Past Events

CARF Workshops (2008)

Product Innovation, Stock Price, and Business Cycle

Dates 2008/7/3(Thu)16:50-18:30
Venue Lecture Hall No.3 on the 3rd floor of the main Economics Building
Speaker Ryo Jinnai (Princeton University)
Co-Sponsor Macroworkshop
Abstract This paper studies the interaction between product innovation, stock price, and aggregate output. Motivated by recent empirical studies, I propose an endogenous variety business cycle model in which existing firm’s expertise is essential for innovation of new products. In the model, the firm value reflects not only the product the firm is manufacturing today but also the firm’s ability to introduce new products in the future. I study how the model responds to various shocks, with special attention to the lead and lag structure between the stock price and output. The stock price leads GDP, which is a well known empirical regularity that most standard models have difficulty generating.
File (PDF)

1.Discrete and Sticky Behavior From Shannon Information Constraints /
2.Information Constrained State Dependent Pricing /
3.Why are Prices Sticky?

Dates 2008/5/30(Fri)15:00-19:00
Venue Meeting Room on the 6th floor of the main Economics Building
Speaker (1) Christopher Sims (Princeton University)

(2) Michael Woodford  (Columbia University)

(3) Andrew Levin (Federal Reserve Board)

Co-Sponsor Macroworkshop
Abstract (1) The literature applying information-theoretic ideas to economics has so far considered only Gaussian uncertainty. Ex post Gaussian uncertainty can be justified as optimal when the associated optimization problem is linear-quadratic, but the literature has often assumed Gaussian uncertainty even where it cannot be justified as optimal. This paper considers a simple two-period optimal saving problem with a Shannon capacity constraint and non-quadratic utility. It derives an optimal ex post probability density for wealth in two leading cases (log and linear utility) and lays out a general approach for handling other cases numerically. It displays and discusses numerical solutions for other utility functions, and considers the feasibility of extending this paper’s approaches to general non-LQ dynamic programming problems. The introduction of the paper discusses approaches that have been taken in the existing literature to applying Shannon capacity to economic modeling, making criticisms and suggesting promising directions for further progress.
Abstract (2) I present a generalization of the standard (full-information) model of state-dependent pricing in which decisions about when to review a firm’s existing price must be made on the basis of imprecise awareness of current market conditions. The imperfect information is endogenized using a variant of the theory of \rational inattention” proposed by Sims (1998, 2003, 2006). This results in a one-parameter family of models, indexed by the cost of information, which nests both the standard state-dependent pricing model and the Calvo model of price adjustment as limiting cases (corresponding to a zero information cost and an unboundedly large information cost respectively). For intermediate levels of the information cost, the model is equivalent to a “generalized Ss model” with a continuous “adjustment hazard” of the kind proposed by Caballero and Engel (1993a, 1993b), but provides an economic motivation for the hazard function and very specific predictions about its form. For moderate levels of the information cost, the Calvo model of price-setting is found to be a fairly accurate approximation to the exact equilibrium dynamics, except in the case of (infrequent) large shocks.
File(1) Christopher Sims

File(2) Michael Woodford


Money and Competing Assets under Private Information

Dates 2008/5/20(Tue)16:50-18:30
Venue Lecture Hall No.3 on the 3rd floor of the main Economics Building
Speaker Guillaume Rocheteau
(Federal Reserve Bank of Cleveland and National University of Singapore)
Co-Sponsor Microworkshop
Abstract This paper studies random-matching economies where fiat money coexists with a real asset, and no restrictions are imposed on payment arrangements. The real asset is partially illiquid due to informational asymmetries about its fundamental value. The extent to which the real asset is used as means of payment depends on the variance of its dividend as well as monetary policy. The effects of inflation on payment arrangements, asset prices, and welfare are analyzed.

Monetary Policy and Learning from the Central Bank's Forecast

Dates 2008/4/18(Fri)18:00-19:00
Venue Conference Room No.2 on the 12th floor of the main Economics Building
Speaker Ichiro Muto (Bank of Japan)
Co-Sponsor Macroworkshop
Abstract We examine the expectational stability (E-stability) of the rational expectations equilibrium (REE) in a simple New Keynesian model in which private agents engage in adaptive learning by referring to the central bank’s forecast. In this environment, to satisfy the E-stability condition, the central bank must respond more strongly to the expected inflation rate than the so-called Taylor principle suggests. On the other hand, the central bank’s strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy is to respond to the current inflation rate to a certain degree.

