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Research suggests that the standard model used to detect opportunistic shifting of core expenses to special items is potentially biased. Such bias has been attributed to the use of accruals, including special item related accruals, as a control for the impact of performance on core earnings in this model. This paper provides an improved classification shifting model which both tests for such accruals-related bias and controls for other sources of error in the measurement of shifting. The paper also modifies conventional market rationality tests in accounting research to examine new dimensions of rationality in relation to measurement and valuation of shifting. The main empirical findings are as follows. First, the improved classification shifting model provides strong evidence of shifting and rejects the hypothesis that inclusion of accruals in the model causes bias. Second, estimates of shifted core expenses generated by the improved model exhibit forecasting properties of shifted earnings. Third, rationality test results are broadly consistent with rationality in relation to shifted core expenses but indicate possible partial (ir)rationality in relation to adjusted special items (i.e., special items excluding shifted core expenses). Further analysis of the latter findings, however, suggests they are more likely related to risk than irrationality. Overall, the paper contributes to improved measurement of shifting and highlights the importance of considering rational expectations when examining stock returns associated with shifting. [ABSTRACT FROM AUTHOR]

A planner uses goals to manage a preference disagreement over effort provision with a doer. Goals set output expectations for the doer which affect her behavior due to reference-dependent, loss-averse preferences over output. We characterize the planner's optimal goal and explore when it is aspirational versus achievable. Specifically, we show that the optimal goal is achieved by the doer only if the extent of preference disagreement is relatively small. Instead, when the extent of preference disagreement is large, the doer falls short of the optimal goal. The stochasticity of output plays an important role in generating this prediction within our model. [ABSTRACT FROM AUTHOR]

The aim of the article is to study the international experience, the experience of implementing the monetary regime of inflation targeting in Ukraine and formulate conclusions based on the results of the analysis of such implementation. It is determined that the basis of the practice of inflation targeting constitutes the idea that there are exclusively rational (inflationary) expectations of economic entities, which are subject to accurate calculation and influence. However, the presented arguments (the existence of business cycles, criticism from the position of adherers of behavioral economics, asymmetric information in financial markets) give grounds to assert that monetary policy can only preestimate the expectations of economic agents with a certain degree of probability. This explains the lack of an accurate correlation between the change in the central bank’s interest rate and its impact on the inflation rate. Based on the experience of foreign countries, it has been determined that at the first-priority stages of implementation of the studied monetary regime in the analyzed examples, there is a tendency to reduce the level of inflation due to increased requirements for the independence of central banks, their transparency and transparency of the monetary policy. The studied examples of the introduction of the monetary regime of inflation targeting show that the co-dependence of the regulatory influence of central banks and inflationary processes is caused by numerous factors (the formation of the institutional structure, the duration of the fight against inflationary processes, etc.). Further on, crisis situations reveal the peculiarity of the studied monetary regime: central banks do not directly manage inflationary processes, but adapt to them and curb inflation by means of a «soft» adjustment (as evidenced by the constant change in forecast analytics on inflation in future periods). The practice of introducing inflation targeting in Ukraine began in 2015 and there was a tendency to curb inflationary processes (which, in principle, is typical for the first-priority stages of the implementation of this monetary regime in other countries). However, the full-scale invasion of Ukraine by the Russian Federation in February 2022 made it impossible to continue the practice of implementing this monetary regime (due to the abandonment of the floating exchange rate, restrictions on foreign exchange transactions, monetary financing of the budget, etc.), which indicates limited opportunities for inflation targeting in extraordinary (crisis) situations.

This paper discusses how macroeconomics can and already has begun to make use of controlled experimental methods to address the assumptions and predictions of macroeconomic models as well as to evaluate the impacts of macroeconomic policy interventions. Specific issues addressed include rational expectations and alternatives, intertemporal optimization with an application to household consumption and savings decisions and the efficacy of various monetary policies.

