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We introduce Behavioral Learning Equilibria (BLE) into a multivariate linear framework and apply it to New Keynesian DSGE models. In a BLE, boundedly rational agents use simple, but optimal AR(1) forecasting rules whose parameters are consistent with the observed sample mean and autocorrelation of past data. We study the BLE concept in a standard 3‐equation New Keynesian model and develop an estimation methodology for the canonical Smets and Wouters (2007) model. A horse race between Rational Expectations (REE), BLE, and constant gain learning models shows that the BLE model outperforms the REE benchmark and is competitive with constant gain learning models in terms of in‐sample and out‐of‐sample fitness. Sample‐autocorrelation learning of optimal AR(1) beliefs provides the best fit when short‐term survey data on inflation expectations are taken into account in the estimation. As a policy application, we show that optimal Taylor rules under AR(1) expectations inherit history dependence and require a lower degrees of interest rate smoothing than REE. [ABSTRACT FROM AUTHOR]

In today's globalized and interconnected world, international relationships are becoming ever more important. This applies not only to political relations but also to transnational attachment, a positive and solidary mutual attitude between the citizens of two countries, which is mainly based on social capital and trust. In particular border areas can benefit enormously when people have a bond with their neighboring country and its inhabitants. Due to their geographic proximity and historically shaped identity, border regions have a high potential for increased economic and social exchange. While empirical work on these characteristics of specific border areas is scarce, this article presents a novel approach which applies the concept of transnational social capital taking the French–German border area as an example. The representative study is based on telephone interviews, which were conducted in the border area and in regions within the two countries as a control for country-level effects. We find strong evidence for border region attachment in form of higher levels of social capital and trust in the border area. Our findings have important implications for borderland economies in general and in particular for cross-border resilience with regard to prevailing risks like upcoming nationalism and disasters such as the Covid-19 pandemic. [ABSTRACT FROM AUTHOR]

This paper develops a multiple-goal investment strategy for sovereign wealth funds. In our investment strategy, we embed the Black-Litterman (B-L) model into the mean variance mental accounting (MVMA) approach. The B-L method provides a means of modeling return expectations, and the MVMA framework allows the derivation of the optimal asset allocation from a global investment perspective, in a response to a specific macroeconomic environment.

This paper builds upon the Economist’s R-word (recession) index by forming a Croatian version of a media news-based economic uncertainty measure. Using the web archives of the four major Croatian news portals (Index.hr, Jutarnji list, Večernji list and 24 sata), an extensive database of as much as 531107 news articles is formed. The R-word index is obtained by calculating the monthly share of recession-related articles. This way Croatia is placed among the few rare world countries which have their own version of this index. It is found that the index is a leading indicator of economic activity in Croatia, preceding GDP growth rates by two months. Using rolling window correlations, the authors also prove that economic agents react to uncertainty shocks in the most intensive manner precisely at the onset of an economic crisis, while the correlation decreases in periods of more stable economic growth rates.

Microfoundations proposed for macroeconomics often include strong counterfactual assumptions about the knowledge and foresight of agents and about the pervasiveness of equilibrium exchange. This paper explores and improves the social-architecture model, an agent-based macromodel that discards such assumptions. In this monetary exchange economy, individuals transact at disequilibrium prices in shopping-based goods markets and search-based labor markets. GDP and unemployment distributions are emergent outcomes of the individual-level interactions. These distributions expose some problems in the original model. Modest model amendments largely address these problems. Some apparently central ingredients of the model prove to have little influence on the simulation results. [ABSTRACT FROM AUTHOR]

Following the failure of Lehman Brothers in September 2008, with the liquidity drying up in the interbank lending markets, the scope for short-term arbitrage in forex markets has reduced substantially. Increased counterparty risk and strengthening of prudential norms have resulted in limits of arbitrage. This paper attempts to theoretically examine the impact of limits of arbitrage in a purely deterministic continuous-time model of exchange rates with boundedly rational agents having heterogeneous expectations. The rate of exchange depends on a combination of fundamental factors and speculative behavior by heterogeneous agents in foreign exchange markets. However, given that our focus is primarily on speculators, we keep the determination of the fundamentals outside the scope of our model. We find that under certain situation the limits of arbitrage might increase the stability of the fundamental equilibrium. However, the limits of arbitrage might indirectly destabilize the fundamental equilibrium by causing a reduction in the number of professional arbitrageurs. [ABSTRACT FROM AUTHOR]

