Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 204 Abstract:
In an overlapping generations model with borrowing and lending, uncertainty, and asymmetric information, fiat money may be essential to the existence of a competitive equilibrium. It may also serve to enhance the information of economic agents in a well-defined sense. In addition, the model presented provides suggestions about why the presence of valued fiat currency is essential to existence of equilibrium, even though in equilibrium perfect substitutes for money may exist.
Creator: Mulligan, Casey B. Series: Great depressions of the twentieth century Abstract:
I prove some theorems for competitive equilibria in the presence of distortionary taxes and other restraints of trade, and use those theorems to motivate an algorithm for (exactly) computing and empirically evaluating competitive equilibria in dynamic economies. Although its economics is relatively sophisticated, the algorithm is so computationally economical that it can be implemented with a few lines in a spreadsheet. Although a competitive equilibrium models interactions between all sectors, all consumer types, and all time periods, I show how my algorithm permits separate empirical evaluation of these pieces of the model and hence is practical even when very little data is available. For similar reasons, these evaluations are not particularly sensitive to how data is partitioned into "trends" and "cycles." I then compute a real business cycle model with distortionary taxes that fits aggregate U.S. time series for the period 1929-50 and conclude that, if it is to explain aggregate behavior during the period, government policy must have heavily taxed labor income during the Great Depression and lightly taxed it during the war. In other words, the challenge for the competitive equilibrium approach is not so much why output might change over time, but why the marginal product of labor and the marginal value of leisure diverged so much and why that wedge persisted so long. In this sense, explaining aggregate behavior during the period has been reduced to a public finance question - were actual government policies distorting behavior in the same direction and magnitude as government policies in the model?
Stichwort: Depressions, Taxes, World War 2, and Competitive equilibrium models Fach: H30 - Fiscal Policies and Behavior of Economic Agents: General, E32 - Business Fluctuations; Cycles, and C68 - Computable General Equilibrium Models
Creator: Bassetto, Marco Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 624 Abstract:
How should a government use the power to commit to ensure a desirable equilibrium outcome? In this paper, I show a misleading aspect of what has become a standard approach to this question, and I propose an alternative. I show that the complete description of an optimal (indeed, of any) policy scheme requires outlining the consequences of paths that are often neglected. The specification of policy along those paths is crucial in determining which schemes implement a unique equilibrium and which ones leave room for multiple equilibria that depend on the expectations of the private sector.
Stichwort: Government strategy, Implementation, Commitment, and Competitive equilibrium Fach: E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, F34 - International Lending and Debt Problems, and C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
Creator: Kehoe, Patrick J. and Perri, Fabrizio Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 621 Abstract:
Previous literature has shown that the study and characterization of constrained efficient allocations in economies with limited enforcement is useful to understand the limited risk sharing observed in many contexts, in particular between sovereign countries. In this paper we show that these constrained efficient allocations arise as equilibria in an economy in which private agents behave competitively, taking as given a set of taxes. We then show that these taxes, which end up limiting risk sharing, arise as an equilibrium of a dynamic game between governments. Our decentralization is different from the existing ones proposed in the literature. We find it intuitively appealing and we think it goes farther than the existing literature in endogenizing the primitive forces that lead to a lack of risk sharing in equilibrium.
Stichwort: Sustainable equilibrium, Decentralization, Incomplete markets, Default, Enforcement constraints, Sovereign debt, and Risk-sharing Fach: E44 - Financial Markets and the Macroeconomy, D50 - General Equilibrium and Disequilibrium: General, E32 - Business Fluctuations; Cycles, F34 - International Lending and Debt Problems, E21 - Macroeconomics: Consumption; Saving; Wealth, and F30 - International Finance: General
Creator: Kehoe, Patrick J. and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 307 Abstract:
We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy, these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital, these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.
Stichwort: Decentralization, Default, Sustainable equilibrium, Incomplete markets, Sovereign debt, Risk-sharing, and Enforcement constraints Fach: E32 - Business Fluctuations; Cycles, F34 - International Lending and Debt Problems, E21 - Macroeconomics: Consumption; Saving; Wealth, D50 - General Equilibrium and Disequilibrium: General, F30 - International Finance: General, and E44 - Financial Markets and the Macroeconomy
Creator: Prescott, Edward C. and Ríos-Rull, José-Víctor Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 329 Abstract:
Arrow-Debreu competitive equilibrium analysis is extended to environments with information sets differing in space as well as in time and with people moving between locations. Equilibrium is shown to exist and to be optimal and the equilibrium price system is characterized. Such environments include many of those studied in the equilibrium search literature.
Replaced by WP 449.
Stichwort: Growth, Classical approach, Competitive general equilibrium, Production, and Search environment Fach: D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness and O21 - Planning Models; Planning Policy
Creator: Bryant, John B. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 149 Abstract:
Game theory addresses a problem which is central to economics. Yet, according to the folklore of economics, game theory has failed. This paper argues that this is an incorrect interpretation of the game theory literature. When faced with a well-posed problem, game theory provides a solution. Procedures for facing game theory with well-posed problems are suggested, and examples of economic applications provided. The applications are Samuelson's fiat money model, Phelps' capital overaccumulation problem, multiple rational expectations equilibria, and a bargaining problem.
Stichwort: Nash equilibrium, Minimax-Nash, and Competitive equilibrium Fach: C72 - Noncooperative Games
Creator: Eichenbaum, Martin S. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 148 Abstract:
A critical roadblock to modelling inventories of finished goods has been the claim that production and inventory decisions of a perfectly competitive firm are determined independently of each other. A basic goal of this study is to specify fundamental preferences of economic agents, technologies, constraints and market structures that are, in a rough way, capable of generating patterns of serial correlation and cross correlation between inventories and employment of factors of production that are consistent with those observed in the data. The claim is made that the time series for inventories, output and employment can be interpreted as emerging from a well specified dynamic, stochastic competitive equilibrium in which economic agents are assumed to form rational expectations about variables not included in their information sets. Inventories and employment will not be related in a direct way if and only if the price elasticity of demand for output is equal to infinity.
Stichwort: Time series analysis and Competitive equilibrium Fach: C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models and D51 - Exchange and Production Economies
Creator: Shell, Karl and Wright, Randall D. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 133 Abstract:
We analyze economies with indivisible commodities. There are two reasons for doing so. First, we extend and provide new insights into sunspot equilibrium theory. Finite competitive economies with perfect markets and convex consumption sets do not allow sunspot equilibria; these same economies with nonconvex consumption sets do, and they have several properties that can never arise in convex environments. Second, we provide a reinterpretation of the employment lotteries used in contract theory and in macroeconomic models with indivisible labor. We show how socially optimal employment lotteries can be decentralized as competitive equilibria once sunspots are introduced.
Stichwort: Contract theory, Economic theory, Equilibrium theory, Competitive equilibrium, and Macroeconomic model