Rational Expectations and the Defris-Williams Inflationary Expectations Series*

This paper evaluates the Defris-Williams inflationary expectations series as a measure of rational expectations for the period 1973(1) to 1980(2). The results show that the series violates the rationality criterion, being an inefficient and biased predictor of inflation. By constructing an ‘information-augmented’ D-W series, the quantitative importance of omitted information available to consumers at the time of making their forecasts is isolated. The key omitted economic variables are found to be lagged monetary growth and unemployment or an indexation dummy which explains 70 percent of the forecast error of the D-W series. These results suggest that a theoretically constructed expectations series may prove to be a superior measure of market expectations of inflation in Australia.     

Adaptive Learning and Iterated Weak Dominance

This article addresses the idea that rational players should not play iteratively weakly dominated strategies by showing that when a particular type of adaptive learning process converges, then players must have learned to play strategy profiles equivalent to those that survive iterated nice weak dominance and, for certain games, equivalent to those that survive iterated weak dominance. For games satisfying the weak single crossing condition, the set of strategies that survive iterated weak dominance is small in that its bounds are pure strategy Nash equilibria. The results hold regardless of the order in which dominated strategies are eliminated.Journal of Economic LiteratureClassification Number: C72.     

Iterated potential and robustness of equilibria

For any given set-valued solution concept, it is possible to consider iterative elimination of actions outside the solution set. This paper applies such a procedure to define the concept of iterated monotone potential maximizer (iterated MP-maximizer). It is shown that under some monotonicity conditions, an iterated MP-maximizer is robust to incomplete information [A. Kajii, S. Morris, The robustness of equilibria to incomplete information, Econometrica 65 (1997) 1283-1309] and absorbing and globally accessible under perfect foresight dynamics for a small friction [A. Matsui, K. Matsuyama, An approach to equilibrium selection, J. Econ. Theory 65 (1995) 415-434]. Several simple sufficient conditions under which a game has an iterated MP-maximizer are also provided.     

Induced Preferences, Nonadditive Beliefs, and Multiple Priors

We study a decision maker who follows the Savage axioms. We show that if he or she is able to take unobservable actions that influence the probabilities of outcomes, then it can appear to an outsider as if his or her subjective probabilities are nonadditive. Implications for multiperiod decision are explored. We extend the model to include a second individual who is also able to take a hidden action. We show that this may induce uncertainty-averse preferences over some class of acts, even if the second individual acts to help the decision maker with high probability.     

Priors from General Equilibrium Models for VARS*

This article uses a simple New Keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression, and shows that the resulting model is competitive with standard benchmarks in terms of forecasting, and can be used for policy analysis.     

理性预期和适应性预期股价模型的比较研究

本文首先介绍了理性预期股价模型和适应性预期股价模型 ,并对两种模型的定价方法和实证分析结果进行了比较 ,得出了较理性预期模型而言 ,适应性预期模型对于成熟股票市场有更强的解释能力 ,结论对我国股市有一定借鉴意义。     

Iterated strict dominance in general games

We offer a definition of iterated elimination of strictly dominated strategies (IESDS^*) for games with (in)finite players, (non)compact strategy sets, and (dis)continuous payoff functions. IESDS^* is always a well-defined order independent procedure that can be used to solve Nash equilibrium in dominance-solvable games. We characterize IESDS^* by means of a “stability” criterion, and offer a sufficient and necessary epistemic condition for IESDS^*. We show by an example that IESDS^* may generate spurious Nash equilibria in the class of Reny's better-reply secure games. We provide sufficient/necessary conditions under which IESDS^* preserves the set of Nash equilibria.     

Iterated strict dominance in general games

We offer a definition of iterated elimination of strictly dominated strategies (IESDS^*) for games with (in)finite players, (non)compact strategy sets, and (dis)continuous payoff functions. IESDS^* is always a well-defined order independent procedure that can be used to solve Nash equilibrium in dominance-solvable games. We characterize IESDS^* by means of a “stability” criterion, and offer a sufficient and necessary epistemic condition for IESDS^*. We show by an example that IESDS^* may generate spurious Nash equilibria in the class of Reny's better-reply secure games. We provide sufficient/necessary conditions under which IESDS^* preserves the set of Nash equilibria.     

