Peter R. Hartley

Consumer Rationality and Credit Cards

Borrowing on credit cards at high interest rates might appear irrational. However, even low transactions costs can make credit cards attractive relative to bank loans. Credit cards also provide liquidity services by allowing consumers to avoid some of the opportunity costs of holding money. The effect of alternative interest rates on the demand for card debits can explain why credit card interest rates only partially reflect changes in the cost of funds. Credit card interest rates that are inflexible relative to the cost of funds are not inconsistent with a competitive equilibrium that yields zero profits for the marginal entrant.

The Relationship between Crude Oil and Natural Gas Prices: The Role of the Exchange Rate

To the extent that energy sources can be substituted in end-uses, one might expect the prices of different fuels to be linked. High prices for one fuel will create incentives to substitute toward other fuels that are relatively less expensive. Consistent with this basic economic prediction, many authors have documented a tendency for the natural logarithm of prices of different energy commodities to be cointegrated.

Macroeconomic fluctuations: Demand or supply, permanent or temporary?

Abstract We use generalized method of moments to estimate a rational expectations aggregate demand/aggregate supply macroeconomic model for five European economies and the United States. Our aim is to examine whether supply or demand shocks have predominated in these economies during the post-war era, and whether shocks of either type have been primarily temporary or permanent in nature. We find that permanent or temporary demand shocks have been the dominant source of variance in output growth in all six countries, but there is a less consistent pattern for inflation. Permanent supply shocks had the dominant influence on autocorrelations.

Coherent Probability From Incoherent Judgment

People often have knowledge about the chances of events but are unable to express their knowledge in the form of coherent probabilities. This study proposed to correct incoherent judgment via an optimization procedure that seeks the (coherent) probability distribution nearest to a judges estimates of chance. This method was applied to the chances of simple and complex meteorological events, as estimated by college undergraduates. No judge responded coherently, but the optimization method found close (coherent) approximations to their estimates. Moreover, the approximations were reliably more accurate than the original estimates, as measured by the quadratic scoring rule. Methods for correcting incoherence facilitate the analysis of expected utility and allow human judgment to be more easily exploited in the construction of expert systems.

Value function approximation in the presence of uncertainty and inequality constraints an application to the demand for credit cards

Abstract We present an algorithm for approximating the solution to discrete-time stochastic dynamic programs with inequality constraints. The algorithm exploits the state preference approach to choice under uncertainty to reduce the dimensionality of the state space, and polynomial approximation to improve computational efficiency. It is particularly useful in financial applications involving liquidity and credit constraints and more than one asset. The algorithm provides information about the derivatives of the value function, and therefore risk aversion, along with asset demands.

Inside Money as a Source of Investment Finance

Households demand bank deposits for the liquidity services such assets provide. Higher yielding assets usually are available to finance future consumption. Nevertheless, the demand for bank liabilities enables banks to finance investment. One might therefore expect more capital in an economy utilizing banks. The author shows that, when low wealth households cannot borrow, bank lending increases the capital stock and reduces equilibrium interest rates, while making the real equilibrium more sensitive to shifts in the demand for inside money. When households can borrow, however, bank lending is absorbed by low wealth households and banks have few effects on the real equilibrium.

A generalized method of moments approach to estimating a “Structural vector autoregression”

Abstract A generalized method of moments estimator is used to test a small structural model of the U.S. macroeconomy. As with vector autoregression studies, we view the observable variables as endogenous functions of a set of unobservable shocks. We assume expectations are formed rationally and model monetary policy as a regime rather than a series of discretionary interventions. We find money growth rate shocks to be the most important source of output fluctuations. Real shocks to the demand for capital, and portfolio shocks, are found to be important in explaining covariation between output growth and changes in inflation and interest rates.

A Model of Optimal Dynamic Oil Extraction: Evidence From a Large Middle Eastern Field

We model the economically optimal dynamicoil production decisions of a representative country whose oilfields resemble the largest developed oil field in Saudi Arabia,Ghawar. A government-controlled enterprise may base its oil productiondecisions on criteria other than maximization of the presentdiscounted value of profits. In particular, oil production decisionsare likely to reflect many political, strategic and geopoliticalmotives of the government. Our analysis of the optimal economicdecisions nevertheless enables one to assess the extent to whichlong-run value maximization is being followed. This in turn allowsone to judge the costs that political decisions are imposingin terms of foregone economic output, government revenue andforeign exchange. These costs ought to be of interest to policy-makerswithin Saudi-Arabia and also to external parties interested inmodifying Saudi pricing and production decisions.

Wage differentials and asymmetric mobility

Abstract We explore whether a priority given to a husbands career within a family could partly explain the gender wage gap. We show that restrictions preventing women from pursuing job opportunities, regardless of location, are likely to depress womens relative pay more than will restrictions requiring women to place a high value on non-pecuniary aspects of jobs. However, neither restriction is likely to have a large effect in the absence of interaction with investment in firm-specific human capital. The effects of such restrictions on wage differentials are likely to be large enough that empirical studies which do not examine wages, human capital investment and job search in a simultaneous equations framework could produce results which are seriously biased.

Natural Gas and Geopolitics: The Baker Institute World Gas Trade Model

This working paper describes a spatial and intertemporal equilibrium model of the world market for natural gas. Specifically, the model calculates a pattern of production, transportation routes and prices to equate demands and supplies while maximizing the present value of producer rents within a competitive framework. Data incorporated into the specifications of supplies and demands in each location are taken from a variety of sources including the United States Geological Survey, the Energy Information Administration, the International Energy Agency, the World Bank and various industry sources. A subsequent working paper uses the model to investigate the possible effects of a number of scenarios including possible political developments.