Bayesian–Walrasian equilibria: beyond the rational expectations equilibrium

In general rational expectations equilibrium (REE), as introduced in Radner (Econometrica 47:655–678, 1978) in an Arrow–Debreu–McKenzie setting with uncertainty, does not exist. Moreover, it fails to be fully Pareto optimal and incentive compatible and is also not implementable as a perfect Bayesian equilibrium of an extensive form game (Glycopantis et al. in Econ Theory 26:765–791, 2005). The lack of all the above properties is mainly due to the fact that the agents are supposed to predict the equilibrium market clearing price (as agent’s expected maximized utility is conditioned on the information that equilibrium prices reveal), which leads inevitably to the presumption that agents know all the primitives in the economy, i.e., random initial endowments, random utility functions and private information sets. To get around this problematic equilibrium notion, we introduce a new concept called Bayesian–Walrasian equilibrium (BWE) which has Bayesian features. In particular, agents try to predict the market-clearing prices using Bayesian updating and evaluate their consumption in terms of Bayesian price estimates, which are different for each individual. In this framework agents maximize expected utility conditioned on their own private information about the state of nature, subject to a Bayesian estimated budget constraint. Market clearing is not an intrinsic part of the definition of BWE. However, both in the case of perfect foresight and in the case of symmetric information BWE leads to a statewise market clearing; it then becomes an ex post Walrasian equilibrium allocation. This new BWE exists under standard assumptions, in contrast to the REE. In particular, we show that our new BWE exists in the well-known example in Kreps (J Econ Theory 14:32–43, 1977), where REE fails to exist. This work was done in the Spring of 2005, when EJB was a visiting professor at the University of Illinois.     

The information content of market-based measures for the long-term inflation expectations of professionals: evidence from a midas analysis

Long-term inflation expectations taken from the Survey of Professional Forecasters are a major source of information for monetary policy. Unfortunately, they are published only on a quarterly basis. This article investigates the daily information content of market-based measures, such as inflation-linked swaps and breakeven inflation rates, for the next survey outcome. Using a mixed data sampling approach, we find that professionals account for the daily dynamics of market-based measures when they submit their long-term inflation expectations. We propose a daily indicator of professionals’ inflation expectations that outperforms alternative indicators that ignore the high-frequency dynamics of market-based measures. To illustrate the usefulness of the new indicator, we provide new evidence on the (re-)anchoring of U.S. inflation expectations.     

Explaining Disagreement on Interest Rates in a Taylor‐Rule Setting

Most studies on disagreement focus on one specific variable, thereby neglecting the fact that disagreement can be co‐moving with disagreement on other variables. In this paper, we explore to what extent disagreement regarding the interest rate is driven by disagreement on inflation and unemployment. This relationship can be motivated by the theoretical concept of the Taylor rule. Using survey microdata for both professional forecasters and consumers, we provide evidence that disagreement on the interest rate is mainly driven by disagreement on inflation. We further show that disagreement is significantly influenced by central bank transparency, as well as news on money and credit conditions.     

Evaluating how predictable errors in expected income affect consumption

This article studies whether anomalies in consumption can be explained by a behavioural model in which agents make predictable errors in forecasting income. We use a micro-data set containing subjective expectations about future income. This article shows that the null hypothesis of rational expectations is rejected in favour of the behavioural model, since consumption responds to predictable forecast errors. On average, agents who we predict are too pessimistic increase consumption after the predictable positive income shock. On average, agents who are too optimistic reduce the consumption.     

Rationalizable expectations and sunspot equilibria in an overlapping-generations economy

There are two theories for the treatment of market uncertainty: rationalizable expectations and sunspot equilibria. This paper shows how the game-theoretic solution concept of rationalizable expectations can be applied to an overlapping-generations exchange economy. Some general properties of these equilibria are discussed. It is shown that rationalizable-expectations equilibria are the predictions yielded by considering sunspot equilibria in which probability beliefs may differ across individuals. This result allows for a new interpretation of sunspot equilibria and helps to understand their relevance.     

