We study a dynamic duopoly model of R\&D to analyze the impact of imperfect appropriability on market structure and welfare. We pursue this analysis by extending the Markov-Perfect dynamic industry model proposed by Ericson and Pakes (EP) (1995), through the introduction of a non-proprietary productivity component to R\&D as part of a dynamic, stochastic process. We find that when spillovers are costless, or that when firms can absorb spillovers by investing in imitative R\&D, the impact of the extent of spillovers on concentration levels is negligible. However, when.spillovers require absorptive capacity investment in own R\&D, concentration levels decline with increases in the extent of spillovers and welfare improves. The difference lies in the degree of substitutability between own and external R\&D sources. When own and external R\&D are perfect or nearly perfect substitutes, the rates of innovation and hence the market structures are unaffected. When spillovers can only be obtained through absorptive R\&D, the degree of substitutability falls, leading to higher rates of innovation, particularly by smaller firms,and a less concentrated market structure.
In an article by Comte and Renault, a generalization of Stochastic Differential Equations to continuous fractional processes is presented. However, the problems in estimating such models are barely discussed there. In the present paper I analyze a new model, namely a long-memory generalization of Ornstein-Uhlenbeck type processes, which are the continuoustime analogues of long-memory autoregressions of order 1. A fractional Brownian motion with drift is a special case. These are important examples of applications in asset pricing and the term structure of interest rates. It turns out that the covariance structure may be simplified substantially by performing a simple integral wavelet transform, namely the Haar transform. By using the so–called confluent hypergeometric function, first the exact expression for the covariance function of the long memory Ornstein-Uhlenbeck process is found. Secondly, by using the Haar wavelets this covariance function is transformed to facilitate estimation of the parameters. The Haar wavelets also result in a natural sampling procedure. Computation is simplified in consequence of using wavelet transforms.
Czech Republic, Hungary and Poland will have to join the European and Monetary Union. Surprisingly, there is very little work on the welfare consequences of the loss of monetary policy flexibility for these countries. This paper fills this void by providing a framework to evaluate quantitatively the economic costs of joining the EMU. Using a two country dynamic general equilibrium model with sticky prices we investigate the economic implications of the loss of monetary policy flexibility associated with EMU for each country. The main contribution of our general equilibrium approach is that we can evaluate the effects of monetary policy in terms of welfare. Our findings suggest that these economies may experience sizable welfare losses as a result of joining the EMU. Results show that the cost associated with the loss of the monetary policy flexibility is bigger in the presence of persistence technological shocks, weak correlation of monetary shocks, strong risk aversion and a small trade share with the EMU
This paper investigates the impact of financial development on property valuation in a rational expectations framework by modeling the agency theoretic perspective of risk averse investors (property owners) and financiers (banks/ capital markets). In contrast to previous research, we consider a setting in which financiers possess no inherent information processing or monitoring advantages. We demonstrate that property financing is undertaken in a pecking order of increasing pareto-efficiency (with reduction in its overall costs and a subsequent increase in the value of the underlying collateral) in a three staged process as financial architecture advances from a partially liberalized bank to the developed stage of capital markets. The primary solution is obtained in the rudimentary stage of commercial banks (in a specialized banking system), where the default-free mortgages are pareto-optimal to defaulting mortgages in accordance with the prognosis of Scott (1976) and Stulz and Johnson (1985). A pareto-improvement of the first solution is obtained by removing the restriction on ownership of property for financiers such as universal banks and pension funds, insurance companies, etc. This solution resolves the real estate version of the asset location puzzle (see Geltner and Miller, 2001). A further pareto-enhancement of this equilibrium is obtained under financial innovation by embedding the above default-free mortgage with options (in the form of a participating mortgage) in accordance with the prognosis of Green (1984), Haugen and Senbet (1981, 1987) and Schnabel (1993). Our results yield implications for financial system development. Our analysis predicts that an optimal financial system will configure itself skewed towards capital markets irrespective of the source of its origination (from specialized banking system or universal banking system). We also rationalize the co-existence of banks and financial markets in a well-developed financial system
This paper investigates the process of deriving a single decision solely based on the decisions made by a population of experts. Four different amalgamation processes are studied and compared among one another, collectively referred to as central decision makers. The expert, also referred to as reference, population is trained using a simple genetic algorithm using crossover, elitism and immigration using historical equity market data to make trading decisions. Performance of the trained agent population’s elite, as determined by results from testing in an out-of-sample data set, is also compared to that of the centralized decision makers to determine which displays the better performance. Performance was measured as the area under their total assets graph over the out-of-sample testing period to avoid biasing results to the cut off date using the more traditional measure of profit. Results showed that none of the implemented methods of deriving a centralized decision in this investigation outperformed the evolved and optimized agent population. Further, no difference in performance was found between the four central decision makers
In applied microeconometric panel data analyses, time-constant random effects and first-order Markov chains are the most prevalent structures to account for intertemporal correlations in limited dependent variable models. An example from health economics shows that the addition of a simple autoregressive error terms leads to a more plausible and parsimonious model which also captures the dynamic features better. The computational problems encountered in the estimation of such models -- and a broader class formulated in the framework of nonlinear state space models -- hampers their widespread use. This paper discusses the application of different nonlinear filtering approaches developed in the time-series literature to these models and suggests that a straightforward algorithm based on sequential Gaussian quadrature can be expected to perform well in this setting. This conjecture is impressively confirmed by an extensive analysis of the example application.
