Jaylson Jair da Silveira

Inflation Targeting and Macroeconomic Stability with Heterogeneous Inflation Expectations

Abstract: Drawing on an extensive empirical literature that suggests persistent and time-varying heterogeneity in inflation expectations, this paper embeds two inflation forecasting heuristics–one based on the current rate of inflation, and the second anchored to the official inflation target–in a simple macrodynamic model. Decision makers switch between these forecasting heuristics based on satisficing evolutionary dynamics. We show that convergence toward an equilibrium consistent with the level of output and rate of inflation targeted by policymakers is achieved regardless of whether or not the satisficing evolutionary dynamics that guide the choices agents make between inflation forecasting strategies are subject to noise. We also show that full credulity–a situation where all agents eventually use the forecasting heuristic based on the target rate of inflation–is neither a necessary condition for realization of the inflation target nor an inevitable consequence of the economy’s achievement of this target. These results demonstrate that uncertainty in decision making resulting in norm-based inflation expectations that are both heterogeneous and time-varying need not thwart the successful conduct of macroeconomic policy.

Monetary Neutrality Under Evolutionary Dominance of Bounded Rationality

We provide evolutionary game-theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock by introducing a novel analytical notion we call boundedly rational inattentiveness. We investigate the behavior of the general price level in a context where a firm can either pay a cost (featuring a random component) to update its information set and establish the optimal price (Nash strategy) or freely use non-updated information and establish a lagged optimal price (bounded rationality strategy). We devise an evolutionary micro-dynamics (with and without mutation) that, by interacting to the dynamics of the aggregate variables, determines the co-evolution of the frequency distribution of information-updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. As it turns out, the evolutionary learning dynamics takes the information-updating process to a long-run equilibrium configuration in which, albeit either most or even all firms play the bounded rationality strategy, the general price level is the symmetric Nash equilibrium price and monetary shocks have persistent, though not permanent, impacts on real output.

Conhecimento Imperfeito, Custo de Otimização e Racionalidade Limitada: Uma Dinâmica Evolucionária de Ajustamento Nominal Incompleto

Elabora-se um modelo dinâmico evolucionario que proporciona microfundamentos ao ajustamento nominal incompleto. Mostra-se a emergencia de equilibrios evolucionarios tanto de estrategia pura (sobrevivencia somente de firmas plenamente racionais ou de firmas de racionalidade limitada) como de estrategia mista (sobrevivencia de ambas as firmas). Nos equilibrios de estrategia pura a moeda e neutra, enquanto no equilibrio de estrategia mista a moeda nao e neutra. Alem disso, analisa-se a possibilidade de bifurcacoes no numero de – e nas propriedades de estabilidade dos – equilibrios evolucionarios geradas pela politica monetaria.

CONQUERING CREDIBILITY FOR MONETARY POLICY UNDER STICKY CONFIDENCE

We derive a best-reply monetary policy when the confidence by price setters on the monetary authority’s commitment to price level targeting may be both incomplete and sticky. We find that complete confidence (or full credibility) is not a necessary condition for the achievement of a price level target even when heterogeneity in firms’ price level expectations is endogenously time-varying and may emerge as a long-run equilibrium outcome. In fact, in the absence of exogenous perturbations to the dynamic of confidence building, it is the achievement of a price level target for long enough that, due to stickiness in the state of confidence, rather ensures the conquering of full credibility. This result has relevant implications for the conduct of monetary policy in pursuit of price stability. One implication is that setting a price level target matters more as a means to provide monetary policy with a sharper focus on price stability than as a device to conquer credibility. As regards the conquering of credibility for monetary policy, it turns out that actions speak louder than words, as the continuing achievement of price stability is what ultimately performs better as a confidence-building device.

