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Actions of a player in a game are examined with regard to his/her beliefs about the other players and the game's real-life context. A two-person zero-sum game is also presented with the player's rational expectations.

Using an adaptive ordinary least-squares algorithm based on an ordinary least-squares algorithm, linear models with expectational leads are studied.

A study is conducted to examine the impact of social interaction between rational agents, on equilibria of economies.

The unique property of equilibrium in linear rational expectations models is established using a geometric criterion.

The interaction of psychology and economics and how neuroscience can help in the better understanding of rational economics is examined.

This paper addresses the statistical properties of time series driven by rational bubbles a la Blanchard and Watson (1982). Using insights on the behavior of multiplicative stochastic processes, we demonstrate that the tails of the unconditional distribution emerging from such bubble processes follow power-laws (exhibit hyperbolic decline). More precisely, we find that rational bubbles predict a 'fat' power tail for both the bubble component and price differences with an exponent μ smaller than 1. The distribution of returns is dominated by the same power-law over an extended range of large returns. Although power-law tails are a pervasive feature of empirical data, these numerical predictions are in disagreement with the usual empirical estimates. It therefore appears that exogenous rational bubbles are hardly reconcilable with some of the stylized facts of financial data at a very elementary level., SINCE THE PUBLICATION of the original contributions on rational expectations (RE) bubbles by Blanchard (1979) and Blanchard and Watson (1982), a huge literature has emerged on theoretical refinements of the [...]

Emotion affects people's reason in economic matters. This article attempts to link research on emotion and on bounded rationality. Emotions actually affect rational thinking in two distinct ways: prioritizing and focusing. These effects are discussed.

This paper studies two approaches for estimating and testing rational expectations models where trend specification is uncertain. One applies a filter to the approximating model and its data, while the other applies also a filtering operation but which is treated with seasonality.

Byline: Fabrice Collard (1), Michel Juillard (2) Keywords: stochastic simulations; nonlinear models; rational-expectations Abstract: We propose to apply to the simulation of general nonlinearrational-expectation models a method where the expectation functions areapproximated through a higher-order Taylor expansion. This method has beenadvocated by Judd (1998) and others for the simulation of stochasticoptimal-control problems and we extend its application to more general cases.The coefficients for the first-order approximation of the expectation functionare obtained using a generalized eigenvalue decomposition as it is usual forthe simulation of linear rational-expectation models. Coefficients forhigher-order terms in the Taylor expansion are then obtained by solving asuccession of linear systems. In addition, we provide a method to reduce abias in the computation of the stochastic equilibrium of such models. Theseprocedures are made available in DYNARE, a MATLAB and GAUSS based simulationprogram.This method is then applied to the simulation of a macroeconomic modelembodying a nonlinear Phillips curve. We show that in this case a quadraticapproximation is sufficient, but different in important ways from thesimulation of a linearized version of the model. Author Affiliation: (1) GREMAQ-CNRS, France (2) CEPREMAP and University Paris 8, France Article History: Registration Date: 09/10/2004

Research is presented concerning the empirical and theoretical characteristics which define quality in the marketplace. The importance of a corresponding view of quality by the customer and the supplier is discussed.

Links between equilibrium allocations with rational expectations and ex-post exchange economy cores are examined, in a model characterized by asymmetric information.

Research is presented concerning the relationship which exists between the ex-post core of the economy and the fine core of an atomless exchange economy which contains differential information.

This paper aims at analyzing the role of uncertainty on investment. In our analysis we will follow recent economic literature concerning stochastic models of irreversible investment and restrict our attention to the Italian economy. We show that theoretically, and in the presence of irreversibility, demand and interest rate uncertainty both reduce demand for capital. Our empirical results support the traditional interpretation according to which expected demand growth rates positively affect investment, while the interest rate level is negatively correlated to the accumulation rate. As for uncertainty, investment decisions in Italy are negatively affected by demand volatility, while interest rate volatility seems to play no significant role.

Human behavior can be explained through complex feelings. Human brains process feelings and thoughts, and feelings may be specialized in terms of information types. Mistakes can help in understanding mental processes.

Economists who have studied emotions have tended to focus on anticipated emotions, whereas psychologists have looked more at immediate emotions and how they affect decisions. Economists could also usefully examined immediate emotions.

A model using algorithms which simplify decision trees offers a number of benefits, such as being empirically testable. This model uses a bounded rationality approcah.

The existence of a fully revealing rational expectation equilibrium for a generic set of endowments is established.

Expectations data and its consistency with nonlinear dynamics, is examined.

Byline: Bennett T. McCallum (1) Keywords: expectations; bubbles; uniqueness; stability; state variables; multiplicity Abstract: This paper concerns the minimal-state-variable (MSV) criterion for selection among solutions in rational expectationsmodels that feature a multiplicity of paths that satisfy all of the model's conditions. It compares the MSVcriterion with others, including the widely used saddle-path (dynamic stability) criterion. It is emphasized that theMSV criterion can be viewed as a scientifically useful classification scheme that delineates the unique solutionthat is free of bubble components. In the process of demonstrating uniqueness for a broad class of linear models,the paper exposits a convenient computational procedure. Applications to current issues are outlined. Author Affiliation: (1) National Bureau of Economic Research, Carnegie Mellon University and, Pittsburgh, PA, 15213 Article History: Registration Date: 29/09/2004

The formal result on the convergence of recursive, stochastic algorithms offers probability boundaries for convergence which may be employed to detail the local stability in the state of process of learning of rational expectations equilibria. The results were obtained sans the addition of a so-called projection facility which a priori constrains appraises to stay in a neighborhood of some specific solution.

