SEEING THE INVISIBLE: A TEST OF RATIONAL EXPECTATIONS IN THE VALUATION OF HUMAN CAPITAL Preferred
districts need not have particularly effective schools, however, when peer group enters into
parental valuations, as wealthy families can be stuck in ineffective schools by their
unwillingness to abandon the peer group offered. For parental valuations that place
substantial weight on school effectiveness, this becomes less likely as Tiebout choice
increases parents exit options.
The model used–an extension of the log-linear dividend-price ratio model of Campbell
and Shiller (1988, 1989)–facilitates a straightforward test of these alternatives in a linear
regression with the log price-earnings ratio as dependent variable. The regression results suggest
that the correlation between the price-earnings ratio and expected inflation is the result of both
effects; that is, an increase in expected inflation reduces equity prices because it is associated
with both lower expected real earnings growth and higher required real returns.
During the last decade, hedge funds have become one of the most important institutional
investors in global financial markets. Although their activities have been viewed critically by
regulators, politicians, and the public, this negative perspective is often based more on myth
than on thorough economic analysis and empirical facts. Most people lack the necessary
information and understanding of the role that hedge funds play in financial markets. Blaming
them for the financial crisis or other market turbulences is often based on specific conjectures
and not on rigorous research.
Long term interest rates play an important role in economics and Önance due
to their impact on real activity. Nevertheless, it is widely recognized that
forecasting their level is di¢ cult. In the same way, modelling their link to
monetary policy is not so easy even if this relationship appears crucial, as
emphasized by Goodfriend (1993) for the United States. Similarly the same
di¢ culty concerns the rational expectations hypothesis framework in which
most empirical analyses of the term structure of interest rates are conducted.
The third result links this permanent component to monetary authorities
behaviour. Recently, G¸rkaynak, Sack and Swanson (2003) show that
the change in expectations of the long-run ináation rate by private agents
depend on macroeconomic and monetary surprises. Moreover, the relationship
between ináation, interest rates and monetary policy has been studied for a
long time and, for example, since the seminal paper of Mankiw and Miron
(1986), a signiÖcant number of papers have studied the relationship between
monetary policy and the rational expectations theory....
In this book we try to present a balanced overview of modern macroeconomic theory.
We have adhered to two guiding principles in writing this book. First, we have
adopted a rather eclectic approach by paying attention not just to the most recent
insights in the field but also to developments that are currently less fashionable. In
doing so we hope to provide the students with a better overview of current and past
debates in macroeconomic theory.
In a competitive world of symmetric information
and costless enforcement, credit contracts
could be written conditional on borrower behavior.
Borrowers would then have access
to loans under any interest rate-collateral
combination that would yield lenders a zero
expected profit. However, as a large literature
has shown, information asymmetries
and enforcement costs make such conditional
contracting infeasible and restrict the set of
available contracts, eliminating as incentive incompatible
high interest rate, low collateral
With many economies in fiscal consolidation mode, there has been an intense debate about
the size of fiscal multipliers. At the same time, activity has disappointed in a number of
economies undertaking fiscal consolidation. A natural question therefore is whether
forecasters have underestimated fiscal multipliers, that is, the short-term effects of
government spending cuts or tax hikes on economic activity.
The natural question is whether these heterogeneous expectations co-evolve into homogeneous
rational-expectations beliefs, upholding the efficient-market theory, or whether richer individual and
collective behavior emerges, upholding the traders’ viewpoint and explaining the empirical market
phenomena mentioned above. We answer this not analytically—our model with its fully heterogeneous
expectations it is too complicated to admit of analytical solutions—but computationally.
Moreover, the necessity of taking into account monetary policy in the
rational expectations framework has been demonstrated in particular by the
seminal work of Mankiw and Miron (1986) for the short end of the term
structure. For the long part of the term structure, Fuhrer (1996), without
specifying any process for the perception of regime shifts by agents, has shown
that the expectations hypothesis can be accepted for the long part of the yield
curve if we allow some small and discrete changes in the coe¢ cients of the
reaction function for the Federal Reserve System.
The picture of the market that results from our experiments, surprisingly, confirms both the efficient-
market academic view and the traders’ view. But each is valid under different circumstances—in different
regimes. In both circumstances, we initiate our traders with heterogeneous beliefs clustered randomly in an
interval near homogeneous rational expectations. We find that if our agents adapt their forecasts very
slowly to new observations of the market’s behavior, the market converges to a rational-expectations
Much of my market design philosophy stems from a desire to understand the impact of agent interactions and
group learning dynamics in a ﬁnancial setting. While agent-based markets have many goals, I see their ﬁrst scientiﬁc
use as a tool for understanding the dynamics in relatively traditional economic models. It is these models for which
economists often invoke the heroic assumption of convergence to rational expectations equilibrium where agents’
beliefs and behavior have converged to a self-consistent world view.
The main contents of this chapter include all of the following: The equation of exchange, the quantity theory of money, classical economics, the monetarist school, supply-side economics, the rational expectations theory.
"The Management of Mergers and Acquisitions is far away from the perfect, polished presentations of the merchant bankers in which value creation is all too often just the result of a well-executed PowerPoint presentation.
Philippe Very takes us into the real world where management is the key word - management of the expected and the unexpected, of rationality and emotions, of processes and people. He combines the expertise of the researcher with live business cases.
"The Management of Mergers and Acquisitions is far away from the perfect, polished presentations of the merchant bankers in which value creation is all too often just the result of a well-executed PowerPoint presentation. Philippe Very takes us into the real world where management is the key word - management of the expected and the unexpected, of rationality and emotions, of processes and people. He combines the expertise of the researcher with live business cases.
SYSTEM DESIGN AND CONSUMER BEHAVIOR IN ELECTRONIC COMMERCE Hanushek cautions: If the efficiency of our school
systems is due to poor incentives for teachers and administrators coupled with poor decisionmaking
by consumers, it would be unwise to expect much from programs that seek to
strengthen market forces in the selection of schools, (1981, p. 34-35; emphasis added).
Moreover, if students outcomes depend importantly on the characteristics of their
Performance evaluation measures the skill of an asset manager and its principal idea
is to compare the returns with an alternative appropriate portfolio to that which was obtained
in a particular case. The emergence of modern portfolio theory (MPT) by Markowitz (1952),
who quantifies how rational investors make decisions based on expected return and risk, has
brought much development to portfolio performance measurement.
Chapter 34 NEW ECONOMETRIC APPROACHES TO STABILIZATION POLICY IN STOCHASTIC MODELS OF MACROECONOMIC FLUCTUATIONS
During the last 15 years econometric techniques for evaluating macroeconomic policy using dynamic stochastic models in which expectations are consistent, or rational, have been developed extensivel
Amat (1992) also differentiates two control perspectives. In the first place, a limited perspective
of the control concept, which can be understood as analysis a posteriori and in monetary terms of the
effectiveness of the management by the different person in charge of the company, in relation to the
results that were expected to be obtained or to the predetermined objectives. In this perspective, control
is developed rationally and isolated from its context (people, culture, environment), and it is ensured by
comparing the results obtained with those expected.