Recent papers have modeled the prevalence of risk-tolerance as shaped by growth, making testable predictions about the distribution of risk-tolerance across the globe. We test these predictions using a dataset containing a survey question capturing people's risk-tolerance for representative samples from 78 countries. We find a negative between-country correlation between risk-tolerance and GDP per capita. Together with the positive within-country correlation between risk-tolerance and income, this results in a risk-income paradox. We further find a negative interaction effect of risk-tolerance and GDP on fertility. These findings provide support for endogenous-preference models of economic growth. [ABSTRACT FROM AUTHOR]

While recent research on family business succession has focused on examining the importance of individual and family characteristics, the role of macroeconomic conditions has been often neglected. This paper investigates the impacts of macroeconomic conditions on family business heir's career choice intention using individual level cross-country data of 18 European countries for the year 2013. We find that the level of economic development measured by GDP per capita, growth of GDP per capita, and youth rate of unemployment influence a family business heir's career choice intention. We also demonstrate that beyond the cross-country differences in macroeconomic conditions, individual characteristics of siblings, age, gender, work experience in family business, and start-up time play an important role. To mitigate succession failures, policies towards business succession with related firm survival should be specifically designed depending on different macroeconomic and youth labour market conditions. [ABSTRACT FROM AUTHOR]

We study the null geodesics in a static circularly symmetric (SCS) black hole spacetime, which is a solution in the |$(2+1)$| D massive gravity proposed by Bergshoeff, Hohm, and Townsend (BHT massive gravity). We obtain analytic solutions for the null geodesic equation in the SCS black hole background and find the explicit form of deflection angles. We see that, for various values of the impact parameter, the deflection angle can be positive, negative, or even zero in this black hole spacetime. The negative deflection angle indicates the repulsive behavior of the gravity that comes from the gravitational hair parameter that is the most characteristic quantity of the BHT massive gravity. [ABSTRACT FROM AUTHOR]

This paper investigates the welfare implications of tax policies in the economy with present-biased consumers. We show that consumption taxes, income subsidies, or capital subsidies can improve not only hyperbolically discounted intertemporal utilities, but also exponentially discounted commitment utilities. This finding implies that both consumers and the government can have incentives to adopt tax policies against present-biased decisions. All the results are shown in a three-period model with general utility and production functions. A steady-state analysis indicates that the proposed tax policy is effective in recovering the welfare/capital loss due to consumers' present bias. [ABSTRACT FROM AUTHOR]

We investigate the claims of behavioral paternalism in the more realistic framework of complex choice. In particular, we analyze the claims made by behavioral paternalists that predictive analytics over large amounts of data will make it possible to target and successfully implement purportedly welfare-enhancing nudges deemed to make nudged agents better off "as judged by themselves" (AJBT). We draw parallels between the socialist calculation debate and nudge theoretical arguments, particularly the libertarian socialism of H. D. Dickinson and the libertarian paternalism of Cass Sunstein and Richard Thaler. We find that if actual idealized behavior is a more complicated process of recursive feedback using a knowledge classification method, behavioral paternalists engaging in an automatized process of notice-and-comment rulemaking using Big Data methods still encounter epistemological problems and the problems associated with radical uncertainty unearthed during the socialist calculation debate and afterwards. [ABSTRACT FROM AUTHOR]

This paper studies the interaction between the housing sector and the macroeconomic environment in Korea. Besides serving as a typical small open economy, Korea provides an interesting laboratory case, since the country was subject to various housing-cycle phases over the sample, and its policymakers implemented active policies to stabilize the housing market. We present a microfounded open-economy model extended to incorporate a housing sector. The model is estimated using Bayesian methods and a large set of observables. We highlight the role of assumptions about house-price expectations on economic dynamics. In the benchmark case of rational expectations, the spillovers from housing to macro variables are modest. House prices are largely driven by sector-specific demand and supply shocks. Business cycle fluctuations are mostly driven by open-economy shocks. When the assumption of rational expectations is relaxed in favor of extrapolative expectations, however, the impact of the housing sector increases. Macroeconomic spillovers from the housing market become more important, with housing shocks accounting for up to twenty percent of fluctuations in the broader economy. [ABSTRACT FROM AUTHOR]

