Information and Prices

We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate in this data. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect, and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central bank's policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk that threaten to push inflation off target. This model, while an improvement on standard models, is considered just a starting point for their revision. It leads to critical questions that researchers need to answer as they continue to revise their approach to monetary policy analysis. Copyright © 2009 by the National Bureau of Economic Research.

The paper proposes an agent-based evolutionary ecological-economic model that captures the link between the economy and the ecosystem in a more inclusive way than standard economic optimization models do. We argue that an evolutionary approach is required to understand the integrated dynamics of both systems, i.e. micro–macro feedbacks. In the paper, we illustrate that claim by analyzing the non-triviality of finding a sustainability policy mix as a use case for such a coupled system. The model has three characteristics distinguishing it from traditional environmental and resource economic models: (1) it implements a multi-dimensional link between the economic and the ecological system, considering side effects of production, and thus combines the analyses of environmental and resource economics; (2) following literature from biology, it uses a discrete time approach for the biological resource allowing for the whole range of stability regimes instead of artificially stabilizing the system, and (3) it links this resource system to an evolving, agent-based economy (on the basis of a Nelson-Winter model) with bounded rational decision makers instead of the standard optimization model. The policy case illustrates the relevance of the proposed integrated assessment as it delivers some surprising results on the effects of combined and consecutively introduced policies that would go unnoticed in standard models.

Critics of globalisation object to many things, some of which can be easily understood within standard economic models, but others of which seem to reflect a view of the world that economists generally do not share. This paper attempts to identify several alternative frameworks for analysis within which some of their criticisms may be understood, with the ultimate aim of extracting testable implications that differ from standard models. Three such alternative models are suggested, all of which focus mainly on the behaviour of owners and managers of corporate capital: an anti‐labour model, in which capitalists are willing to sacrifice some of their own profits for the chance to make labour worse off; a labour‐monopsony model in which capitalists co‐operate globally to increase profits by depressing wages; and an international political economy model in which capitalists use their resources to influence the political process for more than just obtaining import protection. This third framework, which is not spelled out in any detail here, has capitalists seeking policies such as export subsidies and other means of promoting market access, and it also has them influencing the international negotiations that set the rules of international agreements and organisations, such as the NAFTA and WTO. Examples of the latter sort of influence are discussed.

The stylized fact of prices increasing more strongly than they decrease in response to identically-sized cost changes, have been confirmed in many empirical studies. However, most of them claim that standard pricing theory cannot account for this phenomenon. Using constant marginal costs and allowing the demand function to be log-concave, this paper shows that the positive asymmetric pricing phenomenon in terms of magnitude can be explained by two of the classic standard economic competition models, Stackelberg with homogenous goods and Bertrand with non-homogenous goods. Furthermore, based on simulations, this paper compares the magnitudes of asymmetry generated in the standard economic competition models. Results show that with a log-concave demand function and constant marginal costs, the magnitude of the positive asymmetric pricing is positively related to the market power. Therefore, the monopoly model is the most asymmetric one, followed by Cournot, Stackelberg and Bertrand.

The Role of Sentiment in Optimal Development of Residential Projects

Classical decision theory is a picture of harmony. Models are designed to predict economically consequential choices, and empirical tests concern their ability to explain these choices. The models themselves are typically solved using optimization techniques with solid axiomatic foundations. These foundations allow for a complete understanding of the qualitative and quantitative relationship of the models to relevant choice data. The consensus within economics concerning this decision theoretic methodology has had powerful positive externalities, ensuring strong communication across professional subdisciplines. Economics stands out in this respect from other social sciences, in which the approach to model-building is more fragmented, and in which communication problems are correspondingly more profound. Despite its harmony, many researchers view classical decision theory as limited in its ability to incorporate psychological factors. As detailed in section 15.2, this has led to ever growing interest in non standard economic models that sit outside the choice theoretic tradition. At the same time, diverse new forms of “psychological” data are being developed, concerning features of informational search, eye movements, neurological responses, and answers to non-standard survey questions. The possibilities for new insights to be gleaned by appropriately combining non-standard theories with novel psychological data excite many prominent researchers (e.g. Benhabib and Bisin [this volume], Camerer [this volume], Crawford [this volume], and Schotter [this volume]). While the recent expansion in the scope of economic theory and measurement opens up intriguing new vistas, it also raises profound challenges. In particular, it has disturbed the harmonic situation that previously prevailed. In striking contrast with the classical theory, there are expanding gaps between the new economic models and the psychological data that are used to inspire and to test them. Should these gaps continue to expand, it will pose a significant threat to

A common assumption in standard economic models is that agents are risk-averse and prudent, and it is often argued that prudence is necessary to generate precautionary savings. This paper shows that prudence is not necessary to generate precautionary savings in small open economy models with more than two periods. A new class of preferences, which enables the isolation of the effect of risk aversion on precautionary savings, is introduced. The effects of changes in risk aversion, interest rates, and persistence and volatility of shocks on average asset holdings are qualitatively identical to the ones observed for standard constant-elasticity-of-substitution preferences. These results show that the almost universal assertion in the literature - that only prudent consumers can generate positive levels of precautionary savings - is simply incorrect.

