Joshy Easaw

Optimal access pricing for natural monopoly networks when costs are sunk and revenues are uncertain

This paper studies optimal access pricing for natural monopoly networks with large sunk costs and uncertain revenues. Using techniques from the option pricing literature, we show that the optimal access price corresponds to a risk-free form of the Efficiency Component Pricing Rule (ECPR), that is, where the opportunity cost is based on the risk free rate of return. We also show that at levels of revenue above the optimal level that triggers entry, the entrant should pay a premium above risk-free ECPR that rewards the incumbent for relinquishing his rights to the risky cash flows at the higher revenue level.

Trade Integration and Business Cycle Convergence: Is the Relation Robust across Time and Space?

In this paper we investigate the relationship between trade intensity and the business cycle correlation using a panel data set taken from 24 countries over the period 1959–2003. Most previous studies did not account for the possibility that the business cycle correlation may be influenced by unobservable country‐pair specific effects. Our estimates, using both fixed‐ and random‐effects methodologies, suggest that trade intensity and the business cycle correlation are positively related to one another. However, detailed investigation shows that this relationship exists mainly for the European countries.

Elections and UK government expenditure cycles in the 1980s: an empirical analysis

This paper tests whether there exists any significant difference in the responsiveness of UK government expenditure policy to changes in national income and unemployment in pre- and post-election periods. The absence of such a political effect would see the national income and unemployment elasticities for government expenditure being uniform over an election period. The empirical analysis deliberately covers the three UK Conservative governments between 1979 and 1992 when academic debate on the implications of discretionary policy for the economy and social welfare were particularly prominent and when it appeared that political rhetoric concurred with the academic prescriptions.

Do Households Anchor their Inflation Expectations? - Theory and Evidence from a Household Survey

The purpose of the present paper is to study how households form inflation expectations. Using a novel survey-base dataset of Italian households’ opinions of inflation we investigate two separate, but related, types of behavior: ‘inattentiveness’ and ‘anchoring’. The present analysis extends the existing literature by incorporating explicitly inflation targets and distinguishing between aggregate and disaggregate dynamics based on demographic groups. In addition, we extend the literature by considering both the short- and long-run dynamics as households update their inflation expectations while also accounting for their state-varying behavior. All these issues provide important insights into understanding actual inflation dynamics and the conduct of monetary policy.

Generalized State-Dependent Models: A Multivariate Approach

The main purpose of this paper is to develop generalized ‘State Dependent Models’ (SDM) in a multivariate framework for empirical analysis. This significantly extends the existing SDM which only allow univariate analysis following a simple AR process. The extended model enables greater possibility for empirical analysis of economic relationships. The principle advantage of SDM is that it allows for a general form of non-linearity and can be fitted without any specific prior assumption about the form of non-linearity. We describe the general structure of the SDM and the problem of its identification is also considered. Finally, we apply the algorithm to show the impact of sentiment and income when modelling US consumption.

Households forming macroeconomic expectations: inattentive behavior with social learning

Abstract There has been a heightened interest in how households form their macroeconomic expectations. Recent innovative studies have shown that households form their expectations by observing professionals’ forecasts albeit imperfectly. Such inattentive behavior has been used to explain inflation dynamics. The purpose of the present paper is to provide further microfoundations to the “sticky information” expectations model by incorporating social learning between households. Here, social learning is modeled through spatial local interactions: households learn from their neighbors as they form their expectations. We show the convergence of households’ expectations depends on the rate of absorbing the professional’s forecasts and the interaction rate with neighbors but also on the spatial variability of the cross-section expectation distribution. The analysis also distinguishes between active and passive households as the latter do not have access to the professional’s forecast or prefer to learn from others, such as the active households. We show that the social interactions between active and passive households can lead to non-monotonic convergence. Finally, while our model with active agents is able to match only the mean inflation expectation of the Michigan survey, our model with active and passive agents is able to replicate both the first and the second moments of the inflation expectations observed in the survey.

Households' Forming Subjective Expectations Using Perceived News: Do Shocks to ‘Good’ News Matter More than ‘Bad’ News?

The present paper examines the microfoundations of how households form subjective expectations about the macroeconomy using a novel survey-based data set. In particular, we are interested in the role of perceived news. The paper outlines a model where households may give unequal importance (or weights) to ‘good’ and ‘bad’ news. We also consider whether the relationship is state-varying and has any structural changes. The ensuing empirical investigation uses time-varying smooth transition autoregressive models. We find that weights given to the news are state-varying, with little, or no, weight given to bad news. There is also a clear structural change in the relationship after September 2001.

Household Inflation Expectations: Information Gathering, Inattentive or 'Stubborn'?

The purpose of this paper is to investigate the microfoundations of how non-experts’ (or general public) form inflation expectations. Using a unique dataset we investigate the range of near rational inflation expectations. An important contribution to understanding how non-experts form their expectations is ‘sticky information expectations’, specifically the epidemiological model. Our analysis uses an extended version of the epidemiological model. We find that the general public are best depicted as those who are either information gathers or inattentive. In addition, the inattentive general public can be either forward-looking or ‘stubborn’, that is persistent.