A very timely issue for economic agent-based models (ABMs) is their empirical estimation. This paper describes a line of research that could resolve the issue by using machine learning techniques, using multi-layer artificial neural networks (ANNs), or so called Deep Nets. The seminal contribution by Hinton et al. (Neural Comput 18(7):1527-1554, 2006) introduced a fast and efficient training algorithm called Deep Learning, and there have been major breakthroughs in machine learning ever since. Economics has not yet benefited from these developments, and therefore we believe that now is the right time to apply multi-layered ANNs and Deep Learning to ABMs in economics. [ABSTRACT FROM AUTHOR]

Tracking the chain of events generated by an aggregate shock in an Agent Based Model (ABM) is apparently an impossible mission. Employing the methodology described in Assenza and Delli Gatti (J Econ Dyn Control 37(8):1659–1682 2013) (AD2013 hereafter), in the present paper we show that such a task can be carried out in a straightforward way by using a hybrid macro ABM consisting of a IS curve, an Aggregate Supply (AS) curve and a Taylor Rule (TR) in that aggregate investment is a function of the moments of the distribution of firms' net worth. For each shock (fiscal expansion, monetary tightening, financial shock) we can decompose the change of the aggregate scale of activity (measured by the employment rate) in a first round effect – i.e., the change generated by the shock keeping the moments of the distribution of net worth at the pre-shock level – and a second round effect, i.e., the change brought about by the variation in the moments induced by the aggregate shock. In turn, the second round effect can be decomposed in a term that would show up also in a pure Representative Agent setting (RA component) and a term that is specific to the model with Heterogeneous Agents (HA component). In all the cases considered, the first round effect explains most of the actual change of the output gap. The second round effect is unambiguously negative. The HA component has the same sign of the RA component and explains a sizable fraction of the second round effect. [ABSTRACT FROM AUTHOR]

In this paper we study an economy with a high degree of financialization in which (non-financial) firms need loans from commercial banks to finance production, service debt, and make long-term investments. Along the business cycle, the economy follows a Minsky base cycle with firms traversing through the various stages of financial fragility, i.e. hedge, speculative and Ponzi finance (cf., Minsky in The financial instability hypothesis: a restatement. Hyman P Minsky archive paper, vol 180, pp 541-552, 1978; Stabilizing an unstable economy. Yale University Press, 2nd edn 2008, McGraw-Hill, New York, 1986; The financial instability hypothesis. Economics working paper archive wp74. The Jerome Levy Economics Institute of Bard College, 1992). In the speculative financial stage cash flows are insufficient to finance the repayment of principle but sufficient for paying interest, so banks are willing to roll-over credits in order to prevent loan defaults. In the Ponzi financial position even interest payments cannot be served, but banks my still be willing to keep firms alive through “extend and pretend” loans, also known as zombie-lending (Caballero et al. in Am Econ Rev 98(5):1943-1977, 2008). This lending behavior may cause credit bubbles with increasing leverage ratios. Empirical evidence suggests that recessions following such leveraging booms are more severe and can be associated to higher economic costs (Jordà et al. in J Money Credit Bank 45(s2):3-28, 2013; Schularick and Taylor in Am Econ Rev 102(2):1029-1061, 2012). We study macroprudential regulations aimed at: (i) the prevention and mitigation of credit bubbles, (ii) ensuring macro-financial stability, and (iii) limiting the ability of banks to create unsustainable debt bubbles. Our results show that limiting the credit growth by using a non-risk-weighted capital ratio has slightly positive effects, while using loan eligibility criteria such as cutting off funding to all financially unsound firms (speculative and Ponzi) has strong positive effects. [ABSTRACT FROM AUTHOR]

This paper offers a pioneer attempt to unveil the time-varying impact of consumer confidence on GDP growth. The empirical analysis is based on a state space model with time-varying coefficients, which is employed on a dataset from 11 New EU Member States. It is shown that the impact of consumer confidence (reflecting the overall uncertainty level in the country) skyrockets in the 2008 Great Recession, providing evidence that the recent crisis was to some extent psychologically governed. After that, the influence of consumer confidence on GDP mostly stabilizes at earlier levels. The EU accession seems not to play an important role in the observed relationship. The obtained conclusions are quite robust across countries and remain intact upon the inclusion of additional control variables in the model. A possible solution for keeping the psychological determinants of the crisis under control is a prompt, coherent, and clearly communicated crisis management policy, which might help preventing a momentous drop of consumer confidence and overall uncertainty. [ABSTRACT FROM AUTHOR]

