Conventional economics supposes that agents value the present vs. the future using an exponential discounting function. In contrast, experiments with animals and humans suggest that agents are better described as hyperbolic discounters, whose discount function decays much more slowly at large times, as a power law. This is generally regarded as being time inconsistent or irrational. We show that when agents cannot be sure of their own future one-period discount rates, then hyperbolic discounting can become rational and exponential discounting irrational. This has important implications for environmental economics, as it implies a much larger weight for the far future.
]]>We investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the U.S. and other G7 economies. During the postwar period, these countries experienced dramatic demographic change, although details regarding extent and timing differ from place to place. Using panel-data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in U.S. business cycle volatility. Using both simple accounting exercises and a quantitative general equilibrium model, we find that demographic change accounts for a significant part of this moderation.
]]>Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agents whose decisions are difficult to aggregate because of incomplete capital markets and the indivisible nature of labor supply. If we were to explain the model-generated aggregate time series using decisions of a stand-in household, such a household must have a nonconcave or unstable utility as is often found with the aggregate US data.
New Keynesian Macroeconomics (NKM) obeys to the new dogma that macroeconomics should be
firmly grounded in First Principles of micro theory. Households are assumed to run an intertemporal
optimization calculus with respect to leisure and consumption by making use of perfect financial markets.
The supply side is organized so that full employment prevails. Macroeconomic coordination
problems between saving and investment are absent. In order to make model predictions more compatible
with empirical facts, NKM chooses "ad hoc" microfoundations: utility functions and market
structures are designed arbitrarily to allow for persistence of macro variables. NKM's reduced hybrid
macro model, with lags and expectational leads, is a useful "work horse", compatible with various micro
reasoning. However, NKM's insistence on the representative agent obstructs an understanding of
heterogeneous beliefs and learning.
Free Exchange - Sometimes Economists Believe Strange Things
Econbrowser - The Failure of Macroeconomics?
Mark Thoma - The Unfortunate Uselessness of Most 'State of the Art' Academic Monetary Economics
]]>The two overall themes in this thesis are monetary policy, chapter 1, 2, and 3 and the interrelationships between macroeconomics on business-cycle frequencies and the bond market, chapter 3 and 4.
]]>All major industrial countries will experience significant population aging over the next several decades. In both academic circles and the business press it is widely believed that population aging will have important effects on financial markets because of its expected impact on saving rates and the demand for investment funds. This paper reviews the literature on the macroeconomic and asset market effects of population aging, focusing on four related issues: (a) The impact of population age structure on aggregate household saving; (b) The effect of population aging on investment demand; (c) Evidence on the influence of population age structure on financial market asset prices and returns; and (d) Effects of globalization on our interpretation of the impact of demographic change.
]]>Lots of nice papers and discussion among the "big guns" of this field.
]]>Frederic S. Mishkin (2007) - Headline versus Core Inflation in the Conduct of Monetary Policy, At the Business Cycles, International Transmission and Macroeconomic Policies Conference, HEC Montreal, Montreal, Canada
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Donald G. Freeman (1997) - Do core inflation measures help forecast inflation? Economics Letters Volume 58, Issue 2, 1 February 1998, Pages 143-147
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Alan Mankikar & Jo Paisley (2004) - Core Inflation: A Critical Guide, Bank of England - Monetary Analysis Bank of England Working Paper No. 242
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Mark A Wynne (1999) - Core Inflation: A Review of Some Conceptual Issues, ECB Working Paper No. 5
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Those lecture notes cover the basics of a course in microeconomic theory for MSc students in Economics. They were developed over five years of teaching MSc Economic Theory I in the School of Economics at the University of East Anglia in Norwich, UK. The lectures differ from the standard fare in their emphasis on utility theory and its alternatives.
The programme of this course is divided in three parts; choice under uncertainty, game theory and incentive theory. The whole of the course can be covered in sixteen hours of teaching, along with eight hours of workshops, over eight weeks.
This is an intensive program that is designed both to cover the basics in each area and progress quickly to more advanced topics. The course is thus accessible to students with little background in economics, but should also challenge more advanced students who can focus on the later sections in each parts and concentrate on the suggested readings.
Exercises covering each part increase gradually in difficulty and are often of theoretical interest on their own. Detailed answers are provided.
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