This paper is concerned with the multiplicative-noise rational expectations (MRE) problem. By resorting to a linear quadratic optimal control (LQOC) problem, the approximate solution to the MRE problem can be obtained. It is worth highlighting that this approximate solution can be highly close to the exact solution by adjusting weighted matrices in the cost function of the LQOC problem. Since the conditional expectation of the state is involved in the cost function, the LQOC problem is an optimization control with an additional measurability restriction, which is very involved. The orthogonal decomposition technique is used to deal with this measurability restriction. The solvability condition and the optimal decision are given by developing generalized Riccati-type equations. Numerical experiments are provided to illustrate the effectiveness of the achieved results. [ABSTRACT FROM AUTHOR]

Problem definition: This paper focuses on subscription box services in which a provider selects the assortment of products to include in the box by taking into account the customer's preferences. Customers interested in purchasing a product choose between engaging in active search (i.e., visit physical stores) or subscribing to a box delivery service. We study the subscription box company's problem of selecting the optimal contents of the box to maximize expected revenue (by driving demand from customers). Methodology/results: Because a product may be both available at a store and included in the box, the assortment in a box affects the set of stores that a customer would visit under active search and, therefore, the customer's subscription decision. We model such interaction by applying a cross-nested logit framework that correlates the contents in the box with the products available at the stores. We find that the box should include a collection of popular subsets of the store products for customers that experience a relatively low or relatively high search cost. If a preview of the box is available, we find that, for customers with intermediate values of the search cost, it may be optimal to include a so-called utility loss leader, that is, a product with relatively low valuation, to entice customers to subscribe to the box delivery service and therefore increase the likelihood of a sale. We use rational expectations to model a setting in which a preview of the box is not available. In such cases, it is never optimal to include a utility loss leader in the box. Managerial implications: Our model captures the impact of product overlap across different shopping channels on customer choice and the subscription box company assortment decision. We derive insights on how the subscription service provider should determine the contents of the box in anticipation of the customer's search behavior. We also examine the decision of offering exclusive products in addition to branded items. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.1204. [ABSTRACT FROM AUTHOR]

A consumer's decision to engage in search depends on the beliefs the consumer has about an unknown product characteristic (e.g., price). Because beliefs are rarely observed, researchers typically assume that consumers have rational expectations or update beliefs consistent with Bayesian updating. These assumptions are restrictive and do not enable the researcher or the retailer to price discriminate among consumers on the basis of heterogeneity in beliefs. The authors use Monte Carlo experiments to show how these assumptions affect estimates of search cost. Next, they design an incentive-aligned online study in which participants search over the price of a homogeneous good, and the authors elicit distributions of price beliefs before and after each search. Drawing on data collected from a nationally representative panel, they find substantial heterogeneity in prior price beliefs, such that participants update their beliefs in response to search outcomes but deviate from Bayesian updating in that they underreact to new information. Importantly, the authors show that (1) assuming Bayesian updating does not significantly bias search cost estimates at the aggregate level if the researcher accounts for heterogeneous prior beliefs, (2) eliciting heterogeneity in prior expected prices is much more important than eliciting heterogeneity in prior price uncertainty, and (3) a retailer can increase profits through third-degree price discrimination by recognizing the heterogeneity in prior beliefs. [ABSTRACT FROM AUTHOR]

This paper develops a model for predicting the failure time of a wide class of weighted k-out-of-n reliability systems. To this aim, we adopt a rational expectation-type approach by artificially creating an information set based on the observation of a collection of systems of the same class–the catalog. Specifically, we state the connection between a synthetic statistical measure of the survived components' weights and the failure time of the systems. In detail, we follow the evolution of the systems in the catalog from the starting point to their failure–obtained after the failure of some of their components. Then, we store the couples given by the measure of the survived components and the failure time. Finally, we employ such couples for having a prediction of the failure times of a set of new systems–the in-vivo systems–conditioned on the specific values of the considered statistical measure. We test different statistical measures for predicting the failure time of the in-vivo systems. As a result, we give insights on the statistical measure which is more effective in contributing to providing a reliable estimation of the systems' failure time. A discussion on the initial distribution of the weights is also carried out. [ABSTRACT FROM AUTHOR]