The recent crisis in some euro area countries is intensively fueling the political and economic policy debate about the effectiveness of the applied adjustment programs. This paper aims to contribute to explaining why the results of these programs could be different across countries, flagging the crucial role of exports. In view of recent economic literature about substitution between domestic and foreign sales, helping exports when domestic demand is adjusting, this paper uses panel data techniques to assess the role of the export structure in explaining this substitution effect in the euro area countries. Building a novel indicator for product concentration, the results suggest that domestic demand developments are more relevant to explaining exports in countries with a lower product concentration index (that is, more diversified exports). This contributes to explain why euro area countries under stress registered different economic performance, in particular the clearly less favorable behavior of Greece, where exports structure is concentrated more strongly in some goods and services than in other euro area countries. With different export behavior the final evaluation of the Greek adjustment would be certainly different. These results suggest that export structure should be taken into consideration when designing or evaluating this type of adjustment programs. [ABSTRACT FROM AUTHOR]

This paper investigates the patterns of adoption of mobile money in emerging and developing countries. Mobile money is a mobile-based service, which provides access to low-cost financial services for people excluded from the banking system. It is designed to overcome the difficulties related to entering the banking system and the unavailability of banking infrastructure. Drawing on macroeconomic comparative and case study analysis conducted by practitioner experts, this study takes a wide macroeconomic approach to the adoption of mobile money adoption in 2011 and 2014, based on the alternative strategy of cluster analysis. We exploit the new technology diffusion frameworks to evaluate dissimilarity among groups of countries with similar levels of adoption of mobile money. We investigate whether adoption of mobile money services are highest in countries where access to formal banking services is lowest. Our analytical results support the predictions in the technology diffusion literature and nuance the potential of mobile money as a tool to counter banking exclusion. [ABSTRACT FROM AUTHOR]

Adaptive learning introduces persistence in the evolution of agents’ beliefs over time, helping explain why economies present sluggish adjustments towards equilibrium. The pace of this learning process is directly determined by the gain parameter. We document and evaluate gain calibrations for a broad range of model specifications with macroeconomic data, also developing alternative approaches to the endogenous determination of time-varying gains in real-time. Our key findings are that learning gains are higher for inflation than for output growth and interest rates, and that calibrations to match survey forecasts are lower than those derived according to forecasting performance, suggesting some degree of bounded rationality in the speed with which agents update their beliefs. [ABSTRACT FROM AUTHOR]

In this paper, we examine empirically the Macroeconomic policy impact on economic Growth in four Arab open economies over the period 1982–2013. The multivariate Markov switching approach is used to study the trade openness, financial development, financial integration, inflation and investment shock effects on growth according to the economic state. Our findings are (i) two economies were under persistent recession states for most of the time, (ii) macroeconomic policy do not lead to dynamic gains from trade in the largest Arab countries, (iii) inflationary pressure stimulates economic growth through domestic investment, (iv) financial Integration and the financial Development suggest that structural reforms in the banking sector and financial markets should be implemented, and (v) short term stabilization policies should be accommodated to the macroeconomic fluctuations. These results in terms of economic policy recommendations were not possible to be carried out outside the RBC framework. [ABSTRACT FROM AUTHOR]

A recent strand of macroeconomic literature has placed sentiment fluctuations at the forefront of the academic debate about the foundations of business cycles. Waves of optimism and pessimism influence the decisions of investors and consumers, and they might therefore be interpreted as a driving force for the performance of the economy in the short term. In this context, two questions regarding the formation and evolution of psychological moods in an economic setting gain relevance: First, how can we model the process of transmission of sentiments across economic agents? Second, is this process capable of generating endogenous and persistent fluctuations? This paper answers these two questions by proposing a simple and intuitive continuous-time dynamic sentiment spreading model based on the rumor propagation literature. As agents contact with one another, endogenous fluctuations are likely to emerge, with trajectories of sentiment shares potentially exhibiting periodic cycles and chaotic behavior. [ABSTRACT FROM AUTHOR]

Is bad economic news a self-fulfilling prophecy? This paper examines the local employment effects of exposure to pessimistic economic news. By combining detailed data on newspaper subscriptions with a tabulation of negative newspaper stories, the flow of such news across the United States during the 2008 recession is reconstructed at county and quarterly levels. The resulting data set is used to estimate the causal impact of such news on unemployment, hiring, and separation rates. Exposure to pessimistic news is found to suppress hiring and total employment during the early stages of the recession by up to 40% compared to prerecession levels; such news can account for some 7% of the total reduction in employment between 2007 and 2010. Content analysis of the articles in question rules out the possibility that this relationship is driven by reverse causation, that is, newspapers merely reporting poor economic performance. Further analysis of Google search data suggests that the effect is mediated by changes in public attitude caused by exposure to negative news. These findings imply that labor market outcomes can differ due to arbitrary differences in the dispersal of economic information. Bearings on economic theory, including the notions of 'sunspots' and 'animal spirits,' are discussed. [ABSTRACT FROM AUTHOR]

