantly more likely to score ≥7 pts. on the MDQ 25.6% vs. 8.6%; p=0.01). In comparison to non-obese individuals, the obese patients scored significantly higher in MDQ section I and on the MDQ items referring to the ‘irritability–racing thoughts’ dimension of hypomania. The multiple logistic regression analysis revealed that obesity had been significantly related to the odds of obtaining ≥7 pts. on the MDQ section 1 (odds ratio [OR] = 2.07; 95% confidence interval [CI]: 1.17–3.63), and marginally significantly related to experiencing periods of ‘ups’ and ‘downs’(OR = 1.67; 95% CI: 1.00–2.81). Conclusions. Our study adds to previous suggestions that obesity may be significantly related to the BSD. However, the clinical implications of this finding need to be determined in further studies, performed in accordance with the paradigm of evidence based medicine (EBM)

Demand-Side Shocks and Macroeconomic Policy

The paper focuses on short run macroeconomic dynamics triggered by dem and side shocks. In particular, the paper analyzes, in a general equilibrium framework, the impact of transitory demand side shocks on the behavior of macroeconomic variables and examines the relevance of policy instruments during downturns in economics activity. The paper establishes that transitory shocks can have persistent effects. It shows that stabilization is desirable even if shocks are transitory in nature. In particular, the article reveals that debt financed government spending is a diable stabilization tool and can improve welfare at all horizons even though it inhibits physical capital formation

Volatility as a Choice

endogenous volatility self-confirming beliefs general equilibrium rationalit

A consistent route to randomness

Fully rational agents are allowed to optimize over expectations formation technologies in an environment where it is costly to collect and process information. It is shown in a general equilibrium framework that optimization over expectations by rational and forward-oriented agents can lead to endogenous instability. Specifically, we illustrate that resulting equilibria can be both chaotic and self-consistent with the distribution of agents' expected forecasting errors coinciding with the actual errors implied by the endogenous dynamic process. Moreover, we show that the equilibrium dynamics, while being purely deterministic, need not be distinguishable from stochastic dynamics to an outside rational observer.Rational selection over expectations Endogenous instability Chaos Consistent equilibria Costly information acquisition

Demand Side Shocks and Macroeconomic Policy

The paper focuses on short run macroeconomic dynamics triggered by demand side shocks. In particular, the paper analyzes, in a general equilibrium framework, the impact of transitory demand side shocks on the behavior of macroeconomic variables and examines the relevance of policy instruments during downturns in economics activity. The paper establishes that transitory shocks can have persistent effects. It shows that stabilization is desirable even if shocks are transitory in nature. In particular, the article reveals that debt financed government spending is a viable stabilization tool and can improve welfare at all horizons even though it inhibits physical capital formation. Finally, the paper resolves apparently contradictory observations and shows that recessions are simultaneously times of cleansing and sullyingBusiness Cycles, Policy, Debt, Welfare Costs.