Rational expectations and M2 demand

This essay expands on existing studies of M2 money demand. It differs in that it applies a rational expectations approach to an adaptive expectation model. Unlike the adaptive expectations models, the author includes an explanatory variable for expectations of future inflation. The expectation variables used are: the actual inflation rate (t + 1) and the Livingston Survey from the Philadelphia Fed. By using the different measures of expectations the author is able to compare several adaptive expectations models that appear in the literature and the rational expectations models for fit and forecast ability. The empirical results are such that the importance of including the rational expectations variable is evident even though the overall fit of the equation is comparable to one of the existing adaptive expectations models.     

Keynes,investment, unemployment and expectations

In Keynes’ General Theory, investment determines effective demand, which determines unemployment and the labour market plays a negligible role. In New Keynesian models, labour market institutions determine the natural rate of unemployment and the speed at which unemployment adjusts to it. Investment is mostly ignored as a key variable behind the problem of high unemployment, despite a strong empirical association between investment and unemployment. We discuss the evolution of the ‘Keynesian’ model, and how in the process of domesticating the General Theory, the central relationship between unemployment and investment and the role of the state of confidence was bred out of the model. We then present some evidence of the centrality of investment and expectations to the long‐term evolution of unemployment in OECD countries. We also argue that recent results in finance, which find that individuals do not behave rationally and, moreover, that there may be no basis for rational calculation, provides support for Keynes’s notion that animal spirits play a central role in investment.     

Inventory investment,investment and employment with uncertain demand

In that paper, a model of the optimal behaviour of firms with respect to the determination of capacity employment, investment and inventories is presented and estimated. Firms face an infinite horizon and an uncertain expected demand. The optimality conditions are derived, linearized and integrated. After having defined the stable optimal paths, one can proceed to the estimation of the model and to various simulations.     

Long-run investment under uncertain demand

In the literature investigating the impact of uncertainty on short-run and long-run investment, most authors have used a log linear profit function. This functional form has been generally considered a reasonable approximation for a more general one and has the advantage of providing closed form solutions for both short-run investment rule and long-run rate of capital accumulation. In this paper, we consider the profit function for the case of a monopolistic firm facing a linear demand function with additive shocks. Under this assumption, analytical solutions, for both short-run investment rule and long-run rate of capital accumulation, are not available. We then 1) propose an analytical approximation of the short-run investment rule and 2) show how such approximation can be used in order to derive the corresponding i) steady-state distribution of the optimal stock of capital and ii) the long-run average rate of capital accumulation. Finally, we compare the long-run rates of capital accumulation calculated under both profit function specifications. We find that, within a plausible range of parameter values, the two rates are significantly different. Hence, we conclude that the choice of a log linear functional form has a non-trivial impact on the magnitude of the long run rate of capital accumulation.     

Continuous utility functions for noninferior demand functions

Summary It is shown that if a demand function with no inferior goods satisfies the Slutsky conditions and has a convex range, then it is generated by a continuous utility function. The same conclusion holds when the Slutsky conditions are replaced by the strong axiom of revealed preference.     

Tax policy and investment demand: A vintage approach

The effects of changes intax incentives for investment are investigated for a putty-clay vintage model in which replacement is an economic decision without requiring static expectations or steady-state growth. It is shown that, with a Cobb-Douglas ex ante production function, the effect on output and its price is identical with that in a non-vintage model with the same parameters. The effect on investment and employment is to introduce a long-run cyclical element. Some simulations for UK manufacturing show that even the direction of the short-run effect on investment and employment can be different dates.     

Technology investment and alternative regulatory regimes with demand uncertainty

A vertically integrated incumbent and an OLO (Other Licensed Operator) compete in the market for broadband access. The incumbent has the option to invest in building a Next Generation Network that covers all urban areas with similar demand structures. The investment return in terms of demand increase is uncertain. We compare the impact of different access regulation regimes – full regulation, partial regulation (only the copper network is regulated), risk sharing – on investment incentives and social welfare. We find that, when the alternative for the OLO is using the copper network rather than leaving the market entirely, exclusion of the OLO does not necessarily happen in equilibrium even when the incumbent is better in offering value-added services. Risk sharing emerges as the most preferable regime both from a consumer and a social welfare perspective for a large range of parameters.     

Inverting systems of demand functions

This note gives a set of sufficient conditions under which a system of demand functions for “gross substitutes” can be inverted to obtain an equivalent system of inverse demand functions, and vice versa. These conditions also ensure that either system can be inverted to obtain a system of “mixed” demand functions, i.e., a mixture of demand and inverse demand functions. In addition, the resultant functions possess intuitive properties expected of gross substitutes.     

Rational expectations and the demand for money: A nonparametric approach

This paper tests the U.S. demand for money for evidence of the effect of rational expectations of the income and interest rate variables that enter as arguments into that function. The data employed are simple-sum and Divisia aggregates, and the nonparametric tests are of the identification and information orthogonality of the various monetary measures. The Akaike Criterion is used to distinguish among the alternative specifications. While non-rationality is the typical result, Divisia aggregates appear to be more “rational” than simple sum. There is evidence of mean-reversion in interest rates as well.     

Homothetic preferences and community excess demand functions

It has recently been shown that microeconomic theory imposes almost no restriction on community excess demand functions besides Walras' Law, if the economy contains no more commodities than consumers.It is shown that the same result is true if the preferences of the consumers are further restricted by the seemingly strong requirement that they be homothetic, even when the distribution of initial endowments is a set of independent points in commodity space fixed in advance except for a scaling factor which is common to all consumers.     

Linear demand functions in theory and practice

Integrability conditions for an incomplete system of linear demand functions are considered. The parameter restrictions consistent with integrability are identified, and the structure of the conditional preference map is obtained. It is found that the conditional preferences for a set of linear demand functions are either quadratic or Leontief from a translated origin. Welfare analysis with linear demand models is also considered.     

Engel curves and systems of demand functions

The functional forms of the Engel curves implied by several popular complete systems of demand functions are discussed. Among the systems are those generated by generalized quadratic indirect utility (the translog system, the generalized Leontief system, etc.), the linear and quadratic expenditure systems, and Deaton and Muellbauer's PIGL and AIDS. A new system, which can produce the Engel curves of all these systems as special cases, is suggested. The different Engel curves are tested against data from a Norwegian survey of consumer expenditure. This is done both in a complete system of Engel curves for eight commodities and commodity by commodity.     

Optimal taxation theory and excess demand functions

A class of individual excess demand functions found in optimal taxation theory is shown to restrict the set of possible community excess demand functions.     

Fixed investment,factor substitution and the elasticity of demand

The results of comparative stability analysis of demand- and supply-side input–output models using the UK data are presented, as well as the results of the comparison between the UK and US comparative stability analyses of the two models. The results of comparative stability analysis of the two models using the US data were reported elsewhere (Bon, 1986). The forecasts of sectoral and total output of the two models are generated with known final demand and value added figures from subsequent tables, and are compared with known output figures for benchmark years. The results of the UK and US studies are very similar. The demand-side model performs somewhat better in terms of total output forecasts, but the supply-side model performs some-what better for a larger number of sectors. In particular, the supply-side model offers better forecasts for the mature economic sectors such as agriculture, mining, and construction. Both models should be used to determine the extent to which an extent to which an economy or a sector are demand- or supply-driven.     

Efficiency and formation of expectations: evidence from the European investment survey

The European Commission conducts an annual survey regarding planned and realized business fixed investment across various manufacturing sectors in Euroland. In this study we investigate the predictive content of survey-based expectations on investment. In addition, we empirically test the rationality of respondents both in a time series as well as in a panel context. According to our results, based on pooling the data, efficiency is rejected since expectations are biased predictors of actual outcomes. Furthermore, expectations revisions are found to be correlated with components of the information set known at the time of decision making. Finally, our results qualify regressive expectations as the mechanism that more adequately describes the formation of expectations.     

The theory of mixed demand functions

The properties of Samuelson's mixed demand functions, which express demand as a function of a mixed set of prices and quantities, are derived. By analyzing compensated (or substitution) effects and uncompensated effects, the relationships between mixed demand functions and conditional (or rationed) demands are examined. This provides insights on the behavioral implications of consumer theory for alternative demand specifications.     

The integrability of consumer demand functions

The purpose of this paper is to characterize the class of systems of consumer demand functions that are representable as ratios of first-order polynomial functions and are integrable. Starting from a general system of consumer demand functions representable as ratios, we impose successively the restrictions corresponding to homogeneity, summability, symmetry, non-negativity, and monotonicity. We find that the only such systems which are capable of modeling arbitrary own- and cross-substitution effects are the systems generated by transcendental logarithmic utility functions.     

The role of low expectations in health and education investment and hazardous consumption

Abstract .  Young people with little 'social or health capital' may be more likely to take up hazardous consumption and shun investments in human capital, raising their likelihood of a 'rags to rags' sequence. First, diminishing marginal utility could raise the marginal benefit of hazardous consumption and the cost of investment. But poor youths may also have lower expectations of future success, independent of the choices they make. Lower expectations of success could reduce the future cost of hazardous consumption and benefit of investment. We test the effect of expectations on decisions to smoke, drink hazardously, exercise, and complete high school, using a longitudinal study of youth in New Zealand. We find that 15-year-olds' expectations of success predict the subsequent onset of smoking, lack of exercise, and failure to complete high school, but not hazardous drinking. While some of the influence of expectations can be explained by low social and health capital, IQ, and other factors, expectations retain a direct effect on smoking and exercise once these other factors are controlled for.