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This paper is based on cognitive psychology’s view of “curvilinear” optimism–pessimism and hence, contains a flavor of behavioral macroeconomics. The substructure of a real overlapping-generations business cycle model is assumed to be underlined by the long-term character of firms’ rational expectations. This model is combined with the workers’ “bell-shaped” optimism–pessimism about a fractional-reserve-banking economy. An exogenous shock will be propagated through this workers’ psychology. Policy-wise, the public sector is ignored and the only purpose of the monetary authority is to secure the efficiency of intergenerational income distribution in a business environment with zero full-employment general-equilibrium profit. Within this context, monetary policy is found to be in the spirit of the Old Chicago quantity theory in that monetary expansion is anti-recessionary, and the increase of the reserve ratio is shown to be anti-inflationary. It is a viewpoint with Chartalist flavor. [ABSTRACT FROM AUTHOR]

Whether economic growth improves subjective well-being has been under debate. Studies that find such an association also document heterogeneity between countries in the magnitude of the relationship. We test a theoretical model in which economic growth enhances subjective well-being only when a large share of the population derives their subjective well-being from relational goods with positive externalities instead of positional goods with negative externalities. The choice between relational and positional goods is determined by individuals' relational abilities and expectations which we operationalize as attachment security. We specifically test whether economic growth improves subjective well-being more in those countries where the average attachment security is higher. We find support for the hypothesis in the Eurobarometer data but less support in the World Values Survey data. [ABSTRACT FROM AUTHOR]

Behavioral bias – loss aversion – can explain monetary policy inertia in setting interest rates. Economic literature has tended to explain inertia in monetary policymaking in terms of frictions and delays, or has stressed the role of governance rules. We introduce a new driver of inertia, independent from frictions and central bank governance settings. While the degree of conservatism doesn’t necessarily produce monetary inertia, we show that introducing loss aversion in individual behavior influences the stance of monetary policy under three different but convergent perspectives. First of all, a Moderation Effect can emerge, i.e. the number of pigeons increases. At the same time also a Hysteresis Effect can become relevant, whereby both doves and hawks soften their attitudes. Finally a Smoothing Effect tends to stabilize the number of pigeons. Together, the three effects consistently cause higher monetary policy inertia. [ABSTRACT FROM AUTHOR]

Standard economics omits the role of narratives (the stories that people tell themselves and others) when they make all kinds of decisions. Narratives play a role in understanding the environment; focusing attention; predicting events; motivating action; assigning social roles and identities; defining power relations; and establishing and conveying social norms. This paper describes the role narratives play in decision making, as it also juxtaposes this description against the backdrop of the Bolshevik-spawned narrative that played a critical role in the history of Russia and the Soviet Union in the 20th Century. [ABSTRACT FROM AUTHOR]

The main aim of this theoretical paper was to show that a matching model of behavioural economics is able to shed light on important and intricate economic relationships such as those among unemployment, underground economy and growth. Precisely, it will show that in a trustful society the underground economy and unemployment are low and growth is high, whereas in a distrustful society the underground economy is high, unemployment is reduced only in the short run, and long-run growth is low. [ABSTRACT FROM AUTHOR]

The challenge of rendering monetary exchange intelligible within a Walrasian general equilibrium framework is well known. Perhaps less well known is the difficulty of integrating monetary and exchange economies in decentralized conceptions of equilibrium, of which the evenly rotating economy of Ludwig von Mises (1949) is an early example. After reviewing the prospect for money in the evenly rotating economy, I survey the modern literature on frictions that make money useful for exchange. While exploring techniques commonly used to generate a useful role for money in this environment, I make a distinction between exchange frictions and epistemic frictions. Although theoretical efforts have largely focused on exchange frictions, recent experimental evidence suggests that epistemic frictions warrant further attention. I conclude that Mises should be seen as a pioneer in this literature, though recent advances demonstrate that the set of frictions capable of rendering money useful is much larger than he envisioned. [ABSTRACT FROM AUTHOR]