Monopoly with local knowledge of demand function

In this note, we propose a model where a quantity setting monopolist has incomplete knowledge of the demand function. In each period, the firm sets the quantity produced observing only the selling price and the slope of the demand curve at that quantity. Given this information and through a learning process the firm estimates a linear subjective demand curve. We show that the steady states of the dynamic equation are critical points of the objective profit function. Moreover, results depend on convexity/concavity of the demand. When the demand function is convex and the objective profit function has a unique critical point: the steady state is a globally stable maximum; conversely when then steady state is not unique, local maximums are locally stable, while local minimums are locally unstable. On the other hand when the demand function is concave, the unique critical point is a maximum: there can be stability or instability of the critical point and period two cycles around it via a flip bifurcation. Moreover, through simulations we can observe that, with a mixed inverse demand function, there are different dynamic behaviors, from stability to chaos and that we have transition to complex dynamics via a sequence of period-doubling bifurcations. Finally, we show that the same results can be obtained if the monopolist is a price setter.     

From FDI network topology to macroeconomic instability

Journal of Economic Interaction and Coordination - Fragmentation of production undoubtedly constitutes a possible channel of economic contagion and could play a key role in the study of systemic...     

Exchange market pressure: some caveats in empirical applications

The Exchange Market Pressure (EMP) index, developed by Eichengreen et al. (1994 Eichengreen, B, Rose, AK and Wyplosz, C. 1994. Speculative attacks on pegged exchange rates: an empirical exploration with special reference to the European monetary system, NBER Working Paper No. 4898  [Google Scholar]), is widely used as a tool to signal whether pressure on a currency is softened or warded off through monetary authorities’ interventions or, rather, a currency crisis has originated. In this article we show how the index is sensitive to some assumptions behind the aggregation of the information available (exchange rates, interest rates and reserves), especially when emerging countries are involved. Specifically, we address the way exchange rate variations are computed and the impact of different definitions of the reserves, and we question the constancy of the weights adopted. These issues compound with the choice of a fixed threshold when crisis episodes are identified through the EMP index. As a result, one should exert caution in subsequent econometric analyses where a dependent binary variable is built to identify crisis periods.     

A dynamic exchange rate model with heterogeneous agents

In this paper, we analyze a heterogeneous agent model in which the fundamental exchange rate is endogenously determined by the real markets. The exchange rate market and the real markets are linked through the balance of payments. We have analytically found that there exists at least a steady state in which the exchange rate is equal to its fundamental value and incomes of both countries are equal to the autonomous components times the multiplier (as in the Income-Expenditure model). This steady state can be unique and unstable when all agents act as contrarians, while when agents act as fundamentalists it is unique but its stability depends on the reactivity of actors of the market. Finally, we show that the (in)stability of the economic system depends on both the reactivity of the markets and that of different types of agents involved. Employing well-know functional forms, we show that the model can replicate some of the statistical features of the true time series of the exchange rate.