In this essay, 2006 Nobelist Edmund Phelps expands upon the ideas about innovation and creativity he introduced in his 2013 book Mass Flourishing. Phelps argues that while economies have continued to evolve, the concepts in economics have lagged behind.In standard economic models, the reward for work is fundamentally the market wage. There is no room for any human agency by which a person might gain rewards other than the going wage. Thus, standard models miss the character of a modern economy.The treatment of “innovation” is especially lacking. Standard economics uses the word “innovation” to denote a shift in a “technology” parameter. Yet these parametric shifts are exogenous to the economy–not new products or new methods conceived in the economy, thus endogenous to the economy.Western nations that have gone from brilliance to very slow growth have little idea of how to redevelop the old élan of their best decades. With only the standard toolkit, economists may offer relief from some of the symptoms of the illness, but not a cure. Standard economics cannot cure the illness because it cannot know the causes.The critically missing element in standard economics is indigenous innovation. This refers to new ideas not just to adaptations.A great many businesspeople take the view that a company “innovates” when it detects and acts on a new opportunity–one that fills a need. But the concept of an indigenous innovation–a new idea that brings new practice–is miles away from the concept of detecting and acting on an opportunity that brings new practice.Indigenous innovation, where it occurs, is driven by people's creativity. Innovators use their imagination to conceive of new products or methods and their ingenuity and savvy to implement the new product or method, that is, to make it and market it.New ideas are not the same thing as science. Science does not tell us whether there will be a market for any of the new possibilities; business knowledge is indispensable here. Even in Western countries, myriad business discoveries may have led to as many new products and methods as from scientific discoveries between the 1820s and 1960s.Phelps believes the “spirit” of dynamism derived from modern ethical values including individualism, vitalism, and selfexpression. They also include what Phelps calls “visionaryism” or the desire to create entirely new things.Modern societies developed as the result of these modern values. And where these values reached a critical mass, modern economies sprouted up which brought mass innovating and thus rapid economic growth. The dynamism also enriched work. Ordinary people had engaging employment and most of them prospered and many flourished.Phelps sees several causes for the loss of dynamism, particularly regulation and what he calls “social protection.” He is not referring to social security but to efforts to inhibit change. Not only does social protection stymie potential agents of change on the outside (e.g., by blocking potential startups) but CEOs who might have been innovators are reduced to being lobbyists and rent seekers. He thinks the private sector may also suffer from “decadence” including corruption, weak governance, and short‐termism.Phelps refers collectively to the old values opposing modern values as “corporatist values.” Now pervasive in all the nations of the West, corporatism is behind the selfserving vested interests, clientelism, and cronyism.Two propositions follow from this assessment:1. Nations that lack the dynamism for mass indigenous innovation will not achieve the prosperity of which modern economies are capable. “Reform” will be fruitless without the right culture. It will be necessary to bring back into schools and the home the literature of adventure and exploration.2. The once‐dynamic nations of the West cannot regain the stunning indigenous innovation of the 19th and 20th centuries without first doing battle with corporatist values. Western nations will have to reassert the modern values.

The Cuban government has for many decades put out a large amount of data on the performance of its economy, in the first instance in the flagship economic publication Anuario Estadístico de Cuba, and then in numerous more specific publications from ONEI (Oficina Nacional de Estadísticas e Información). A glaring exception to this is the absence of official data on FDI (Foreign Direct Investment) into the country. The government has long argued that this is due to the obsessive enforcement by the US of its economic Blockade against Cuba; publicising who is making investments into Cuba is helps the US government execute its policy of exerting as much pressure on investors as possible to cancel their investment before it is even initiated. As one example among thousands, see Panasonic's cancellation in 2018 of its contract for Cuban cobalt (Erisman 2023). Regardless of the reasons for it, the government of Cuba does not publish data on FDI into Cuba. Given the need for estimates of such FDI by both economists evaluating the macro-performance of Cuba and investors considering investing in the island, the two standard approaches to generating such estimates are the following. First, one can continually scrutinise the hundreds of presentations and discussions about the economy by different members of different parts of the government or sometimes academia that are presented on television and reproduced in newspapers, finding and collecting small pieces of information about FDI presented here or there. Alternatively, people who do overall investigations of the performance of the Cuban economy (for which, again, the Cuban government provides much information) can use standard (though somewhat variable) economic models and reasoning to deduce estimations of how much FDI must have occurred for the rest of the data to be consistent. By far the best-known and most used of such estimations are those made from time to time by the EIU (Economist Intelligence Unit) in its reports on Cuba's economic performance. Both of these types of estimates appear in many of the chapters throughout the book.