The policies related to regional economic activity developed by European Union (EU) and the role played by regions as economic subject have determined a bigger set of disaggregated statistics at macroeconomic level. The methodologies used nowadays by the Italian national institute of statistics (ISTAT) are based on an information set build on the basis of inner statistical surveys and other external sources. The estimates of regional accounts carried out on the complete information set require an amount of time bigger than the one expected for the already mentioned aims. A strong need to carry out advanced estimates of regional accounts in a quicker time has emerged. The Kalman filter could be the right tool if we use a short time series span. Since it is available a larger data set from ISTAT web site (www.istat.it) from 1980 up to 2004, a different approach will be performed here, and is mainly based on Spatial Panel recently used by Elhorst and Baltagi. SAR (simultaneous autocorrelation model) and SEM (simultaneous error model) will be used. In a similar fashion the first log differences of ULA (units of labour) will be used to forecast the first log differences of four value added branches at constant prices. Finally some conclusions will be drawn on the performances of SAR and SEM
We present an spectral numerical method for the numerical valuation of bonds with embedded options. We use a CIR model for the short-term interest rate. The method is based on a Galerkin formulation of the partial differential equation for the value of the bond, discretized by means of orthogonal Laguerre polynomials. The method is shown to be very efficient, with a high precision for the type of problems treated here and is easy to use with more general models with nonconstant coefficients. As a consequence, it can be a possible alternative to other approaches employed in practice, specially when a calibration of the parameters of the model is needed to match the observed market data.
In this paper we use a non-tA¢tonnement dynamic macroeconomic model with overlapping generations of consumers to study the role of expectations and inventories in the business cycle. Prices are fixed at the beginning of each period but adjusted between periods, taking into account possible market imbalances that have occurred within the period in an equilibrium with stochastic rationing. Producers hold inventories if they do not succeed to sell all their supply in the current period. Consumers too may store the consumption good so as to transfer it to the second period of their life. Whether they do this depends on their price expectations: only if they expect the price to rise will they desire to buy the planned consumption for both periods in the first period. Therefore price expectations are decisive for the type of dynamics that comes forth. In particular there are multiple equilibria in the sense that, for otherwise the same parameters but with different types of expectations, there are sequences of inflationary as well as deflationary equilibria with self-confirming expectations. In addition, and consistent with expectations, there may be endogenous expectations-switching along a trajectory. The above framework is applied to policy evaluations regarding the effectiveness of measures to overcome a quasi-stationary state of deflationary recession with underemployment, as is currently occurring in Japan. Such a state may have been provoked by a restrictive monetary shock and exasperated by over-investment and inventory holding, the latter by amplifying the spill-over effect from the goods to the labour market. If the recession is not to deep, creating inflationary expectations succeeds in exiting from the recession. Otherwise there may be a temporary effect of reducing unemployment but then the economy falls back into recession. Thus in that case other policy measures have to be taken, too. Among these, and contrary to conventional wisdom, balanced-budget cuts in taxes and government spending combined with downward rigidity of nominal wages seem to be the most effective ones.
The present paper discusses implications for Agent-based Computational Economics (ACE) of a formal definition of emergence introduced by Dessalles, Phan in part I of this work. This exemplification is based on an extension of the model of emergence of classes by Axtell et al. The present paper is an attempt to integrate both downward and upward causation in one single framework, in which the whole is the result of the collective interactions between agents, but, in which the agents are constrained by the whole (downward causation), by way of the social dimension of their belief (imergence). One limit of the basic model is that dominant and submissive classes remain implicit: classes only emerge for external observers (weak emergence). We enhance the model to allow for strong emergence: agents get an explicit representation of the dominant class whenever that class emerges. While with strong emergence class behaviour may became a stochastically stable regime
This paper employs a standard new Keynesian model to compute the inflation/output volatility frontier, i.e. the curve. The computation is performed both under equilibrium uniqueness and under indeterminacy. While under uniqueness the Taylor curve looks like expected - i.e. a monotonically decreasing curve in the ($\sigma x$, $\sigma \Pi$) diagram -, under indeterminacy a new result arises. We find that the tighter is the monetary policy, the higher is the inflation/output gap volatility. This is due to impact of systematic monetary policy on inflation and output persistence. In fact, under indeterminacy a more aggressive monetary policy causes an increase in inflation persistence, and augments its volatility. The effects on output tend to be of opposite sign. This finding is robust to different parameterization of the DSGE new-Keynesian monetary model employed. This result i) offers support the move from passive to active monetary policy as one of the possible rationales for the Great Moderation, ii) underlines the need of a deeper understanding of the link between systematic monetary policy and macroeconomic persistence, and iii) warns against sub-samples pooling when performing macroeconometric analysis.