Exchange Rates and Fundamentals: A Generalization (joint with John H.Rogers)

Dates 2008/4/10(Thu)16:50-18:30
Venue Lecture Hall No.3 on the 3rd floor of the main Economics Building
Speaker James M. Nason (Federal Reserve Bank of Atlanta)
Co-Sponsor Macroworkshop
Abstract Exchange rates have raised the ire of economists for more than 20 years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts. Engel and West (2005) show that these failures can be explained by the present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper broadens and generalizes the Engel and West (EW) hypothesis. We use standard time series tools to broaden analysis of the PVM. For example, our analysis exploits a common feature implication of the PVM and a discount near unity to show that the exchange rate follows a random walk. A PVM of the exchange rate is also constructed from an open economy dynamic stochastic general equilibrium (DSGE) model. The DSGE-PVM predicts that the exchange rate exhibits random walk behavior. Bayesian estimates reveal that the Canadian dollar-U.S. dollar exchange rate is dominated by permanent monetary and productivity shocks as the discount factor becomes close to one. Thus, our results generalize the EW hypothesis to the larger class of open economy DSGE models, while presenting new challenges for future research.

Spurious regressions in technical trading: momentum or contrarian?

Dates 2008/1/25(Fri)16:50-18:10
Venue Lecture Hall No.4, 3rd floor of the main Economics Building
Speaker Mototsugu Shintani (Vanderbilt University)
Co-Sponsor Applied Statistics Workshop
Abstract This paper investigates a spurious effect in forecasting asset returns when signals from technical trading rules are used as predictors. The simulation result shows that, even if the past information has no predictive power, buy or sell signals constructed from the difference between the short and long moving average of past values can be statistically significant when forecast horizon is relatively long. The theory implies that both momentum and contrarian are possible, while the probability of each case depends on the type of the test statistics employed. Several possibilities of preventing the spurious regression are also discussed. The proposed method is applied to the stock market index and foreign exchange rates to reconsider the predictive power of technical trading rules.

1. Everyone-a-banker or the Ideal Credit Acceptance Game: Theory and Evidence. (joint with Juergen Huber and Martin Shubik)
2. Three Minimal Strategic Market Games: Theory and Experimental Evidence. (joint with Juergen Huber and Martin Shubik)

Dates 2008/1/22(Tue)16:50-18:30
Venue Lecture Hall No.3, 3rd floor of the main Economics Building
Speaker Shyam Sunder (Yale University)
Co-Sponsor Microworkshop
Abstract (1) Is personal credit issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sorin (1995) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues her own IOUs and a costless efficient clearinghouse adjusts the exchange rates among them so the markets always clear. The results suggest that if the information system and clearing are so good as to preclude moral hazard, any form of information asymmetry, or need for trust, the economy operates efficiently at any price level without government money. Conversely, perhaps explanations for prevalence of government money should be sought in either the above mentioned frictions or our unwillingness to experiment with innovation.
Abstract (2) In this experiment we examine the performance of three minimal strategic market games relative to theoretical predictions. These models of a closed exchange economy with monetary and financial structures have limited amounts of cash to facilitate transactions. Subsequent experiments will deal with credit limitations, banking and credit, the role of clearinghouses and the possibility for the universal issue of credit by individuals. In theory, with enough money the non-cooperative equilibria should converge to the respective competitive equilibria as the number of players increases. Since general equilibrium theory abstracts away from the market mechanism, it makes no predictions about how the paths of convergence to the CE may differ across market mechanisms. GE allows no role for money or credit. In contrast to most market experiments conducted in open or partial equilibrium settings, we report on closed settings that include feedbacks. Laboratory examination of the three market mechanisms reveals convergence to CE with increasing number of players. It also reveals significant differences in the convergence paths across the mechanisms, suggesting that to the extent deviations from CE are of interest (either because the number of players in the environment of substantive interest is small, or because disequilibrium behavior itself is of substantive interest), theoretical abstraction from the market mechanisms has been taken too far. For example, the oligopoly effect of feedback from buying a good that the player is endowed with is missed. Inclusion of mechanism differences into theory would help us understand markets better.