Macroeconomic Implications of Term Structures of Interest Rates Under Stochastic Differential Utility with Non-Unitary EIS

This paper proposes a continuous-time term-structure model under stochastic differential utility with non-unitary elasticity of intertemporal substitution (EIS, henceforth) in a representative-agent endowment economy with mean-reverting expectations on real output growth and inflation. Using this model, we make clear structural relationships among a term structure of real and nominal interest rates, utility form and underlying economic factors (in particular, inflation expectation). Notably, we show that, if (1) the EIS is less than one, (2) the agent is comparatively more risk-averse relative to time-separable utility, (3) short-term interest rates are pro-cyclical, and (4) the rate of expected inflation is negatively correlated with the rate of real output growth and its expected rate, then a nominal yield curve can have a low instantaneous riskless rate and an upward slope.     

Dynamic Interactions in Trade Policy in a Differential Game Model of Tariff Protection

This paper develops a two‐country dynamic game model of tariff protection to reconsider optimal trade policies and their implications for welfare. The authors show that an import subsidy is optimal in the feedback Nash equilibria, which results in a curious possibility that the domestic market is monopolized by the foreign firrm. However, welfare comparisons among Nash equilibria, free trade, and autarky reveal that feedback Nash equilibria involve higher welfare than both autarky and free trade, i.e. dynamic noncooperative choices of policy serve as tacit policy coordination and ensure larger trade gains relative to free trade.     

The Long-run Trade Pattern in a Growing Economy

We analyze the determinants of the trade pattern in a two-country growing economy. The long-run trade pattern depends on the structure of the absolute advantage as well as the comparative advantage, because the absolute advantage determines the terms of trade and the value of the marginal product of capital which affect the growth rate in our model. Moreover, we find that opening trade reduces or removes the difference in the growth rates of the two countries when the country lagging in the growth rate has a comparative advantage in a consumption commodity. Received June 18, 2001; revised version received July 16, 2002 Published online: April 30, 2003     

Investment in Infrastructure and Effects of Tourism Boom

This paper develops a dynamic trade model of a small open economy with productivity effects of public infrastructure and inbound tourism (i.e. foreign visitors' consumption of nontradable goods produced in the home country). It is shown that the economy either specializes in the production of the nontradable good or diversifies production. In the case of specialization, a tourism boom, i.e. an increase in the foreign tourists' demand for the nontradable good, makes the economy better off. In the case of diversified production, by contrast, a tourism boom induces a deterioration in the terms of trade and the economy may be worse off.     

Rationalizable foresight dynamics

This paper proposes and studies the rationalizable foresight dynamics. A normal form game is repeatedly played in a random matching fashion by a continuum of agents who make decisions at stochastic points in time. A rationalizable foresight path is a feasible path of action distribution along which each agent takes an action that maximizes his expected discounted payoff against another path which is in turn a rationalizable foresight path. We consider a set-valued stability concept under this dynamics and compare it with the corresponding concept under the perfect foresight dynamics.     

COMMENTS ON "MONEY IS PRIVACY" BY CHARLES KAHN, JAMES McANDREWS, AND WILLIAM ROBERDS: MONETARY THEORY AND GAME THEORY*

Three classes of models on money closely related to game theoretic models are (i) search theoretic models; (ii) repeated games (in a narrow sense); and (iii) trading post games. This note tries to point out the sense of affinity between the theory of microfoundations of money and the theory of "repeated games" in a broad sense of the term.     

Are “Anti-Folk Theorems” in repeated games nongeneric?

Folk Theorems in repeated games hold fixed the game payoffs, while the discount factor is varied freely. We show that these results may be sensitive to the order of limits in situations where players move asynchronously. Specifically, we show that when moves are asynchronous, then for a fixed discount factor close to one there is an open neighborhood of games which contains a pure coordination game such that every Perfect equilibrium of every game in the neighborhood approximates to an arbitrary degree the unique Pareto dominant payoff of the pure coordination game.     

An Asymptotic Expansion Approach to Currency Options with a Market Model of Interest Rates under Stochastic Volatility Processes of Spot Exchange Rates

This paper proposes an asymptotic expansion scheme of currency options with a libor market model of interest rates and stochastic volatility models of spot exchange rates. In particular, we derive closed-form approximation formulas for the density functions of the underlying assets and for pricing currency options based on a third order asymptotic expansion scheme; we do not model a foreign exchange rate’s variance such as in Heston [(1993) The Review of Financial studies, 6, 327–343], but its volatility that follows a general time-inhomogeneous Markovian process. Further, the correlations among all the factors such as domestic and foreign interest rates, a spot foreign exchange rate and its volatility, are allowed. Finally, numerical examples are provided and the pricing formula are applied to the calibration of volatility surfaces in the JPY/USD option market.