Rational expectations and fixed-event forecasts: An application to UK inflation

This paper tests a version of the rational expectations hypothesis using ‘fixed-event’ inflation forecasts for the UK. Fixed-event forecasts consist of a panel of forecasts for a set of outturns of a series at varying horizons prior to each outturn. The forecasts are the prediction of fund managers surveyed by Merrill Lynch. Fixed-event forecasts allow tests for whether expectations are unbiased in a similar fashion to the rest of the literature. But they also permit the conduct of particular tests of forecast efficiency - whether the forecasts make best use of available information - that are not possible with rolling-event data. We find evidence of a positive bias in inflation expectations. Evidence for inefficiency is much less clear cut.First version received: June 2002/ Final version received: November 2003We would like two anonymous referees and an editor for comments that have significantly improved the paper. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of England.     

Expectations in micro data: rationality revisited

An increasing number of longitudinal data sets collect expectations information regarding a variety of future individual level events and decisions, providing researchers with the opportunity to explore expectations over micro variables in detail. We present a theoretical framework and an econometric methodology to use that type of information to test the Rational Expectations (RE) hypothesis in models of individual behavior. This RE assumption at the micro level underlies a majority of the research in applied fields in economics, and it is the common foundation of most work in dynamic models of individual behavior. We present tests of three different types of expectations using two different panel data sets that represent two very different populations. In all three cases we cannot reject the RE hypothesis. Our results support a wide variety of models in economics, and other disciplines, that assume rational behavior. We would like to acknowledge outstanding research assistance from Huan Ni. The Michigan Retirement Research Center (MRRC) and the TIAA-CREF Institute made this research possible through their financial support of two related projects. Benítez-Silva also acknowledges the financial support from NIH grant AG1298502 on a related project, and also from the Fundación BBVA, and the Spanish Ministry of Science and Technology through project number SEJ2005-08783-C04-01, and wants to thank the Department of Economics at the University of Maryland and the Department of Economics at Universitat Pompeu Fabra for their hospitality during the completion of this paper. Three anonymous referees provided excellent comments and suggestions. Any remaining errors are the authors’.     

Economic policy as expectations management: Keynes’ and Friedman's complementary approaches1

We investigate how Keynes and Friedman, respectively, address the issue of the disequilibria at stake in a monetary economy through a shared concern for the formation of expectations. We show that Keynes was interested in the coordination of long-term expectations regarding non-monetary assets prospective yields, while Friedman focused on the adaptation of short-term nominal expectations. Regarding the remedies to these disequilibria, both economists called for devices that aim to stabilise market expectations. As a direct outcome, Keynes designed policies that aim to stabilise the long-term state of expectations while Friedman basically aimed at the acceleration of the competitive adjustment process.     

缓解通货膨胀预期的策略思考

通货膨胀的发生会对国民经济发展产生各种不良影响,导致产业和经济结构的畸形变化.通货膨胀预期作为通货膨胀的心理延续对通货膨胀的再现起着举足轻重的作用,所以采取何种措施缓解通货膨胀预期成为中国政策运行的重点.当前通货膨胀预期是需求拉动型、成本推进型和预期型三种类型交叉,金融预期和金融作用紧密结合、投资过热、原材料成本价格上升及市场预期的影响成为通货膨胀预期动因.准确分解通货膨胀预期的成因,采取有针对性的调控政策,落实科学发展观,进行增长模式的改革以及明确宏观经济政策目标,通过合理预期应对通货膨胀预期等措施,成为缓解通货膨胀预期的必经之路.     

Inflation literacy and inflation expectations: Evidence from Austrian household survey data

Inflation expectations are known to be quite heterogeneous across agents. We investigate whether this heterogeneity is primarily due to differences in people’s understanding of the inflation process and of the goals and intentions of the central bank. Using micro data from a survey conducted among 2000 Austrian households, we construct an indicator of “inflation literacy” from several questions on people’s knowledge about different aspects of inflation. We find that this indicator helps explain both the level and the uncertainty of inflation expectations: Households with relatively higher levels of inflation literacy tend to have lower and more accurate short-term and long-term inflation expectations. Interestingly, however, they are less certain about their inflation expectations than people with lower levels of inflation literacy. We also find that people’s trust in the central bank and in its ability to maintain price stability significantly dampens their inflation expectations.     

Subjective Inheritance Expectations and Economic Outcomes

In this paper we investigate whether and to what extent inheritance expectations act as a driver of economic choices. We use survey data that are representative of the Dutch adult population with a specific module on subjective probabilities on receiving an inheritance and its amount in the next 10 years. We analyze whether the expected inheritance acts as a deterrent to saving. Results suggest that individuals perceive the expected inheritances as a potential increase of personal wealth, which leads to a reduction in savings. Expectations also appear to matter for the intentions to bequeath and for intended choices on work versus leisure in the future.     

