Harashima, Taiji (2009): Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path.
This is the latest version of this item.
Download (373kB) | Preview
This paper shows that a Nash equilibrium consisting of strategies of choosing a Pareto inefficient transition path is selected by households even without frictions as a result of the revealed government failure in supervision of financial markets. The Pareto inefficiency causes the generation of many of the phenomena observed in a depression (e.g., a persistently large amount of unutilized resources), and it is not necessary to use “animal spirits” to explain the generation of a depression. The revealed government failure in the supervision of financial markets and the resulting increased policy-induced uncertainty makes non-cooperative and risk-averse households behave more myopically, resulting in a Nash equilibrium of a Pareto inefficient path. When the failure of financial supervision is revealed, the household rate of time preference shifts upwards when the expected variance of steady-state consumption increases and/or its expected value shifts downwards.
|Item Type:||MPRA Paper|
|Original Title:||Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path|
|Keywords:||Depression; Pareto efficiency; Nash equilibrium; Time preference; Financial supervision|
|Subjects:||D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D50 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
D - Microeconomics > D9 - Intertemporal Choice and Growth > D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E21 - Consumption; Saving; Wealth
|Depositing User:||Taiji Harashima|
|Date Deposited:||03. Dec 2009 17:38|
|Last Modified:||12. Feb 2013 04:34|
Barro, Robert J. and José F. Ursúa. (2009) “Stock-Market Crashes and Depressions,” NBER Working Papers, No. 14760.
Barsky, Robert B. and Eric R. Sims. (2009) “Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence,” NBER Working Papers, No. 15049.
Becker, Gary S. and Casey Mulligan. (1997) “The Endogenous Determination of Time Preference,” Quarterly Journal of Economics, Vol. 112, No. 3, pp. 729–758.
Berger, Allen N., Sally M. Davies, and Mark J. Flannery. (2000) “Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?” Journal of Money, Credit, and Banking, Vol. 32, No. 2, pp. 641–667.
Böhm-Bawerk, Eugen von. (1889) Capital and Interest, Reprinted by Libertarian Press, South Holland, IL, 1970.
Brock, William A. and Leonard Jay Mirman. (1972) “Optimal Economic Growth and Uncertainty: the Discounted Case,” Journal of Economic Theory, Vol. 4, No. 3, pp. 479–513.
Curry, Timothy, Gary S. Fissel, and Gerald Hanweck. (2003) “Market Information, Bank Holding Company Risk, and Market Discipline,” U.S. Federal Deposit Insurance Corporation Working Paper, No. 2003–04.
Das, Mausumi. (2003) “Optimal Growth with Decreasing Marginal Impatience,” Journal of Economic Dynamics & Control, Vol. 27, No. 10, pp. 1881–1898.
DeYoung, Robert, Mark J. Flannery, William W. Lang, and Sorin Sorescu. (2001) “The Information Content of Bank Exam Ratings and Subordinated Debt Prices,” Journal of Money, Credit and Banking, Vol. 33, No. 4, pp. 900–925.
Do, Quy-Toan and Andrei A. Levchenko. (2007) “Comparative Advantage, Demand for External Finance, and Financial Development,” Journal of Financial Economics, Vol. 86, No. 3, pp. 796–834.
Easterly, William and Ross Levine. (2003) “Tropics, Germs, and Crops: How Endowments Influence Economic Development,” Journal of Monetary Economics, Vol. 50, No. 1, pp. 3–39.
Epstein, Larry G. (1987) “A Simple Dynamic General Equilibrium Model,” Journal of Economic theory, Vol. 41, No. 1, pp. 68–95.
Epstein, Larry G. and J. Allan Hynes. (1983) “The Rate of Time Preference and Dynamic Economic Analysis,” Journal of Political Economy, Vol. 91, No. 4, pp. 611–635.
Farmer, Roger E. A. and Andrew Hollenhorst. (2005) “Shooting the Auctioneer,” NBER Working Papers, No. 12584.
Fisher, Irving (1930) The Theory of Interest, Macmillan, New York
Frederick, Shane, George Loewenstein and Ted O’Donoghue. (2002) “Time Discounting and Time Preference: A Critical Review,” Journal of Economic Literature, Vol. 40, No. 2, pp. 351–401.
Fuhrer, Jeff. (2006) “Intrinsic and Inherited Inflation Persistence,” International Journal of Central Banking, Vol. 2, No. 3, pp. 49–86.
Fuhrer, Jeff and George Moore. (1995) “Inflation Persistence,” Quarterly Journal of Economics, Vol. 110, No. 1, pp. 127–159.
