Real exchange rate targeting and macroeconomic instability

Using an optimizing model of a small open economy, this paper studies the macroeconomic effects of PPP rules whereby the government increases the devaluation rate when the real exchange rate—defined as the price of tradables in terms of nontradables—is below its long-run level and reduces the devaluation rate when the real exchange rate is above its long-run level. The paper shows that the mere existence of such a rule can generate aggregate instability due to self-fulfilling expectations. The result is shown to obtain in both flexible- and sluggish-price environments.     

Note on the non-existence of sunspot equilibrium

In this note, we emphasize the role of consumers’ risk aversion in the non-existence of sunspot equilibria in incomplete market economies. We prove that there are no sunspot equilibria if the fundamentals of the underlying economy admit a unique equilibrium for any distribution of endowments. This substantiates Mas-Colell’s (Economic analysis of markets and games: essays in honor of Frank Hahn. MIT, Cambridge, 1992) conjecture. We also prove that, in a two-consumer economy, no sunspot equilibrium exists under the more relaxed condition that the underlying economy admits a unique equilibrium for the initial endowment. This is a generalization of Corollaries 1 and 2 of Hens and Pilgrim (Econ Theory 24:583–602, 2004).      

Manipulation of endowments and sunspot equilibria

We study the connection between occurrence of manipulation via reallocating endowments by coalitions and sunspot equilibria. The uncertainty about which coalition will form introduces extrinsic uncertainty into the economy. Under certain conditions, manipulation of endowments by coalitions can occur if and only if sunspots matter. We would like to thank Bill Ethier, Atsushi Kajii, Cuong Le Van, Karl Shell, Koji Shimomura, Nicholas Yannelis, an anonymous referee, as well as seminar participants at the Second Asian General Equilibrium Theory Workshop, 2005, Tokyo; Workshop on Uncertainty and Information, IMS, NUS, 2005; Kobe Institute of Economic Research; Public Economic Theory 2005 Conference, Marseille; and the South and South East Asia Econometric Society Meetings, 2006, Chennai for helpful discussions and comments.     

Quasi-fundamental exchange rate variation

Summary. This paper uses a general equilibrium model to study the determination of the exchange rate in an economy with fundamental uncertainty. The model has steady state equilibria in which the exchange rate is constant. These equilibria may coexist with “quasi-fundamental” equilibria – nonstationary equilibria in which the exchange rate displays stochastic fluctuations that are correlated with the fluctuations in fundamental random variables. The quasi-fundamental equilibria are Pareto dominated by the corresponding constant-exchange-rate steady states. They also converge to these steady states, inevitably or with positive probability. Received: October 2, 1999; revised version: March 26, 2002 RID="*" ID="*" This paper began as a joint project with Alex Mourmouras, who has made many helpful comments and suggestions but is not responsible for any errors or deficiencies. In addition, I thank an anonymous referee for helpful comments.     

Multiple equilibria in two-sector monetary economies: An interplay between preferences and the timing for money

In this paper, we study the occurrence of local indeterminacy in two-sector monetary economies. We consider a general MIUF model with two alternative timings in monetary payments: the Cash-In-Advance timing, in which the cash available to buy goods is money in the consumers’ hands after they leave the bond market but before they enter the goods market, and the Cash-After-the-Market timing, in which agents hold money for transactions after leaving the goods market. We consider three standard specifications of preferences: the additively separable formulation, the Greenwood–Hercovitz–Huffman (GHH) (Greenwood et al., 1988) formulation and the King–Plosser–Rebelo (KPR) (King et al., 1988) formulation. First, we show that for all the three types of preferences, local indeterminacy occurs under the CIA timing with a low enough interest rate elasticity of money demand. Second, we show that with the CAM timing, although determinacy always holds under separable preferences, local indeterminacy can occur with GHH and KPR preferences. We thus prove that compared to aggregate models, two-sector models provide new rooms for local indeterminacy when non-separable standard preferences are considered.     

Self-fulfilling deflations

What types of monetary and fiscal policy rules produce self-fulfilling deflationary paths that are monotonic and empirically relevant? This paper presents simple theoretical conditions that guarantee the existence of these paths in a general equilibrium model with sticky prices. These sufficient conditions are weak enough to be satisfied by most monetary and fiscal policy rules. A quantification of the model which combines a real shock à la Hayashi and Prescott (2002) with a simultaneous sunspot that deanchors inflation expectations matches the main empirical features of the Japanese deflationary process during the “lost decade”. The results also highlight the key role of the assumption about the anchoring of inflation expectations for the size of fiscal multipliers and, in general, for any policy analysis.     

中国经济周期特征与太阳黑子均衡

本文在Benhabib、Farmer（1994）、Farmar、Guo（1994,1995）的不确定性均衡模型框架上,构建了一个考虑了信念偏差所代表的不确定因素和政府支出冲击的太阳黑子RBC模型来解释宏观经济的周期波动;并利用中国改革开放以来的经济数据,对该模型进行了实证检验。我们发现,该模型能够解释80%以上的中国经济波动特征;可以合理预测各宏观经济变量与产出之间的协动关系,合理预测各变量与劳动生产率之间的相关关系;对中国经济的解释力远远高于标准RBC模型,说明这一模型比较适合解释中国经济波动。另外,还发现信念冲击与政府支出冲击均是中国宏观经济波动的重要冲击来源,分别可以解释约30%、60%的经济波动,表明二者均是中国经济波动不可忽略的重要影响因素。我们的发现从不确定均衡和财政政策变动角度对宏观经济波动(比如,消费、就业、投资)的一些现象提供了合理解释。     

Sunspot equilibria and the transfer paradox

Summary. We show that for international economies with two countries, in which agents have additively separable utility functions, the existence of sunspot equilibria is equivalent to the occurrence of the transfer paradox. This equivalence enables us to provide some new insights on the relation of the existence of sunspot equilibria and the multiplicity of spot market equilibria.Received: 1 October 2003, Revised: 1 April 2004, JEL Classification Numbers: C62, D52, F3, F20, 012.Correspondence to: Thorsten HensWe would like to thank Anke Gerber for carefully checking and improving our arguments. Moreover, we are grateful to Piero Gottardi for his encouragement and his comments, to Andreu Mas-Colell and Mike Jerison for very fruitful discussions and to Klaus Schenk-Hoppé for his support in using . All remaining errors are ours.     

Forward and backward dynamics in implicitly defined overlapping generations models

In dynamic economic models derived from optimization principles, the forward equilibrium dynamics may not be uniquely defined, while the backward dynamics is well defined. We derive properties of the global forward equilibrium paths based on properties of the backward dynamics. We propose the framework of iterated function systems (IFSs) to describe the set of forward equilibria and apply the IFS framework to a one- and a two-dimensional version of the overlapping generations (OLG)-model. We show that if the backward dynamics is chaotic and has a homoclinic orbit (a “snap-back repeller”), the set of forward equilibrium paths converges to a fractal attractor. Forward equilibria may be interpreted as sunspot equilibria, where a random sunspot sequence determines equilibrium selection at each date.     

Introduction to financial frictions and debt constraints

This is an introduction to the special section on financial frictions and debt constraints.