Research Database

Three of the arguments made by Temin (2008) in his review of Great Depressions of the Twentieth Century are demonstrably wrong: that the treatment of the data in the volume is cursory; that the definition of great depressions is too general and, in particular, groups slow growth experiences in Latin America in the 1980s with far more severe great depressions in Europe in the 1930s; and that the book is an advertisement for the real business cycle methodology. Without these three arguments — which are the results of obvious conceptual and arithmetical errors, including copying the wrong column of data from a source — his review says little more than that he does not think it appropriate to apply our dynamic general equilibrium methodology to the study of great depressions, and he does not like the conclusion that we draw: that a successful model of a great depression needs to be able to account for the effects of government policy on productivity.

This paper describes a dynamic model in which the provision mechanism for a public project is itself the object of locational choice of individuals. Individuals in an ongoing society must choose between a Majority Rule mechanism and a Voluntary Contribution mechanism. Each mechanism determines a funding decision for a local public project which is repeated over time. Generations of individuals asynchronously supercede their “parents,” creating an entry/exit process that allows individuals with possibly different beliefs to enter society. A self confirming equilibrium (SCE) belief process describes an evolution of beliefs in this society consistent with a self confirming equilibrium of the repeated location/provision game. Due to Fudenberg and Levine (1993), SCE is weaker than Nash as it requires correct forecasts of an individual only along the realized path during the individual's lifetime. Since individuals' beliefs on out-of-equilibrium behavior may vary, an SCE belief process may admit random and heterogenous forecasts in the form of mutations of beliefs across generations as newborn individuals enter the system. It is shown that the process with belief mutation results in a globally absorbing state in which the Majority Rule mechanism is the unique survivor of the two.

Under a narrow set of assumptions, Chamley (1986) established that the optimal tax rate on capital income is eventually zero. This study examines and extends that result by relaxing Chamley’s assumptions, one by one, to see if the result still holds. It does. This study unifies the work of other researchers, who have confirmed the result independently using different types of models and approaches. This study uses just one type of model (discrete time) and just one approach (primal). Chamley’s result holds when agents are heterogeneous rather than identical, the economy’s growth rate is endogenous rather than exogenous, the economy is open rather than closed, and agents live in overlapping generations rather than forever. (With this last assumption, the result holds under stricter conditions than with the others.)

This paper develops a Limited-Dependent Rational Expectations (LD-RE) model where the bounds can be fixed for an extended period, but are subject to occasional jumps. In this case, the behavior of the endogenous variable is affected by the agent's expectations about both the occurrence and the size of the jump. The RE solution for the one-sided and two-sided band are derived and shown to encompass the cases of perfectly predictable and stochastically varying bounds examined by earlier literature. We demonstrate that the solution for the one-sided band exists and is unique when the coefficient of the expectational variable is less than one. In the case of a two-sided band, the RE solution exists for all the parameter values and is unique if the coefficient of the expectational variable is less than or equal to one. These results hold even when the jump probability is stochastically varying and the error terms are conditionally heteroscedastic. As an illustration, we estimate a model of exchange rate determination in a target zone using data for the Franc/Mark exchange rate. Empirical results provide support for the non-linear model with time-varying realignment probability and indicate that the agents correctly anticipated most of the observed changes in the central parity.