The aim of the article is to study the international experience, the experience of implementing the monetary regime of inflation targeting in Ukraine and formulate conclusions based on the results of the analysis of such implementation. It is determined that the basis of the practice of inflation targeting constitutes the idea that there are exclusively rational (inflationary) expectations of economic entities, which are subject to accurate calculation and influence. However, the presented arguments (the existence of business cycles, criticism from the position of adherers of behavioral economics, asymmetric information in financial markets) give grounds to assert that monetary policy can only preestimate the expectations of economic agents with a certain degree of probability. This explains the lack of an accurate correlation between the change in the central bank’s interest rate and its impact on the inflation rate. Based on the experience of foreign countries, it has been determined that at the first-priority stages of implementation of the studied monetary regime in the analyzed examples, there is a tendency to reduce the level of inflation due to increased requirements for the independence of central banks, their transparency and transparency of the monetary policy. The studied examples of the introduction of the monetary regime of inflation targeting show that the co-dependence of the regulatory influence of central banks and inflationary processes is caused by numerous factors (the formation of the institutional structure, the duration of the fight against inflationary processes, etc.). Further on, crisis situations reveal the peculiarity of the studied monetary regime: central banks do not directly manage inflationary processes, but adapt to them and curb inflation by means of a «soft» adjustment (as evidenced by the constant change in forecast analytics on inflation in future periods). The practice of introducing inflation targeting in Ukraine began in 2015 and there was a tendency to curb inflationary processes (which, in principle, is typical for the first-priority stages of the implementation of this monetary regime in other countries). However, the full-scale invasion of Ukraine by the Russian Federation in February 2022 made it impossible to continue the practice of implementing this monetary regime (due to the abandonment of the floating exchange rate, restrictions on foreign exchange transactions, monetary financing of the budget, etc.), which indicates limited opportunities for inflation targeting in extraordinary (crisis) situations. [ABSTRACT FROM AUTHOR]

We attempt to replicate a seminal paper that offered support for the rational expectations hypothesis and reported evidence that markets with certain features aggregate dispersed information. The original results are based on only a few observations, and our attempt to replicate the key findings with an appropriately powered experiment largely fails. The resulting poststudy probability that market performance is better described by rational expectations than the prior information (Walrasian) model under the conditions specified in the original paper is very low. As a result of our failure to replicate, we investigate an alternate set of market features that combines aspects of the original experimental design. For these markets, which include both contingent claims and homogeneous dividend payments (as in many prediction markets), we do find robust evidence of information aggregation in support of the rational expectations model. In total, our results indicate that information aggregation in asset markets is fragile and should only be expected in limited circumstances. This paper was accepted by Bruno Biais, finance. Supplemental Material: The data and online appendix are available at https://doi.org/10.1287/mnsc.2022.4463. [ABSTRACT FROM AUTHOR]

This paper offers a plain model to organise thinking about the disinflation policy. It exploits the insight that monetary and fiscal policy are intertwined. The model links inflationary expectations, monetary policy and fiscal policy, and contemplates a disinflation policy consisting of two plans, not necessarily connected: a monetary plan and a fiscal plan. The central question examined is which type of policy generates a lower policy interest rate – a monetary plan without fiscal cooperation or a monetary plan with fiscal austerity? The economic logic articulated by the model generates the following answer: the equilibrium policy rate set by the central bank can always be brought down by reducing the budget deficit. This qualitatively unambiguous prediction may be dependent on silent omissions, which are briefly discussed at the end of the paper. [ABSTRACT FROM AUTHOR]