A canonical general equilibrium economy model with asymmetric information was created to assess an economy with real assets and inherent uncertainty. The existing works of Radner (1979) are extended by contending that rational expectations equilibrium (REE) are fully revealing. Results show a slight deviation from Radner due to the differences in budget constraints of the models used.

The rationale for, and difficulties of, estimating rational expectations (RE) models of dynamic economic behavior are contrasted with quasi-rational expectations (QRE) models. A multivariate model of US beef cattle supply, derived from dynamic optimizing behavior, is estimated using QRE. In contrast to the recent influential study of Rosen et al. (1994), our model takes adequate account of the complex and changing structure of the industry, particularly of the shift of finishing on ranch and farm to feedlots, and of the way in which the USDA generates the statistical time series used. Our analysis is based on quarterly and monthly data since 1944 and permits a detailed treatment of the dynamic structure of beef production. Tests for QRE against a limited structural form of FRE are presented. Key words: Rational expectations; Cattle cycles; Dynamic optimization

An analysis of the economic selection process in a heterogeneous market indicates that traders who learn, based on the dynamic equilibrium of the model, have an economic advantage over the unlearned traders. This advantage tends to reoccur over time. However, learners become subject to partial information. Traders who learn in the model use least squares updated methods and a realistic but partial forecasting model.

A fully-specified, open-economy macro model has been used to examine if the exchange rate expectations of major countries such as Germany, France, the US and Canada are static or adaptive. Results show that static expectations cannot be rejected in exchange of adaptive expectations at the 5% significance level in Canada, France, the US and the UK and at 1% level for Germany. However, in Italy and Japan, the static expectations can be eliminated in favor of adaptive expectation at 1% level.

Participants in various dynamic competitive security market utilize the information quoted in the market prices, which in turn is derived from the various elements of information from most participants. The use of market prices creates a rational market equilibrium without making an agent's private information insignificant. The market price is found to demonstrate only the portion of private information that is common to the signals of a large number of agents.

The study proposes new methods of assessing the expectations model as the primary conceptual framework in analyzing bond markets and interest rates. The study, which employs monthly data on three-month and one-month U.S. and U.K. interest rates, explains its contradictory empirical results when analyzing long maturities. Results verify earlier tests that yield spread forecasts future change in the one-month rate, however, the regression coefficient deviates considerably from the theoretically predicted values.

The analysis of an economy having a dual period and an asset market and characterized by uncertainty shows the existence of an equilibrium whose characteristic depends on the completeness of the asset market in the first period. Market agents, on the basis of the expected equilibrium situation and, consequently, equilibrium prices, can predict to a good extent future prices amidst the existence of much indeterminacy.

Brown, Richardson and Schwager (BRS) (1987) discovered that the excellent forecasting ability of analysts over time-series models is linked to the characteristics of the information environment of a firm, including firm size and the diffusion of analysts' forecasts. An extension of their study was performed to examine if these characteristics are also connected to analyst excellence as a proxy for the expectation for earnings of the market. Results showed that analyst forecast errors are more highly related to excess returns than random walk forecast errors for the overall sample. This higher relation is positively associated to firm size and negatively related to forecast dispersion. Similar to the BRS finding that superior precision is unrelated to the number of lines of business, this characteristic is not significant.

Sufficient conditions on the knowledge of the players in a game for their beliefs to constitute a Nash equilibrium are demonstrated. A major assumption is mutual knowledge of rationality, wherein players must know that everybody is rational. Player rationality means that his chosen action maximizes his expected utility, considering his beliefs; however, the concept of rationality need not be restricted to expected utility maximization. Aumann and Brandenburger's sufficient conditions can be generalized to the case where players' preferences over uncertain outcomes belong to a large class of non-expected utility preferences.

Voluntary and binary contributions for step-level public goods were examined in models of value orientation and the expectations of individuals on the benefits of public goods. The impact of increasing the benefits of public goods was studied in a game involving 228 subjects in the University of Amsterdam. The determination of expectations, the use of expectations and the differences of expectations among the subjects were investigated. It was concluded that individuals contribute if the expected value of contributing was greater than expected value of not contributing.

A model of price dynamics for future markets has been developed under bounded rationality. Three classes of traders are considered in the model, namely, rational traders, fundamentalist traders and feedback traders. A fourth class, noise traders, is considered in an extension of the model. The model shows that institutional investors acting as feedback traders influence the stabilization or destabilization of the market, allowing or not allowing rational traders to learn the two Rational Expectations Equilibrium of the model.