Regime Monetário de Meta de Inflação em um Ambiente de Heterogeneidade de Estratégias de Formação de Expectativas de Inflação

We study the dynamics of an inflation targeting regime in a macroeconomic context represented by a three-equation model (IS curve, Phillips curve and interest rate rule) and with heterogeneous strategies to form expectations of inflation. Economic agents choose between using the official inflation target as predictor of future inflation (credulous strategy) or paying a random cost (unknown a priori) to perfectly predict it (skeptical strategy). The distribution of these strategies in the population follows an evolutionary dynamics with and without endogenous mutation. We find that full credibility is not

Demanda e desemprego no médio prazo

In this article, we propose a keynesian model in which the traditional labor market equilibrium is replaced by an evolutionary game. In such a model the aggregate demand plays the crucial role in the determination of the medium-run equilibrium, differently from the traditional analysis. We show that economic policy and autonomous spending generate bifurcations, characterized by changes in the number of equilibria and/or in the stability properties. Thus, unemployment is not a result of an ad hoc nominal rigidity, but arises as a spontaneous outcome of an interaction process in which bounded rational agents grope for the best wage bargaining strategy.

The Great Deception: The ‘Science’ of Monetary Policy and the Great Moderation Revisited

Conventional wisdom suggests that the Great Moderation was caused by either good policy, good luck (favourable shocks), more efficient private sector behaviour (such as better inventory management), or more effective financial innovations. We show that it may, instead, have originated from the complementarity of an erroneous reading of the economy by central bankers and evolutionarily time-varying heterogeneity in inflation expectations formation within the private sector. One general finding of our analysis is that seemingly inadequate stabilization policies may, in fact, work. We comment on the broader ramifications for stabilization policy of this finding.

Employee Profit-sharing and Labor Extraction in a Classical Model of Distribution and Growth

ABSTRACT This article sets out a classical model of economic growth in which the distribution of income features the possibility of profit-sharing with workers, as firms choose periodically between two labor-extraction compensation strategies. Workers are homogeneous with regard to labor power, and firms choose to compensate them with either only a conventional wage or a share of profits on top of this conventional wage. Empirical evidence shows that labor productivity (i.e. labor extraction) in profit-sharing firms is higher than labor productivity in non-sharing firms. The frequency distribution of labor-extraction employee compensation strategies and labor productivity across firms is time-variant, being driven by satisficing imitation dynamics from which we derive two significant results. First, heterogeneity in labor-extraction compensation strategies across firms, and hence earnings inequality across workers can be a stable long-run equilibrium outcome. Second, although convergence to a long-run equilibrium may occur with either a falling or increasing proportion of profit-sharing firms, the share of net profits in income and the rates of net profit, capital accumulation and economic growth nevertheless all converge to the highest possible long-run equilibrium values.

Effort Elicitation, Wage Differentials and Income Distribution in A Wage‐Led Growth Regime

Motivated by a considerable (experimental and empirical) evidence on endogenous labor effort and inter- and intra-industry wage differentials, this paper explores implications for income distribution, capacity utilization and economic growth of firms using different strategies to elicit effort (and hence productivity) from workers. The frequency distribution of effort-elicitation strategies in the population of firms is governed by a replicator dynamics that generates wage differential as a long-run, evolutionary equilibrium outcome. Although firms willing to elicit more labor effort have to compensate workers with a higher wage rate, a larger proportion of firms adopting such strategy will not necessarily produce a higher wage share in income and thereby higher rates of capacity utilization and economic growth. The intuition is that, depending on the accompanying rise in average labor productivity, the wage share in income (and hence the aggregate effective demand) may not vary positively with the proportion of firms paying higher wages. Therefore, endogenous labor productivity and wage differentials carry relevant theoretical and policy implications for a wage-led growth regime.

Desemprego e flexibilidade de salários em um contexto evolucionário

We make use of an evolutionary game approach to study the relation between wage flexibility and unemployment in an economy with decentralized wage bargains. In our model, labor unions pick a nominal wage out of a finite set with cardinality in each period, while firms choose employment levels that maximize their profits. We are able to show that: 1) the economy presents multiple equilibria, some are characterized by homogeneity of nominal wages (pure strategy equilibrium) and others by heterogeneity of nominal wages (mixed strategy equilibrium); 2) the medium-run equilibrium is selected by a social learning process, given by a replicator dynamics; and 3) the selected medium-run equilibrium may not be the full employment equilibrium.