Some Interesting Dynamics of Recent Economic Models

1
Some Interesting Dynamics of Recent Economic
Models

• Joshy Easaw
• Department of Economics
• University of Bath
• BICS Industrial Complexity Forum, 10th July 2009

2

• Mr Keynes and Animal Spirits
• Keynes appreciated that most economic activity
  results from rational economic motivations but
  also that much of economic activity is governed
  by animal spirits non-economic motives.
• Animals spirits are the main cause of
  fluctuations in aggregate economy (eg. current
  housing market crisis etc.)
  
• Animal Spirits George Akerlof and Robert
  Shiller, 2009, Princeton University Press
• Households Animal Spirits Depicted by Consumer
  Sentiments (or Confidence) (Akerlof and Shiller
  (2009)
• Households sentiments/confidence
  oscillates between periods of optimism and
  pessimism, affecting their consumption and
  economic cycles.

3
(No Transcript)
4

• Dynamics of consumer sentiments (or confidence)
• Especially households over-reaction and
  under-reaction.
• Theoretical Model Psychology of Economic Voting
• The relationship between households consumer
  sentiments and their view of government
  competence in managing the macroeconomy.
• Bankers and Peasants

5

• Intertemporal Bankers Behavior
• - Consumer sentiment
• - Government Competence
• - Target Government Competence
• Intertemporal Peasants Behavior

6
Phase Diagram Consumer Sentiments and
Government Competence
7

• Why do households form expectations about
• the macroeconomy (eg. inflation)?
• Importance of forming inflation expectations
  wage negotiations and setting wage contracts.
• How do households form expectations about
• the macroeconomy (eg. inflation)?
• Most likely through the news media who report the
• forecasts (or expectations) of professional
  economists

8
(No Transcript)
9

• Standard/Current Model (Carroll 2003 and 2006)
  Epidemiology of expectations formation
• (1)
• - households inflation expectations
• - professionals inflation expectations
• - households absorption rate

10
Easaw and Ghoshrays Easaw and Golinellis
extended model

• i. Active Households inflation expectations

(2)
- active households inflation expectations
- active households absorption rate
ii. Passive Households inflation expectations
(3)
- proportion passive household observes active
household
(4)
- passive households absorption rate of either
professionals or actives expectations
Empirical Results General public (passive
learners) learns partly via the professionals and
partly via trade unions (active learners).
11

• III Dynamics of Sticky Information Expectations
  II The Case of Spatial Learning (Easaw and
  Mossay (2009)
• 1. Social Interaction
• Two scenarios
• First Scenario Active households partly observe
  professionals forecast directly or via their
  neighbors (active)- through social interaction
  

- active households absorption rate
- active households interaction rate
12
Second Scenario Passive households partly
observe professionals forecast indirectly via
active households or via their neighbors
(passive) - through social interaction
- passive households absorption rate
- passive households interaction rate
13
(No Transcript)
14
Spatial Convergence

• Convergence depend on both absorption and
  interaction rate
• The interaction rate introduces the dimension of
  space to the element of time. Hence, when
  learning agents are learning from neighbors
  their relative inflation expectations matter.
  That is the relative dispersion of their
  inflation expectations Spatial Frequency.
• Dynamics of Spatial Learning
• Convergence takes place but also depend on
  spatial frequencies.
• In the case of passive households (under certain
  conditions) it overshoots initially

15
Time Path of the Active and Passive Households
Expectations
Expectations
16
(No Transcript)