The directions of FDI and the self-intensifying expectations of the exchange rate and the effectiveness of sterilized intervention

In this paper, we develop the Renminbi’s dynamic model to analyze the relationship between the flow directions of foreign direct investment (FDI) and the exchange rate’s expectations on the basis of distinguishing the real interest rate from the desired interest rate. We find that the exchange rate expectation has a self-intensifying mechanism, which could have a reverse effect on the country’s macroeconomic stabilization. We discuss the issue on how expectation impacts the macro economy and then analyze the conditions of successful intervention, which is helpful for policy management. __________ Translated from the The Journal of World Economy (世界经济), 2005, (7) (in Chinese)     

The Liverpool macroeconomic model of the United Kingdom

The paper describes the Liverpool Model, a rational expectations model of the UK economy used for forecasting since March 1980. The model is of the ‘new classical’ type, in that all markets clear; in the labour market, there is a union sector with one-year nominal wage contracts but the non-union sector clears excess demands. Equilibrium (or ‘natural rate’) values of output, employment, real wages, etc are endogenously determined. In- and out-of-sample errors, a full set of simulations, and a complete listing are included. The interim experience of the model as a test bed for rational expectations methods is ‘far from discouraging’.     

A new approach to measure tactical voting: evidence from the British elections

Although tactical voting attracts a great deal of attention, it is very hard to measure as it requires knowledge of both individuals’ voting choices as well as their unobserved preferences. In this article, we present a simple empirical strategy to nonparametrically identify tactical voting patterns directly from balloting results. This approach allows us to study the magnitude and direction of strategic voting as well as to verify which information voters and parties take into account to determine marginal constituencies. We show that tactical voting played a significant role in the 2010 election, mainly for Liberal–Democratic voters supporting Labour. Moreover, our results suggest that voters seem to form their expectations based on a national swing in vote shares rather than newspaper guides published in the main media outlets or previous election outcomes. We also present some evidence that suggests that campaign spending is not driving tactical voting.     

The impact of terrorism on expectations,trust and happiness – the case of the November 13 attacks in Paris,France

I use quasi-experimental evidence to measure the impact of the 13 November 2015 attacks in Paris, France, on various channels through which terrorism can affect the economy. The evidence suggests the attacks reduced optimism and increased trust in the national government but did not affect current life satisfaction nor political orientation.     

Temporary overpessimism: Job loss expectations following a large negative employment shock

Job loss expectations were widespread amongst workers in East Germany following reunification with West Germany. Though experiencing a large negative employment shock, East German workers were nevertheless overpessimistic immediately after reunification with respect to their job loss risk. Over time, job loss expectations fell and converged to West German levels, which was driven by a stabilizing economic environment and by an adaptation of the interpretation of economic signals with workers learning to distinguish individual risk from firm-level risk. In fact, conditional on actual job loss risk, East German workers quickly caught up to West Germans regarding the share of correctly predicted job losses.     

Money demand, the Cagan model, testing rational expectations vs adaptive expectations: The case of Turkey

This paper estimates the Cagan type demand for money function for Turkish economy during the period 1986:1–1995:3 and tests whether Cagan's specification fits the Turkish data using an econometric technique assuming that forecasting errors are stationary. This paper also tests the hypothesis that monetary policy was implemented in aiming to maximize the inflation tax revenue. Finally, the Cagan model is estimated with the additional assumption of rational expectations for Turkey for the considered period. First version received: March 1998/final version received: October 1998     

Disagreement in inflation expectations: empirical evidence for Colombia

The literature on expectation disagreements in emerging economies is scarce. This paper examines the disagreements in inflation expectations for the Colombian economy during the 2010–2017 period. We combine empirical tests with an analysis of a monthly survey of expectations of financial analysts in Colombia to obtain valuable evidence to formulate guidelines on the expectations modelling in developing economies. The findings indicate that disagreements present inertia and that inflation volatility increases disagreements. However, the central bank’s stance, as established through a press release, can reduce disagreement. Moreover, if central bank communication is clear and there is a credible inflation target, there tend to be fewer disagreements.