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The non-causal ("forward-looking") solution used routinely in academic macroeconomics may represent a violation of a law of entropy, namely that the direction of time is one way (from the past and towards the present), and that the variance of economic processes increases with time. In order to re-establish a degree of compatibility with the law of entropy, so called hybrid forms are required add-ins to DSGE (Dynamic Stochastic General Equilibrium) models. However, the solution that uses hybrid forms is a particular special case of a causal solutions of autoregressive distributed lags, VARs and recursive and simultaneous equations models well known from empirical macro econometrics. Hence, hybrid forms of small scale DSGE models can be analysed and tested against competing model equations, using an econometric encompassing framework. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

We model situations of choice under uncertainty where one is exogenously given information about the unknown states as a "suggested prior" (as in weather forecasts, betting odds provided by bookmakers, success likelihoods provided by medical doctors, estimates given by financial analysts, etc.). We wish to understand when a decision maker would adopt the suggested prior as her own subjective beliefs, yielding fully to the power of suggestion. We find that this happens under surprisingly weak conditions: If a preference relation, may it be complete or incomplete, (1) uses the information it is given consistently (in the sense of being state-neutral) and (2) believes that events that are suggested to occur with zero probability will indeed not occur, then it is not only probabilistically sophisticated, but also holds the suggested beliefs as actual beliefs. If the agent is a (subjective) expected utility maximizer, this happens even in the absence of condition (2). [ABSTRACT FROM AUTHOR]

In a continuous-time market with a safe rate and a risky asset that pays a dividend stream depending on a latent state of the economy, several agents make consumption and investment decisions based on public information–prices and dividends–and private signals. If each investor has constant absolute risk aversion, equilibrium prices do not reveal all the private signals, but lead to the same estimate of the state of the economy that one would hypothetically obtain from the knowledge of all private signals. Accurate information leads to low volatility, ostensibly improving market efficiency, but also reduces each agent's consumption through a decrease in the price of risk. Thus, informational efficiency is reached at the expense of agents' welfare. [ABSTRACT FROM AUTHOR]

An asymptotic theory for estimation and inference in adaptive learning models with strong mixing regressors and martingale difference innovations is developed. The maintained polynomial gain specification provides a unified framework which permits slow convergence of agents' beliefs and contains recursive least squares as a prominent special case. Reminiscent of the classical literature on co‐integration, an asymptotic equivalence between two approaches to estimation of long‐run equilibrium and short‐run dynamics is established. Notwithstanding potential threats to inference arising from non‐standard convergence rates and a singular variance–covariance matrix, hypotheses about single, as well as joint restrictions remain testable. Monte Carlo evidence confirms the accuracy of the asymptotic theory in finite samples. [ABSTRACT FROM AUTHOR]

On average, childless women observed by the Panel Study of Income Dynamics report that they intend to have more children than they actually have. A collection of intentions that record only whether respondents intend to have another child can more accurately predict the number of children they have. Errors in the formation of intentions are not required to explain this finding. Rather, if intentions record a survey respondent's most likely predicted number of children, then the average of these intentions does not necessarily equal average actual fertility, even if intentions are formed using rational expectations. [ABSTRACT FROM AUTHOR]

To explore how speculative trading influences prices in financial markets, we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) and dividend-collecting investors. Moreover, we operate markets at two different levels of money supply. We find that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices. [ABSTRACT FROM AUTHOR]

This paper provides a look into what Lucas meant by the term ‘analogue systems’ and how he conceived making them useful. It is argued that any model with remarkable predictive success can be regarded as an analogue system, the term is thus neutral in terms of usefulness. To be useful Lucas supposed models to meet further requirements. These prerequisites are introduced in two steps in the paper. First, some properties of ‘useless’ Keynesian macroeconometric models come to the fore as contrasting cases. Second, it is argued that Lucas suggested two assumptions as the keys to usefulness for he conceived them as referring to genuine components of social reality and hence as true propositions. One is money as a causal instrument and the other is the choice-theoretic framework to describe the causal mechanisms underlying large-scale fluctuations. Extensive quotes from Lucas’s unpublished materials underpin the claims.