This paper tries to assess which kind of real rigidities can enhance our understanding of inflation and labor market dynamics in a dynamic general equilibrium model with capital and labor market frictions and nominal price rigidities. We particularly introduce real wage rigidities through non-separable preferences as suggested by ChA©ron and Langot (2004). This aims to obtain weaker procyclical real wage in the lines of recent literature. We show that the real rigidities, namely habit formation in consumption and capital adjustment cost improve our understanding of inflation dynamics and persistent real effects of monetary shocks. In addition, we investigate the effects of positive technology shocks on the labor market dynamics.
Many have questioned the empirical relevance of the Calvo-Yun model. This paper appends three widely-studied macroeconomic models (Calvo-Yun, Hybrid and Svensson) with forward rate curves. We back out from observations on the yield curve the underlying macroeconomic model that most closely matches the level, slope and curvature of the yield curve. With each model we trace the response of the yield curve to macroeconomic shocks. We assess the fit of each model with the observed behaviour in forward rates. We find limited support for Calvo-Yun model in terms of fit with the observed yield curve but we find some support for each of the Hybrid and Svensson models. We conclude that macroeconomic persistence seems to be priced into the yield curve
Using monthly data from 1926:01 to 2003:12 for the United States, this paper examines the predictability of real stock prices based on the dividend-price ratio. In particular, we focus on estimating and forecasting a nonlinear exponential smooth autoregressive model (ESTAR). One motivation for nonlinearity in asset markets is the presence of transaction costs, which result in a nonlinear adjustment process towards equilibrium through arbitrage. Using a novel approach that allows for the joint testing of nonlinearity and nonstationarity, we are able to reject the null hypothesis of linearity and that of a nonlinear unit root. We also find evidence of a nonlinear cointegrating relationship between stock prices and dividends where the error correction term follows a globally stationary ESTAR process. This evidence together with nonlinear impulse response functions, which show that large deviations have faster speeds of mean reversion than small deviations indicates that while stock prices may reflect their fundamentals in the long run, they may deviate substantially from their fundamentals for periods of time. Using an ESTAR-EGARCH model of the dividend-price ratio we find empirical support for in-sample and out-of-sample long-horizon predictability, and we explain why it is often difficult to exploit this predictability using real-time forecasts.
We present an optimal (Ramsey) social security policy analysis in the presence of demographic uncertainties and incomplete markets. According to our findings, a social security system is an efficient instrument for intergenerational risk-sharing. When compared with government debt, a pay-as-you-go (PAYG) financed pension system comes closer to the complete markets solution. We further compute impulse response functions to analyze the reactions of purely private markets and the government to exogenous shocks. The higher the impatience of the government relative to the private agents, the more sizeable is the PAYG pension system and the more are the positive impacts of shocks shifted to today’s generations
By following the spirit in Favero and Milani (2005), we use recursive thick modeling to take into account model uncertainty for the choice of optimal monetary policy. We consider an open economy model and generate multiple models for only the aggregate demand and aggregate supply. Models are constructed by matching the rankings of aggregate demand and aggregate supply and adding other specifications for the rest of the variables. The main results show that recursive thick modeling with equal and different weights approximates the recent historical behavior of nominal interest rates in Mexico better than recursive thin modeling
The paper investigates the impact of retailer's myopic behavior on the strategies and outcomes of channel members. Myopia means that the retailer disregards the evolution of the state of the system when optimizing her payoff. The channel is formed of a single manufacturer selling her product through an exclusive retailer. The manufacturer controls the wholesale price and the advertising rate in the brand equity and the retailer the local promotional effort and the retail price. Feedback Nash equilibria are sought for the two scenarios, i.e., with a myopic retailer and a far-sighted one. Since the equilibria turn out to be not amenable to a qualitative analysis, we design a series of simulations to analyze the impact of key model's parameters on strategies and outcomes, as well as to assess the impact of myopia on them
This paper estimates a standard version of the New Keynesian Monetary Model (NKM) augmented with the term structure in order to analyze two types of issue. First we analyse the relative importance of policy inertia, persistent policy shocks and the term spread in the estimated US monetary policy rule. Second, we study the ability of the model to reproduce some stylized facts such as high persistent dynamics and the weak comovement between economic activity and inflation observed in actual US data. The estimation procedure implemented is a classical structural method based on the indirect inference principle. The empirical results show that (i) policy intertia, persistent policy shocks and the term spread are all significant determinants in the estimated US monetary policy rule, (ii) the Fed responds to the information content of the spread about future inflation and real activity, but the Fed does not seem to respond independently to the spread; and (iii) the model augmented with term structure reproduces the weak comovement between economic activity and inflation as well as the strong comovement at medium and long-term forecast horizons between the Fed rate and the 1-yar rate observed in the US dat
