Informational efficiency properties of rational expectations equilibria in non-convex economies

2000 ◽  
Vol 16 (2) ◽  
pp. 323-332
Author(s):  
Giulio Seccia
Keyword(s):  
Rational Expectations ◽  
Informational Efficiency

Funding Constraints and Informational Efficiency

2020 ◽  
Author(s):  
Sergei Glebkin ◽  
Naveen Gondhi ◽  
John Chi-Fong Kuong
Keyword(s):  
Risk Premium ◽  
Equilibrium Model ◽  
Information Acquisition ◽  
Rational Expectations ◽  
Return Volatility ◽  
Informational Efficiency ◽  
Rational Expectations Equilibrium ◽  
Price Informativeness ◽  
Amplification Mechanism ◽  
Increases In Risk

Abstract We analyze a tractable rational expectations equilibrium model with margin constraints. We argue that constraints affect and are affected by informational efficiency, leading to a novel amplification mechanism. A decline in wealth tightens constraints and reduces investors’ incentive to acquire information, lowering price informativeness. Lower informativeness, in turn, increases the risk borne by financiers who fund trades, leading them to further tighten constraints faced by investors. This information spiral leads to (a) significant increases in risk premium and return volatility in crises, when investors wealth declines, (b) complementarities in information acquisition in crises, and (c) complementarities in margin requirements.

Expectational Coordination Failures and Market Volatility

2013 ◽  
Author(s):  
Roger Guesnerie
Keyword(s):  
Economic Theory ◽  
Business Cycles ◽  
Rational Expectations ◽  
Critical Assessment ◽  
Informational Efficiency ◽  
Coordination Failures ◽  
Expectations Hypothesis ◽  
Real Business Cycles ◽  
Modern Economic ◽  
Modeling Principles

This chapter examines one line of criticism of the Rational Expectations Hypothesis (REH): expectational coordination failures. It begins by addressing the question of what went wrong with standard economic theory in general and with its modeling principles in particular and offers three answers relating to the diversification of modeling, the rationality hypothesis, and expectational coordination. It then considers the rise of REH in modern economic theory before discussing three avenues of criticism against REH: internal challenges, external criticisms, and criticism based on real-time learning. It also explains how a critical assessment of REH in different contexts changes the standard (REH-based) economic intuition, focusing on the question of the value of new financial instruments; the informational efficiency of the market; and the “good” expectational coordination that Real Business Cycles (RBC)-like models.

Rational Expectations and Inflation

2017 ◽  
Author(s):  
Thomas J. Sargent
Keyword(s):  
World War I ◽  
French Revolution ◽  
Rational Expectations ◽  
Ronald Reagan ◽  
Fiscal Policies ◽  
Economic Policies ◽  
Budget Deficits ◽  
Nobel Lecture ◽  
Economic Decisions ◽  
The French Revolution

This collection of essays uses the lens of rational expectations theory to examine how governments anticipate and plan for inflation, and provides insight into the pioneering research for which the author was awarded the 2011 Nobel Prize in economics. Rational expectations theory is based on the simple premise that people will use all the information available to them in making economic decisions, yet applying the theory to macroeconomics and econometrics is technically demanding. This book engages with practical problems in economics in a less formal, noneconometric way, demonstrating how rational expectations can satisfactorily interpret a range of historical and contemporary events. It focuses on periods of actual or threatened depreciation in the value of a nation's currency. Drawing on historical attempts to counter inflation, from the French Revolution and the aftermath of World War I to the economic policies of Margaret Thatcher and Ronald Reagan, the book finds that there is no purely monetary cure for inflation; rather, monetary and fiscal policies must be coordinated. This fully expanded edition includes the author's 2011 Nobel lecture, “United States Then, Europe Now.” It also features new articles on the macroeconomics of the French Revolution and government budget deficits.

The Micro and Macro of Managerial Beliefs

2020 ◽  
Author(s):  
Jose Maria Barrero
Keyword(s):  
Rational Expectations ◽  
Asset Price ◽  
Heterogeneous Firms ◽  
Adjustment Costs ◽  
Consumer Welfare ◽  
Sales Growth ◽  
Firm Level ◽  
Managerial Decisions ◽  
Managerial Beliefs ◽  
Growth Volatility

This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not over-optimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise (overconfident): they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications of these facts, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1 percent of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5 to 2.3 percent relative to the rational expectations equilibrium. These findings suggest overreaction may amplify asset-price and business cycle fluctuations.

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