The rational expectations hypothesis holds that agents should be modeled as not making systematic forecasting errors and has become a central model-building principle of modern economics. The hypothesis is often justified on the grounds that it coheres with the general methodological principle of economic rationality. In this article, I propose a novel Darwinian market justification for rational expectations which does not require either structural knowledge or statistical learning, as is commonly required in the economic literature. Rather, this Darwinian market account reconceives rationality as a market level phenomenon instead of as an individualistic property. [ABSTRACT FROM AUTHOR]

Uncovered interest parity is widely used in open economy macroeconomics.  But the evidence rejects UIP and implies forward bias.  There are many suggested explanations for the failure of UIP and forward bias, but none are widely accepted, at least partially because none explain the related puzzles discussed below.  This paper shows how the liquidity effects of open market operations and sterilized “leaning against the wind” can explain the failure of UIP and forward bias even when expectations are rational.  They also appear to be able to explain the related puzzles better than any of the alternatives.

We study a mean–variance acreage model, A = α (E [ p ] , V [ p ]) , where p is price at harvest time and E and V are the expectation and variance operators conditional on information known at planting time. Under the assumption that p = π (A y) where yield y is random and unknown at planting time, we will investigate the existence, uniqueness, and convergence of this fixed point problem as well as the coherence of the mean–variance model. As is well known, Newton's method can not guarantee its convergence unless the initial approximation is sufficiently close to a true solution. In theory, the more variables/randomness one has, the harder it is to find a good initial guess. Specifically we focus on the case when the inverse demand function p = π (A y) is implicitly defined. We will solve the random nonlinear equations by Newton's method and investigate the optimal and robust way to choose random initial values for Newton's method. The robust initial value will allow us to study how the price support program will affect consumer prices, farm prices, and government expenditures as well as their variabilities. Hopefully solving nonlinear random equations will shed some light on the choice of initial values for Newton's method. [ABSTRACT FROM AUTHOR]

This introductory paper offers a look into the intellectual and technical progress that led Robert E. Lucas to his seminal paper entitled Expectations and the neutrality of money. It is argued that the neutrality paper applies the capital-theoretic approach of Lucas's firm microeconomics of the mid-1960s to the representative agent's labour supply decision. While emphasizing this similarity, the study gives an overview of the steps through which Lucas changed the basic decision problem of adjusting to price changes from a static Marshallian setting into his neo-Walrasian dynamic stochastic general equilibrium framework. Extensive references to Lucas's unpublished materials underpin the claims. [ABSTRACT FROM AUTHOR]

Hayek was among the first to realize that for intertemporal equilibrium to obtain all agents must have correct expectations of future prices. Before comparing four categories of intertemporal, the paper explains Hayek's distinction between correct expectations and perfect foresight. The four equilibrium concepts considered are: (1) Perfect foresight equilibrium of which the Arrow-Debreu-McKenzie (ADM) model of equilibrium with complete markets is an alternative version, (2) Radner's sequential equilibrium with incomplete markets, (3) Hicks's temporary equilibrium, as extended by Bliss; (4) the Muth rational-expectations equilibrium as extended by Lucas into macroeconomics. While Hayek's understanding closely resembles Radner's sequential equilibrium, described by Radner as an equilibrium of plans, prices, and price expectations, Hicks's temporary equilibrium seems to have been the natural extension of Hayek's approach. The now dominant Lucas rational-expectations equilibrium misconceives intertemporal equilibrium, suppressing Hayek's insights thereby retreating to a sterile perfect-foresight equilibrium. [ABSTRACT FROM AUTHOR]

