I present an approach to static equilibrium modeling with non-rational expectations, which is based on enriching players' typology. A player is characterized by his “data access”, consisting of: (i) ...“news access”, which corresponds to a conventional signal in the Harsanyi model, and (ii) “archival access”, a novel component representing the player's piecemeal knowledge of steady-state correlations. Drawing on prior literature on correlation neglect and coarse reasoning, I assume the player extrapolates a well-specified probabilistic belief from his “archival data” according to the maximum-entropy criterion. I show with a series of examples how this formalism extends our ability to represent and analyze strategic interactions without rational expectations.
We employ a noisy rational expectations equilibrium model to investigate the influence of relative wealth concerns on wealth gap and welfare. Our analysis reveals that the impact is sensitive to the ...exogeneity or endogeneity of information. When information is exogenous, the average wealth gap between high-precision and low-precision investors is either decreasing or, initially decreases and eventually increases in the degree of relative wealth concerns. Moreover, we identify two or three potential patterns regarding the monotonicity pattern of the welfare of low-precision and high-precision investors. However, when information becomes endogenous, the average wealth gap and welfare decrease.
•The impact is sensitive to the exogeneity or endogeneity of information.•The impact may be not monotonic in the case of exogenous information.•The impact is monotonic in the case of endogenous information.
The economic agents’ perception of the monetary policy might not coincide with the central bank conduct. We investigate this issue by using both actual and expected data identified by professional ...forecasters for Brazil, an emerging economy that has long adopted the inflation-targeting regime. We estimate observed, expected, and forward-looking interest rate rules, apply Full-Information Rational Expectations (FIRE) tests, assess restrictions implied by models of information rigidity, and perform several robustness checks. The estimated policy rules respond to inflation deviations and output gap according to theoretical grounds. Professional forecasters, however, do not believe in aggressiveness to fight inflation in longer forecasting horizons, while FIRE tests unveil information rigidity in the short run. There is a misalignment between the Central Bank practice and the private agents’ perception of the monetary policy in the long but not in the short run, suggesting unanchored long-term inflation expectations.
A Model of Shadow Banking GENNAIOLI, NICOLA; SHLEIFER, ANDREI; VISHNY, ROBERT W.
The Journal of finance (New York),
August 2013, Letnik:
68, Številka:
4
Journal Article
Recenzirano
Odprti dostop
We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: ...outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry-ups when investors neglect tail risks.
In this paper, we derive the Stackelberg solution associated with a leader–follower rational expectations model. By solving the dynamic rational expectations optimization problem subject to forward ...and backward stochastic difference equations (FBSDEs), we obtain the Stackelberg strategy of the leader with an adapted open-loop information structure, in terms of the FBSDEs. Furthermore, we solve the associated FBSDEs by establishing a nonhomogeneous relationship between backward and forward stochastic processes. This leads to an explicit form of the Stackelberg strategy of the leader.
ABSTRACT
The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to ...disagree about both private information and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.
We investigate whether expectations that are not fully rational have the potential to explain the evolution of house prices and the price-to-rent ratio in the United States. First, a stylized ...asset-pricing model solved under rational expectations is used to derive a fundamental value for house prices and the price–rent ratio. Although the model can explain the sample average of the price–rent ratio, it does not generate the large and persistent fluctuations observed in the data. Then, we consider a rational bubble solution, an extrapolative expectations solution and a near rational bubble solution. In this last solution agents extrapolate the future from the latest realizations and the degree of extrapolation is stronger in good times than in bad times, generating waves of over-optimism. We show that under this solution the model not only is able to match key moments of the data but can also replicate the run up in the U.S. house prices observed over the 2000–2006 period and the subsequent sharp downturn.
This paper extends the exact equivalence result between the allocations realized by self-fulfilling mechanisms and rational expectations equilibrium allocations in Forges and Minelli (1997) to a ...large finite-agent replica economy where different replicas of the same agent are allowed to receive different private information. The first result states that the allocation realized by any incentive compatible self-fulfilling mechanism is an approximate rational expectations equilibrium allocation. Conversely, the second result states that, given any rational expectations equilibrium satisfying a “uniform continuity” condition on the equilibrium price, one can construct an approximate incentive compatible self-fulfilling mechanism whose equilibrium allocation coincides with the rational expectations equilibrium allocation for all non-monetary commodities.
Abstract Expectations matter in dynamic models where decisions in one period have implications for outcomes in subsequent periods. Rational expectations were once the dominant assumption but its ...popularity is waning. Human decision‐making deviates from rationality suggesting important influences of perceptions and beliefs on decision‐making. The articles in this special issue provide up‐to‐date reviews of the importance of expectations, beliefs, and perceptions including the role of social media in shaping them.
Public support for a conflict is not a blank check. Combat provides information people use to update their expectations about the outcome, direction, value, and cost of a war. Critical are ...fatalities—the most salient costs of conflict. I develop a rational expectations theory in which both increasing recent casualties and rising casualty trends lead to decreased support. Traditional studies neither recognize nor provide a method for untangling these multiple influences. I conduct six experiments, three on the Iraq War (two with national, representative samples) and three with a new type of panel experiment design on hypothetical military interventions. The results of hazard and ordered logit analyses of almost 3,000 subjects support a rational expectations theory linking recent casualties, casualty trends, and their interaction to wartime approval. I also examine the effects of the probability of victory, information levels, and individual characteristics on the support for war, and contrast results from representative and convenience samples.
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