The Impact of EMU on Inflation Expectations

This paper analyses the impact of the monetary regime change from the Bundesbank to the ECB on inflation expectations. In the theoretical part, the Barro-Gordon model is used to derive the potential effect of a new central bank on inflation and inflation expectations. The econometric investigation is based on a flexible specification of expectation formation which allows both for rational and adaptive elements. The results indicate that the monetary regime change did not have a strong and lasting impact on the formation of inflation expectations and that the credibility of both central banks is not perceived to differ significantly anymore. JEL Classification Numbers: E 58, E 31     

Measuring agents’ reaction to private and public information in games with strategic complementarities

In games with strategic complementarities, public information about the state of the world has a larger impact on equilibrium actions than private information of the same precision, because public signals are more informative about the likely behavior of others. We present an experiment in which agents’ optimal actions are a weighted average of the fundamental state and their expectations of other agents’ actions. We measure the responses to public and private signals. We find that, on average, subjects put a larger weight on the public signal. In line with theoretical predictions, as the relative weight of the coordination component in a player’s utility increases, players put more weight on the public signal when making their choices. However, the weight is smaller than in equilibrium, which indicates that subjects underestimate the information contained in public signals about other players’ beliefs.     

Going for the Wallet? Rule-of-Law Conditionality in the Next EU Multiannual Financial Framework

EU funds that promote economic convergence will hardly reach their objective in countries sliding toward a system that lacks effective checks and balances.The idea of financially sanctioning EU Member States has been advocated for some time and took shape concretely in May 2018. The European Commission presented a draft regulation to sanction Member States with “generalised deficiencies” in the rule of law, which was presented together with a comprehensive proposal for the next MFF.     

When Does Convergence of Asset Price Processes Imply Convergence of Option Prices?

We consider weak convergence of a sequence of asset price models (Sⁿ) to a limiting asset price model S . A typical case for this situation is the convergence of a sequence of binomial models to the Black–Scholes model, as studied by Cox, Ross, and Rubinstein. We put emphasis on two different aspects of this convergence: first we consider convergence with respect to the given physical probability measures (P^n) and second with respect to the risk‐neutral measures (Q^n) for the asset price processes (Sⁿ) . (In the case of nonuniqueness of the risk-neutral measures the question of the good choice of (Qⁿ) also arises.) In particular we investigate under which conditions the weak convergence of (Pⁿ) to P implies the weak convergence of (Qⁿ) to Q and thus the convergence of prices of derivative securities.
The main theorem of the present paper exhibits an intimate relation of this question with contiguity properties of the sequences of measures (Pⁿ) with respect to (Qⁿ) , which in turn is closely connected to asymptotic arbitrage properties of the sequence (Sⁿ) of security price processes. We illustrate these results with general homogeneous binomial and some special trinomial models.