We consider a two-period pure-exchange economy, where uncertainty prevails and agents, possibly asymmetrically informed, exchange commodities and securities of all kinds. Consumers' c haracteristics, anticipations, beliefs and actions are all private and typically not known nor assessed by the other agents. This setting drops rational expectations along the 'common knowledge of rationality and market clearing' (CKRMC) assumptions, and, in particular, it drops the Radner (1979) price model and price inference assumptions. Unaware agents are shown to face an incompressible uncertainty over future states and prices, represented by a so-called "minimum uncertainty set ". A sequential equilibrium obtains when agents expect the 'true' price as a possible outcome on every spot market, and elect optimal market-clearing strategies. This so-called "correct foresight equilibrium" (CFE) is shown to exist whenever agents' anticipation sets include the minimum uncertainty set. When the CKRMC assumptions are restored, the CFE is shown to lead to an overarching concept of rational expectations equilibrium, which generalizes the classical concepts. • The model of asymmetric information drops all forms of rational expectations. • It replaces perfect price foresight by a milder ' correct foresight ' assumption. • It proves the full existence of sequential equilibrium under correct foresight. • It clarifies rational expectations of standard models, including CKRMC's. • It defines a REE concept, which generalizes those of CKRMC models. [ABSTRACT FROM AUTHOR]

We investigate equilibrium in the buyer's bid double auction (BBDA) in a model with correlated private values/costs. Using a combination of theorems and computed examples, we demonstrate that simple equilibria exist even in small markets. Moreover, we bound traders' strategic behavior as a function of market size and derive rates of convergence to zero of (i) inefficiency in the allocation caused by strategic behavior and (ii) the error in the market price as an estimate of the rational expectations price. These rates together with computed examples suggest that strategic behavior can be inconsequential even in small markets in its effect on allocational efficiency and information aggregation. The BBDA thus simultaneously accomplishes both the informational and allocational goals that markets ideally fulfill; it does this perfectly in large markets and approximately in small markets, with the error due mainly to the smallness itself and not the strategic behavior of traders. [ABSTRACT FROM AUTHOR]

We propose and find that aggregate special items conveys more information about future real GDP growth than aggregate earnings before special items because the former contains advance news about future economic outcomes. A two-stage rational expectations test reveals that professional forecasters fully understand the information content of aggregate earnings before special items, but underestimate that of aggregate special items when revising their GDP forecasts. Using vector autoregressions, we show that aggregate earnings before special items has predictive ability for GDP because, as suggested by previous literature, it acts as a proxy for corporate profits included in national income. In contrast, aggregate special items captures changes in the behavior of economic agents on a timely basis, which, in turn, have real effects on firms' investment and hiring, as well as consumers' wealth and spending. Consistent with news-driven business cycles, we find that aggregate special items produces synchronized movements across macroeconomic aggregates. JEL Classifications: E01; E32; E60; M41. [ABSTRACT FROM AUTHOR]

Despite criticism in the wake of the GFC, history shows that theory and curricula adapt to rectify any disconnects between theory, curricula, and practice. Finance theory unquestionably has antecedents in economics, accounting, legal theory, and psychology. Some theoretical developments--including the moral hazard consequences of limited liability--have yet to filter through to many texts and curricula, which also omit explanations of uncertainty; incomplete and (sub)optimal contracting; contagion; and behavioural finance. Student learning outcomes could be enhanced if universities, perhaps in a final year, cross-disciplinary "capstone" course, empowered students to understand the financial documentation evidencing sophisticated transactions; map relevant cash flows and wealth transfers; and recognise Ponzi schemes, the ethics of stakeholder wealth transfers, the conditions for contagion, and incentives for adverse selection and moral hazard in practice. [ABSTRACT FROM AUTHOR]

