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Working Paper
Uncertainty, instrument choice, and the uniqueness of Nash equilibrium: microeconomic and macroeconomic examples
This paper contains two examples of static, symmetric, positive-sum games with two strategic players and a play by nature: (1) a microeconomic game between duopolists with joint costs facing uncertain demands for differentiated goods and (2) a macroeconomic game between two countries' with inflation-bias preferences confronting uncertain demands for moneys. In both examples, each player can choose either of two variables as an instrument, and reaction functions are linear in the chosen instruments. With no uncertainty, there are four (Nash) equilibria, one for each possible instrument pair, ...
Working Paper
Tom Sawyer and the construction of value
This paper challenges the common assumption that economic agents know their tastes. After reviewing previous research showing that valuation of ordinary products and experiences can be manipulated by non-normative cues, we present three studies showing that in some cases people do not even have a pre-existing sense of whether an experience is good or bad ? even when they have experienced a sample of it.
How Do Manufacturers Decide When to Invest in New Equipment?
Although purchasing more and better capital leads to higher productivity, explanations for when and why firms choose to adopt new technology are not straightforward. In this article, we shed some light on how manufacturers choose to adopt new technology by purchasing equipment. The decision can be complicated, so we surveyed manufacturers to get insights into how they approach it. We find that the top two reasons manufacturers invest in new equipment with advanced technology is to keep up with competitors and save on labor costs. But upgrading is not always an obvious choice. Manufacturers ...
Newsletter
How Concentrated Is the Clearing Ecosystem and How Has It Changed Since 2007?
After the global financial crisis of 2008–09, regulators across the globe enacted regulations to repair and strengthen financial markets. Part of the regulations were to mandate that more financial market contracts are cleared through central counterparties (CCPs). CCPs are financial institutions that guarantee performance of a financial contract—typically the buying and selling of contracts related to securities or derivatives. In the United States, the regulations for central clearing were established by the Dodd–Frank Act in 2010 and further promulgated by rules enacted by the ...
Newsletter
Persistently Pessimistic: Consumer and Small Business Sentiment After the Covid Recession
Both consumer and small business sentiment indexes remain very pessimistic by historical standards. In this article, we take a closer look at possible explanations. Our analysis suggests that after the Covid-19 recession in the United States, the responses of consumers and small business owners to sentiment-related surveys have become less sensitive to labor market conditions.
Journal Article
The peopling of macroeconomics: Microeconomics of aggregate consumer expenditures
Since the 1950s economists have been building a theory of aggregate consumer spending, seeking to understand how individual households choose to spend and how their choices change when interest rates, the unemployment rate, and other economic indicators change. Before that time, economists looked for "economic laws" that would explain the connection between one set of economic aggregates and another, without considering the decisions of individual households. Although the process of connecting macroeconomic aggregates to individuals' behavior is far from complete, predictions of aggregate ...
Working Paper
Monetary Policy under Uncertainty in Micro-Founded Macroeconometric Models
We use a micro-founded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data and then determine the policy under commitment that maximizes household welfare. We find that the performance of the optimal policy is closely matched by a simple operational rule that focuses solely on stabilizing nominal wage inflation. Furthermore, this simple wage stabilization rule is remarkably ...
Working Paper
Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy
Many recent studies in macroeconomics have focused on the estimation of DSGE models using a system of loglinear approximations to the models' nonlinear equilibrium conditions. The term macroeconometric equivalence encapsulates the idea that estimates using aggregate data based on first-order approximations to the equilibrium conditions of a DSGE model will not be able to distinguish between alternative underlying preferences and technologies. The concept of microeconomic dissonance refers to the fact that the underlying microeconomic differences become important when optimal monetary policy ...
Working Paper
Evolving to the impatience trap: the example of the farmer-sheriff game
The literature on the evolution of impatience, focusing on one-person decision problems, finds that evolutionary forces favor the more patient individuals. This paper shows that in the context of a game, this is not necessarily the case. In particular, it offers a two- population example where evolutionary forces favor impatience in one group while favoring patience in the other. Moreover, not only evolution but also efficiency may prefer impatient individuals. In our example, it is efficient for one population to evolve impatience and for the other to develop patience. Yet, evolutionary ...