Gerd Weinrich

On the theory of effective demand under stochastic rationing

Abstract The concept of effective demand under stochastic manipulable quantity rationing is shown to be compatible with the existence of nontrivial equilibrium. It is argued that stochastic rationing is unavoidable for any satisfactory definition of effective demand. Moreover, manipulability of the rationing mechanism is necessary for reasons of logical consistency, at least if the distribution over realisations for each agent depends on his own action and on the aggregate values of demand and supply only. In that case, anonymous stochastic rationing schemes reduce to those random functions, the mean value function of which is the uniform proportional rationing mechanism.

Complex business cycles and recurrent unemployment in a non-Walrasian macroeconomic model

Abstract In a dynamic non-tâtonnement macroeconomic model, trades take place in each period even when prices are not Walrasian. Prices are adjusted between trading periods according to the intensity of disequilibrium, a reliable measure of which is obtained by means of stochastic rationing. The degree of downward nominal wage stickiness as well as government policy parameters are decisive for the dynamics that emerge. In particular, it is possible for the economy to converge to quasi-stationary states involving permanent unemployment and decreasing nominal wages or to produce complex business cycles with structural features recurrent over time but varying and unpredictable shape and size.

Endogenous fixprices and sticky price adjustment of risk-averse firms

A risk-averse price-setting firm which knows the quantity demanded at the status quo price but has imperfect information otherwise may choose not to change it although an otherwise identical risk-neutral firm would do so, provided the variance of the firms subjective probability distribution over quantities demanded as a function of price displays a kink at the status quo. This is equivalent to risk aversion of order one. When no such endogenous fixprice exists, the size of price adjustment still tends to zero as risk aversion tends to infinity, and to any arbitrarily small menu cost there exists a degree of risk aversion so that the firm will not adjust.

A firm's optimizing behaviour under a Value-at-Risk constraint

In this article, we employ the concept of value-at-risk to model a kind of risk-averse behaviour of a firm which seeks to maximize profit à la Greenwald–Stiglitz [5]. It is shown that there exists a unique well-defined solution function, which relates output to the firms net worth, but that this function is not monotone. The latter is due to the fact that whenever the VaR-constraint is not binding, the firm behaves in a risk-neutral fashion. It is also shown that in this context, the Modigliani–Miller theorem applies only in the special case where there is no risk of bankruptcy.

MONEY AND GROWTH IN A PRODUCTION ECONOMY WITH MULTIPLE ASSETS

We consider a Diamond-type model of endogenous growth in which there are three assets: outside money, government bonds, and equity. Due to productivity shocks, the equity return is uncertain, and risk averse investors require a positive equity premium. Typically, there exist two steady states, but only one of them is stable, both in the forward perfect foresight dynamics and under adaptive expectations. Tight monetary policy is harmful for growth in the stable steady state. These results hold under four different monetary policy strategies applied by the monetary authority. A monetary contraction increases the bond return, reduces the equity premium and thereby capital investment and growth.

Bank Regulation When Both Deposit Rate Control and Capital Requirements are Socially Costly

We provide a welfare comparison of the two types of banking regulation commonly used to address moral hazard problems, deposit rate ceilings and minimum capital requirements. It is well understood that interference with the price mechanism may lead to inefficiencies -- in the case of a deposit rate ceiling, the expected consequence is financial repression and possibly migration of depositors to unregulated financial institutions. As was already pointed out by Besanko and Thakor (1992), minimum capital requirements are, however, likely to have similar effects, since banks will pass the costs of this regulation on to depositors in the form of lower interest rates. Possibly for this reason there seem to be no theoretical studies supporting the reforms in the 80s and 90s, which saw deposit rate ceilings being replaced by minimum capital requirements. Either the two instruments are considered for all practical purposes equivalent or the conclusion is in favor of deposit regulation. In our model, while both types of regulation may depress deposit rates, there is a real trade-off between the two: capital regulation is costly because the opportunity costs of capital is higher than the return from normal banking activities while deposit rate ceilings may result in an inefficiently high number of banks. We show that, depending on the opportunity costs of banking capital and on the severity of the moral hazard problem they seek to address, each of the two regulatory instruments may welfare dominate the other.

Deflationary Recessions in a General Equilibrium Framework

This paper investigates the role of fiscal and monetary shocks in the occurrence of deflationary recessions. Our model is based on a temporary equilibrium approach with stochastic rationing, where inventory dynamics is explicitly taken into account, amplifying spillover effects between markets. This setting allows us to study the driving forces behind disequilibrium phenomena, and to investigate the efficacy of alternative policies in overcoming them. In particular, we provide for an application of our approach to the study of the Japanese deflationary recession.

Nondegenerate Intervals of No-Trade Prices for Risk-averse Traders

According to the local risk-neutrality theorem an agent who has the opportunity to invest in an uncertain asset does not buy it or sell it short iff its expected value is equal to its price, independently of the agents attitude towards risk. Contrary to that it is shown that, in the context of expected utility theory with differentiable vNM utility function, but without the assumption of stochastic constant returns to scale, nondegenerate intervals of no-trade prices may exist. With a quasiconcave expected utility function they do if, and only if, the agent is risk averse of order one.

Expectations and Policies in Deflationary Recessions

In this paper, we use a non†tA¢tonnement dynamic macroeconomic model to study the role of inventories, expectations and wages in the business cycle. Following a restrictive monetary shock, by amplifying spillover effects inventories may imply that the economy converges to a deflationary locally stable Keynesian underemployment state. The model is applied to evaluate economic policies like quantitative easing as well as the effectiveness of holding inflationary expectations to recover to full employment. If inflationary expectations are not sufficient, imposing downward rigidity of nominal wages helps to exit from the recession.

Bank Regulation in a Complex Environment

We study risk based capital requirements in a monopolistic competition, general equilibrium model. Banks may invest in suboptimal gambling assets rather than risky assets (which we interpret as lending to firms). Capital requirements are used to address this moral hazard problem but may (inadvertently) induce banks to switch into a class of safe assets which are not subject to capital requirements but not optimal either.Our model may contribute to the understanding of the recent contraction in bank funds to European firms despite the quantitative easing by the European Central Bank. Our model suggests as explanation the very design of the Basel accords rather than procyclicality in the traditional sense.Furthermore, since optimizing banks may choose to voluntarily hold capital buffers in response to increased capital requirements, our model also provides a perspective on the new mandatory capital buffers under Basel III.