How did potentially transformative ideas about the way economies should function become enlisted in policy frameworks that produced few major changes to policy orthodoxy at the Federal Reserve after the financial crisis of 2007/08? IPE scholarship has tended to answer this question by identifying the limited purchase of Keynesian ideas in policy circles. In so doing, however, the existing literature has left unexplained the central role of Keynesianism in the Federal Reserve's ideational framework. To fill a gap in this literature, this article argues that ideas fill different functions (cognitive and normative) in the policy process and proposes a new explanatory model, 'depoliticised Keynesianism', for understanding the role that Keynesian ideas played in ideational change at the Federal Reserve after the financial crisis of 2007/08. Using in-depth interviews with current and former Federal Reserve officials, and a quantitative text analysis of Federal Open Market Committee meeting transcripts between 1981 and 2014, it traces the rise of depoliticised Keynesianism to policymakers' normative commitment to depoliticisation and a cognitive interpretation of Keynesian ideas. [ABSTRACT FROM AUTHOR]

The article discusses the problem of conformity of existing macro-economic models to possible changes in the behavior of economic actors, which may affect the micro- and macro-functions used in these models. A historical excursion of the formation of «adaptive» and «rational expectations» in the process of macro-economic regulation is carried out. Several institutional factors that influence its effectiveness and predictability of results are allocated. The possibility of making the right decisions is displayed, if the expectations of economic actors are based on past experience, are constantly checked in the course of economic activity, and the subjective valuations of the future status of markets and prices coincide with the conditional mathematically calculated expectations based on the information currently available. Rational expectations are seen as an addition to the macro-economic theory. They provide greater accuracy to the macro-economic forecasts and grounds for decision-making by economic actors in the process of macro-economic forecasting and regulation. The methodological limitations of the neoclassical model of macro-economic equilibrium are shown and the need for an institutional model of «limited rationality» is proved. The possibility of a realistic assessment of the projected results of macro-economic intervention in the reproductive process is related to the presence in the macro-economic model of behavioral functions, which more accurately reflect the real individual and economic behavior of economic actors. The authors rise the question of the synthesis of new macro-economics and institutionalism to create more realistic models of human behavior, to accurately parameterize future economic conditions and prices in the process of macro-economic regulation.

Abstract In the competitive environment of liner shipping, the ability to nimbly adjust shipping capacity to demand could mean the difference between a thriving shipping operation and one that will most likely fail. How quickly and effectively carriers adjust their capacity may depend on how their expectations regarding trade volumes and freight rates are formed. We find that if adaptive expectations prevail in the decision process, capacity deployment may suffer some degree of inertia but, compared to expectations that are formed rationally, capacity would be be relatively stable. On the other hand, if carrier expectations are rational, capacity deployment might be more likely to align closer and faster with demand. We seek to empirically test whether carriers’ expectations of demand, aiming at deploying the right amount of capacity, can be characterized as adaptive or rational. We find that a) in most cases, adaptive expectations is the paradigm in container shipping; b) the way expectations are formed and the market structure of the liner shipping industry are two things not totally unrelated; and c) rational expectations point to more competitive markets (such as that of the Pacific), while adaptive expectations indicate higher concentration and thus imperfect competition (as is the case in the North Atlantic). Our findings have important regulatory implications in the sense that, if one accepts, as we do, that adaptive expectations are consistent with concentrated industries, while rational expectations suggest more competition, then our paper suggests that the 2008 abolition of the liner conference system from European trades has failed to improve the level of competition in the Europe – US liner shipping markets.

The non-causal (“forward-looking”) solution used routinely in academic macroeconomics may represent a violation of a law of entropy, namely that the direction of time is one way (from the past and towards the present), and that the variance of economic processes increases with time. In order to re-establish a degree of compatibility with the law of entropy, so called hybrid forms are required add-ins to DSGE (Dynamic Stochastic General Equilibrium) models. However, the solution that uses hybrid forms is a particular special case of a causal solutions of autoregressive distributed lags, VARs and recursive and simultaneous equations models well known from empirical macro econometrics. Hence, hybrid forms of small scale DSGE models can be analysed and tested against competing model equations, using an econometric encompassing framework.