Order Independence for Iterated Weak Dominance

In general, the result of the elimination of weakly dominated strategies depends on order. We definenice weak dominance. Under nice weak dominance, order does not matter. We identify an important class of games under which nice weak dominance and weak dominance are equivalent, and so the order under weak dominance does not matter. For all games, the result of iterative nice weak dominance is an upper bound on the result from any order of weak dominance. The results strengthen the intuitive relationship between backward induction and weak dominance and shed light on some computational problems relating to weak dominance.Journal of Economic LiteratureClassification Number: C72.     

Expectations and the Black Market Premium

The purpose of this paper is to gain a better understanding of the black market premium—the percentage differential between the black market and the official exchange rate. Tests are used to see whether the black market premium responds to variations in expectations about the official exchange rate in Argentina, Brazil, Colombia, and Mexico. Expectations of devaluation do cause movements in the black market premium for Argentina, Brazil, and Mexico but this behavior is not observed for Colombia. Colombian economic agents seem less sensitive to expected returns. This perhaps explains the relatively flat black market premium series observed for Colombia.     

Measuring Bubble Expectations and Investor Confidence

This paper presents evidence on two types of investor attitudes that change in important ways through time, with important consequences for speculative markets. The paper explores changes in bubble expectations and investor confidence among institutional investors in the U.S. stock market at six-month intervals for the period 1989 to 1998 and for individual investors at the start and end of this period.

Based on the results of the questionnaires administered during the period, the author develops specific time-series indicators for each of the following: a speculative bubble (an unstable situation with expectations for a increase in the short term only), a negative speculative bubble (an unstable situation with expectations for a downturn in the short term only), and investor confidence (a feeling that nothing can go wrong).

Using the indicators, the author produces indexes indicating the average percentage of the population at a given time with bubble expectations, negative bubble expectations, and investor confidence, respectively.     

Expectations of adult wages and teenage childbearing

The adult earnings of women and the age at which they initiated childbearing are well known to be positively correlated. Most previous research on teenage mothers has emphasized that early births reduce later earnings. This article explores whether the causality might run in the opposite direction: whether the expectation of low adult wages might increase the probability of teenage childbearing. Using the National Longitudinal Survey of Youth, and treating teenage motherhood, wages and education as jointly determined, this investigation gives strong support to the idea that low wages contribute to teenage childbearing.

I also explore two popular policy proposals for reducing the incidence of teenage childbearing: reducing transfer income and providing sex education courses. The former has only a very small effect on teenage childbearing; the latter is significant only for black adolescents.     

Expectations and interest rates on mortgage loans

We examine the role of expectations for interest rates on mortgage loans. Our empirical results, based on cointegration tests, indicate a violation of the expectations hypothesis on the German loan market. In contrast to the capital market, a failure of the expectations hypothesis on the loan market cannot be attributed to the market segmentation hypothesis. Using a simple two-period model, we can show that the deviation from the expectations hypothesis is stronger than on the capital market and such that it confirms the common practice of choosing between loans with variable or fixed interest rates.An earlier version was presented at the annual meeting of theVerein für Socialpolitik 1994. We are grateful to Jürgen Wolters and an anonymous referee for their useful comments and suggestions.     

Iterated regret minimization: A new solution concept

For some well-known games, such as the Traveler?s Dilemma or the Centipede Game, traditional game-theoretic solution concepts—most notably Nash equilibrium—predict outcomes that are not consistent with empirical observations. We introduce a new solution concept, iterated regret minimization, that exhibits the same qualitative behavior as that observed in experiments in many games of interest, including Traveler?s Dilemma, the Centipede Game, Nash bargaining, and Bertrand competition. As the name suggests, iterated regret minimization involves the iterated deletion of strategies that do not minimize regret.     

Monetary Policy,Expectations and Commitment*

Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest‐rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts.