Destabilization effect of international trade in a perfect foresight dynamic general equilibrium model

In the present paper, we consider a two-country, two-good, two-factor general equilibrium model with CIES nonlinear preferences, asymmetric technologies across countries and decreasing returns to scale. It is shown that aggregate instability and endogenous fluctuations may occur due to international trade. In particular, we prove that the integration into a common market on which countries trade the produced good and the capital input may lead to period-two cycles even when the closed-economy equilibrium is saddle-point stable in both countries.     

Time consistency and optimal government policies in perfect foresight equilibrium

This paper develops a framework for determining optimal monetary and fiscal policies in perfect foresight equilibrium. Such equilibria have the property that all underlying demand and supply functions are derived from optimizing behavior, expectations are realized, and all markets clear. The time consistency of optimal policies derived under such circumstances is analyzed for a variety of alternative optimal policy problems. The general conclusion is that time consistency will prevail with respect to the optimization of any single policy instrument which does not appear explicitly in the indirect utility functions; otherwise time inconsistency will result. Monetary instruments are generally examples of the former, and fiscal instruments examples of the latter.     

Effect of restricting asset trade in dynamic equilibrium models

Abstract. This paper shows that differences between the predictions of an international real business cycle model with complete markets and the predictions of a model where agents can trade only risk-free bonds depend heavily on three parameters: discount factor, and degrees of persistence and spillovers in productivity shocks. This sensitivity explains apparently paradoxical results previously obtained in the literature. Also, since empirical work finds that two of those parameters are not estimated precisely, the outcomes of quantitative studies comparing complete-markets and bond economies using only the point estimates of those parameters inherit the substantial uncertainty in the parameter estimates.     

Money,growth, and the stability of the steady state under myopic perfect foresight

The stability of a monetary growth model is demonstrated. It differs from the standard two- asset model in the presence of interest bearing government debt, the endogenous determination of the money supply and an investment function that is sensitive to interest rates and disposable income.     

Predator-prey and neo-classical models of cyclical growth

Journal of Economics -     

Perfect foresight models and the dynamic instability problem from a higher viewpoint

Dynamic macroeconomic models incorporating perfect foresight expectations can display a dynamic instability of the saddle point type. So that unless the initial values happen to place the system on the stable arm of the saddle point, the economic variables will diverge ever more from the equilibrium. We consider the dynamic instability problem in a simple model of monetary dynamics which is non-linear and assumes adaptive expectations which are characterized by an expectations time lag. This model is shown to have a stable limit cycle. By considering perfect foresight as the limit as the expectations time lag tends to zero we are able to view the perfect foresight model from a dimension higher than that from which is it is normally viewed. We are thus able to see that the stable limit cycle continues to exist for the perfect foresight model as well. In this framework there is no longer a dynamic instability problem since whatever the intial values time paths are tending to the stable limit cycle.     

Equilibrium, stability, and deficit financing in a simple nonlinear monetary model under perfect foresight

This paper shows how the nonlinearities associated with inflation taxes and interest payments give rise to problems of nonexistence and nonuniqueness of equilibria. For any choice of fiscal and monetary policy parameters, two sets of steady state equilibria are identified. One of these is associated with a nonzero rate of inflation and depends upon both the monetary and fiscal policy parameters. The other is associated with a stable price level and is independent of the monetary policy parameter. The stability properties resulting from the interaction between the sign and size of the budget deficit and alternative modes of deficit financing are analyzed. These depend critically upon the associated steady state and a variety of types of behavior may result.     

Risk-dominance and perfect foresight dynamics in N-player games

In perfect foresight dynamics, an action is linearly stable if expectation that people will always choose the action is self-fulfilling. A symmetric game is a PIM game if an opponent's particular action maximizes the incentive of an action, independently of the rest of the players. This class includes supermodular games, games with linear incentives and so forth. We show that, in PIM games, linear stability is equivalent to u-dominance, a generalization of risk-dominance, and that there is no path escaping a u-dominant equilibrium. Existing results on N-player coordination games, games with linear incentives and two-player games are obtained as corollaries.     

Pure exchange equilibrium of dynamic economic models

This paper studies competitive equilibrium over time of a one good model in which the agents are members of a population which grows at a constant rate. Each agent lives for n periods and in the i-th period of his life receives an endowment of e_i units of goods. Goods can neither be produced nor stored. The model is thus the n-period generalization of the two- and three-period models studied by Samuelson in [4]. We seek to ascertain the structure of the time paths of consumption in these models. Our results can be summarized roughly as follows: In general, there will exist two kinds of steady state paths, (i) golden rule paths in which the rate of interest equals the growth rate of population and (ii) “balanced” paths in which the aggregate assets or indebtedness of the society as a whole is zero (a fundamental fact about dynamic models is that it is possible for aggregate debt not to equal aggregate credit as it must in the static case). A model is termed classical if in the golden rule state aggregate assets are negative (or debt positive) and Samuelson (following [4]) in the opposite case. It is conjectured that the golden rule program is globally stable in the classical case and the balanced program is stable in the Samuelson case. This is established for the special case n = 2.     

Global stability of dynamic models

A necessary and sufficient condition for global stability of dynamic models is summability to one of the long-run elasticities and cointegration. The short-run coefficients automatically satisfy the homogeneity condition. A relevant restriction has to be imposed in the parameter estimation process; otherwise, the ratios of variables appearing in the model will tend to either infinity or zero, which is economic nonsense in most cases. This conclusion is particularly important for the ECM or VEC (SVEC) models that decompose behavior into long and short-run parts.     

Market structure and competitive equilibrium in dynamic economic models

Recently theorists have analyzed economies which potentially contain both finite and infinite horizon overlapping generations, using “Arrow-Debreu” (complete) markets. Typically, applied models assume recursive spot and contingent securities markets, implying a different equilibrium concept. Indeed, if infinite horizon agents are present recursive equilibria cannot exist without some side conditions on debt. With the right side conditions, we show that every recursive market equilibrium allocation is a complete market equilibrium allocation and vice versa. This bridges a gap between theory and applications, and extends existing equivalence results on market structure.     

Linking dynamic economic and ecological general equilibrium models

Although ecosystems provide myriad services to economies, only one service is considered in most renewable-resource models. The general equilibrium bioeconomic model introduced here admits a second service, and more importantly it accounts for how the two services are impacted by interactions within an eight-species ecosystem and interactions within a regional economy. Endangered Steller sea lion recovery measures via alternative pollock quotas change all ecosystem populations and all economic variables. While non-use values associated with the ecosystem (e.g., existence values) are not considered, all species matter for the economy because they are all used indirectly as support for ecosystem services. Regional welfare changes from reduced quotas show the tradeoff between consumptive and non-consumptive uses of the ecosystem.     

Inflation aversion and macroeconomic policy in a perfect foresight monetary model

This paper reexamines monetary non-superneutrality and the optimality of the optimum quantity of money in the money-in-utility Sidrauski model with endogenous fluctuations of the time preference by introducing inflation aversion. It is shown that the long-run superneutrality of the standard Sidrauski model does not hold, and Friedman's optimum quantity of money is not optimal.     

Existence and local indeterminacy of periodic equilibrium paths in infinite horizon models with external effects

Summary. It is expected that every periodic equilibrium path may exist even under standard assumptions such as low discounting and the concavity of utility functions in infinite horizon models with external effects. Nevertheless, until now no such example has been presented. In this note we will first construct a bounded growth model that has an external effect and every periodic equilibrium path under any discount factor. Next we will study the conditions under which periodic equilibrium paths have a local indeterminacy. Received: December 23, 1998; revised version: April 19, 1999     

Tax incidence in a model with perfect foresight of agents and rationing in markets

This paper examines the incidence of several taxes in a macroeconomic model. Producers and consumers optimize with perfect foresight. Price inertia leads to rationing in the market for goods and for labour. In the long run the system tends towards Walrasian equilibrium. Meanwhile there may be Keynesian Unemployment, Classical Unemployment or Repressed Inflation, with possible switches of regimes. Balanced budget policies are analysed by working through numerical examples.     

On the existence of pure-strategy perfect equilibrium in discontinuous games

We provide sufficient conditions for a (possibly) discontinuous normal-form game to possess a pure-strategy trembling-hand perfect equilibrium. We first show that compactness, continuity, and quasiconcavity of a game are too weak to warrant the existence of a pure-strategy perfect equilibrium. We then identify two classes of games for which the existence of a pure-strategy perfect equilibrium can be established: (1) the class of compact, metric, concave games satisfying upper semicontinuity of the sum of payoffs and a strengthening of payoff security; and (2) the class of compact, metric games satisfying upper semicontinuity of the sum of payoffs, strengthenings of payoff security and quasiconcavity, and a notion of local concavity and boundedness of payoff differences on certain subdomains of a player's payoff function. Various economic games illustrate our results.     

Uncertainty and the theory of international trade in long-run equilibrium

We consider a country with two factors and two industries, each of which faces technical and price uncertainty. Entrepreneurs choose outputs in order to maximize the expected utility of profits. They also draw factor payments and purchase consumption goods after the uncertainty isresolved. They enter and exit from an industry according to whether participation there increases their expected utility. Within this model, the validity of the propositions of neoclassical trade theory depends on how the entrepreneurs' entry decisions are affected by parameter changes via their roles as risk bearers, consumers and factor owners.     

Disaggregated data and trade policy analysis: The value of linking partial and general equilibrium models

Computable General Equilibrium (CGE) models are now routinely utilized for the evaluation of trade policy reforms, yet they are typically quite highly aggregated, which limits their usefulness to trade negotiators who are often interested in impacts at the tariff line. On the other hand, Partial Equilibrium (PE) models, which are typically used for analysis at disaggregate levels, deprive the researcher of the benefits of an economy-wide analysis, which is required to examine the overall impact of broad-based trade policy reforms. Therefore, a PE–GE, nested modeling framework has the prospect of offering an ideal tool for trade policy analysis. In this paper, we develop a PE model that captures international trade, domestic consumption and output, using Constant Elasticity of Transformation (CET) and Constant Elasticity of Substitution (CES) structures, market clearing conditions and price linkages, nested within the standard GTAP model. In particular, we extend the welfare decomposition of Huff and Hertel (2001) to this PE–GE model in order to contrast the sources of welfare gain in PE and GE analyses. To illustrate the usefulness of this model, we examine the contentious issue of tariff liberalization in the Indian auto sector, using PE, GE and PE–GE models. Both the PE and PE–GE models show that the imports of motorcycles and automobiles change drastically with both unilateral and bilateral tariff liberalization by India, but the PE model does a poor job predicting the overall size and price level in the industry, post-liberalization. On the other hand, the GE model overestimates substitution between regional suppliers due to “false competition” and underestimates the welfare gain, due to the problem of tariff averaging in the aggregated model. These findings are shown to be robust to wide variation in model parameters. We conclude that the linked model is superior to both the GE and PE counterparts.     

The stability threshold and two facets of polarization

In this paper we introduce the stability threshold that quantifies the minimal returns to size sufficient to prevent credible secession threats by regions of the country. Severity of internal tension has been linked to degree of polarization of citizens’ preferences and characteristics. We show that the increasing degree of polarization does not, in general, raise the stability threshold, even though this hypothesis holds in some asymptotic sense. We also examine the question of the number of smaller countries to be created if the unity of the large country is not sustainable, and investigate the link between this number and the degree of the country polarization. JEL Classification Numbers H20, D70, D73