Informational efficiency in the housing industry is evaluated by using census disaggregated data to analyze single family house rate appreciation. Indeed the equilibrium component of the rent/price ratios, which varies throughout the 64 standardized metropolitan areas studied because of variations in the grade of rental and private housing, is an important predictor of resulting house price rates. Similarly, the disequilibrium component yields the same predictive ability.

The expectation hypothesis (EH) is examined using vector auto regression and cointegration analysis and applied to maturities in the UK interbank market. Comparison of maturity periods between 1-week and 12-months indicate a gap in the term structures of interest rates when 6-month and 12-month maturity periods are paired. The gap may be explained by liquidity constraints, market segmentation or a premium caused by time varying terms. EH is supported by perfect foresight regressions in all maturity periods except by the Campbell-Shiller vector regression.

An extended matrix inverse result has been developed with a new unified double length regression method to calculate the two-step generalized least squares (2SGLS) estimators of two types of rational expectations models. This newly-developed double-length regression computational method is limited to certain types of rational expectations models and is not suitable for models with MA error and heteroscedasticity. Modified variations of 2SGLS estimators and their applications were also discussed.

The uniform rule without continuity is still unique even in an environment with a finite number of potential players. A model that considers single value and envy-freeness indicates that bilateral consistency can only represent allocations of different economies. This is in contrast with a previous study by Thomson which indicate that continuity, as well as bilateral consistency, can be satisfied by the uniform rule. The approach used cannot be applied to multi-valued settings with infinite number of potential agents.

The Nash implementability of rational solutions of matching problems is determined using the Maskin model that requires monotonicity and no veto power for implementability. The man-optimal stable rule, Pareto optimal and individually rational rules are all monotonic but fail on the no veto power requisite. Despite this limitation, the man-optimal stable rule can be considered implementable because any it can be solved by any subsolutions of the Pareto and the individually rational rule.

Home and favored teams are given an implied advantage in betting markets despite the equalizer effect of point spreads. A model formulated to test the efficiency of the point spread market in football shows that favored and home teams are favored against underdog and away teams. Although the home advantage is supported when the game is played on neutral site and the opposing teams are equally balanced, the study found that betting biases occur because the considerations are limited to the favored teams.

ECONOMIC THEORY has much to say about the relationship between uncertainty and investment. Taken as a whole, however, what theory has to say is ambiguous. Different theories emphasize different channels, [...]

A general equilibrium model of asset pricing is developed where profitable informed trading may transpire without any disturbance in the model. The equilibrium concept used is similar to rational expectations equilibrium and also provides for the possibility of adverse selection. The model developed shows that profitable informed trading decreases agents' welfare when a comparison is done across steady states.

The study of exchange market efficiency has been a growing interest due to the emergence of the flexible exchange rate system during the 1970s. However, most of these studies focused on the efficiency of a single maturity. The rational expectations-efficient market hypothesis is studied for the deutschemark, yen, French franc, Canadian dollar and the UK pound against the US dollar from Apr. 1973 to Mar. 1993.

This article explains deviations from formal expectations regarding choice behavior in settings where economic rationality (i.e., own payoff maximization) dictates either cooperating (full contribution) or free riding (no contribution) in the provision of public goods via the voluntary contribution mechanism. The authors find that the difference between full contribution and the observed level of contribution is greater than or equal to the corresponding difference when free riding is the best strategy. This surprising result is interpreted as the 'spiteful' behavior of subjects whose first priority is not the total amount of payoff they receive but the ranking among them.

A learning model incorporating Bayesian characteristics and set in a stochastic environment is discussed. This model incorporates rational expectations about the state which involve forecasts and beliefs. These are updated continually and form part of a dynamic learning interaction. It is shown that full learning does not always happen. Nonetheless, partial learning has its results which come in the form of better informed predictions.

Bayesian aggregation is analyzed under such limitations as its identity with a subjective probability or a Savagean ordering and its consistency with the Pareto principle. The aggregation problem is shown to be solvable only through the implementation of affine rules, particularly with regards to nonatomic probabilities. When the Pareto principle happens to be strong relative to other conditions, no solution appears to be valid.

The expectations theory of the term structure is tested using Johansen's maximum-likelihood approach to estimation and inference on cointegration. The study begins with unit root tests on measures of the expected future spot interest rate and the forward rate. Johansen's trace and maximal eigenvalue tests were employed for a cointegration test. This methodology may also be used to study the weak form of the expectations theory.

This paper develops a framework for analyzing forecast errors in a panel data setting. The framework provides the means (1) to test for forecast rationality when forecast errors are simultaneously correlated across individuals, across target years, and across forecast horizons using Generalized Method of Moments estimation, (2) to discriminate between forecast errors which arise from unforecastable macroeconomic shocks and forecasts errors which arise from idiosyncratic errors, (3) to measure monthly aggregate shocks and their volatilities independent of data revisions and prior to the actual being realized, and (4) to test for the impact of 'news' on volatility. We use the Blue Chip Survey of Professional Forecasts over the period July 1976 through May 1992 to implement the methodology. Key words: Rational expectations; Aggregate shocks; News; Volatility; GMM estimation; Blue chip survey; Panel data JEL classification: C23; C53; C82; E17; E37