The study was conducted to investigate the impact of development and purification processes as well as raising the efficiency of Lake Burullus on the economic variables that affect its fish production. The study was based on two sources of data: the statistical recorded data during ten years before (2000 to 2009) and ten years from the beginning of the development project (2010-2020). The other source was the data collected during the field trips by interviewing the local fishermen and officials of the company performing the purification and development operations in the lake. Both descriptive and quantitative economic analysis were used for the variables under study using standard statistical and economic models. The different phases of the development and purification project were reviewed, and its impact was measured in order to study the evolution of the quantity and value of fish production in Lake Burullus, the development of fish production efficiency per fishing units and fishermen during the two studied periods, then studying seasonal fluctuations, future expectations and instability coefficient of fish production during the cleansing and development operations. The results of the analysis showed a positive impact of the cleansing and development operations in the lake on all economic variables under study.

Complex systems are composed of particles or agents which interact directly with each other. The rules for this interaction may be very simple and may not reflect the sort of rationality associated with standard economic models. Interaction is not through some exogenously given market, nor does it depend on the complicated reasoning involved in game theory. A complex system exhibits emergent aggregate properties as it organizes itself, and these can explain important phenomena such as bubbles, herding behaviour, and segregation. In each case the aggregate state of the economy or market could not be predicted from the average behaviour of the individuals.

Numerous laboratory studies find that minor nuances of presentation and description change behavior in ways that are inconsistent with standard economic models. How much do these context effect matter in natural settings, when consumers make large, real decisions and have the opportunity to learn from experience? We report on a field experiment designed to address this question. A South African lender sent letters offering incumbent clients large, short-term loans at randomly chosen interest rates. The letters also contained independently randomized psychological "features" that were motivated by specific types of frames and cues shown to be powerful in the lab, but which, from a normative perspective, ought to have no impact. Consistent with standard economics, the interest rate significantly affected loan take-up. Inconsistent with standard economics, some of the psychological features also significantly affected take-up. The average effect of a psychological manipulation was equivalent to a one half percentage point change in the monthly interest rate. Interestingly, the psychological features appear to have greater impact in the context of less advantageous offers and persist across different income and education levels. In short, even in a market setting with large stakes and experienced customers, subtle psychological features appear to be powerful drivers of behavior. The findings pose a challenge for the social sciences: they suggest that psychological nuance matters but may be inherently difficult to predict given the impact of context. Successful incorporation of psychological features into field studies is likely to prove a vital, but nontrivial, addition to the formation of more general theories on when, why, and how frames and cues influence important decisions.

Axiomatic Basics of E-Economics

An urgent case for climate change action that forcefully sets out, in economic, ethical, and political terms, the dangers of delay and the benefits of action. The risks of climate change are potentially immense. The benefits of taking action are also clear: we can see that economic development, reduced emissions, and creative adaptation go hand in hand. A committed and strong low-carbon transition could trigger a new wave of economic and technological transformation and investment, a new era of global and sustainable prosperity. Why, then, are we waiting? In this book, Nicholas Stern explains why, notwithstanding the great attractions of a new path, it has been so difficult to tackle climate change effectively. He makes a compelling case for climate action now and sets out the forms that action should take. Stern argues that the risks and costs of climate change are worse than estimated in the landmark Stern Review in 2006—and far worse than implied by standard economic models. He reminds us that we have a choice. We can rely on past technologies, methods, and institutions—or we can embrace change, innovation, and international collaboration. The first might bring us some short-term growth but would lead eventually to chaos, conflict, and destruction. The second could bring about better lives for all and growth that is sustainable over the long term, and help win the battle against worldwide poverty. The science warns of the dangers of neglect; the economics and technology show what we can do and the great benefits that will follow; an examination of the ethics points strongly to a moral imperative for action. Why are we waiting?

Democratic Governance Mechanisms in Cooperative Banks: A Reassessment