Furlong, Frederick T. and Robard Williams (2006) “Financial Market Signals and Banking Supervision—Are Current Practices Consistent with Research Findings?” Federal Reserve Bank of San Francisco Economic Review, pp 17–26.
Galí, Jordi and Mark L. Gertler. (1999) “Inflation Dynamics: A Structural Econometric Analysis,” Journal of Monetary Economics, Vol. 44, No. 2, pp. 195–222.
Gertler, Mark L. (1988) “Financial Structure and Aggregate Economic Activity: An Overview,” Journal of Money, Credit and Banking, Vol. 20, No. 3, pp. 559–588.
Gertler, Mark L. and A. Trigari. (2009) “Unemployment Fluctuations with Staggered Nash Wage Bargaining,” Journal of Political Economy, Vol. 117, No. 1, pp. 38–86.
Hall, Robert E. (2005) “Employment Fluctuations with Equilibrium Wage Stickiness,” American Economic Review, Vol. 95, No. 1, pp. 50–65.
Hall, Robert E. and Paul R. Milgrom. (2008) “The Limited Influence of Unemployment on the Wage Bargain,” American Economic Review, Vol. 98, No. 4, pp. 1653–1674.
Harashima, Taiji. (2004a) “A More Realistic Endogenous Time Preference Model and the Slump in Japan,” EconWPA Working Papers, ewp-mac0402015.
Harashima, Taiji. (2004b) “A Possibility of Protracted Output Gaps in an Economy without Any Rigidity,” EconWPA Working Papers, ewp-mic/ 0404007.
Harashima, Taiji. (2004c) “The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level,” EconWPA Working Papers, ewp-mac/ 0409018.
Harashima, Taiji. (2007) “Hyperinflation, disinflation, deflation, etc.: A unified and micro-founded explanation for inflation,” MPRA (The Munich Personal RePEc Archive) Paper, No. 3836.
Harashima, Taiji. (2008) “A Microfounded Mechanism of Observed Substantial Inflation Persistence,” MPRA (The Munich Personal RePEc Archive) Paper, No. 10668.
Hornstein, Andreas, Per Krusell, and Giovanni Luca Violante. (2005) “Unemployment and Vacancy Fluctuations in the Matching Model: Inspecting the Mechanism,” Federal Reserve Bank of Richmond Economic Quarterly, Vol. 91, No. 3, pp. 19–50.
Kennan, John. (2006) “Private Information, Wage Bargaining and Employment Fluctuations,” NBER Working Papers, No. 11967.
Keynes, John Maynard. (1936) The General Theory of Employment, Interest and Money, Macmillan Cambridge University Press, London.
La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. (1998) “Law and Finance,” Journal of Political Economy, Vol. 106, No. 6, pp. 1113–1155.
Lawrance, Emily C. (1991) “Poverty and the Rate of Time Preference: Evidence from Panel Data,” Journal of Political Economy, Vol. 99, No. 1, pp. 54–77.
Levine, Ross. (1997) “Financial Development and Economic Growth: Views and Agenda,” Journal of Economic Literature, Vol. 35, No. 2, pp. 688–726.
Levine, Ross, Norman Loayza and Thorsten Beck. (2000) “Financial Intermediation and Growth: Causality and Causes,” Journal of Monetary Economics, Vol. 46, No. 1, pp. 31–77.
Lucas, Robert E., Jr. and Nancy L. Stokey. (1984) “Optimal Growth with Many Consumers,” Journal of Economic Theory, Vol. 32, No.1, pp. 139–171.
Mankiw, N. Gregory (2001) “The Inexorable and Mysterious Tradeoff between Inflation and Unemployment,” Economic Journal, Vol. 111, Issue 471, pp. C45–61
Mirman, Leonard Jay and Itzhak Zilcha. (1977) “Characterizing Optimal Policies in a One-sector Model of Economic Growth under Uncertainty,” Journal of Economic Theory, Vol. 14, No. 2, pp. 389–401.
Mishkin, Frederic S. (1991) “Asymmetric Information and Financial Crises: A Historical Perspective,” in Hubbard, R. Glenn, ed., Financial Markets and Financial Crises, National Bureau of Economic Research, Cambridge, MA.
Morris, Stephen and Hyun Song Shin. (2001) “Rethinking Multiple Equilibria in Macroeconomic Modeling,” NBER Macroeconomics Annual 2000, Vol. 15, pp. 139–182.
Mortensen, Dale T. and Pissarides, Christopher A. (1994) “Job Creation and Job Destruction in the Theory of Unemployment.” Review of Economic Studies, Vol. 61, No. 3, pp. 397–415.
Obstfeld, Maurice. (1990) “Intertemporal Dependence, Impatience, and Dynamics,” Journal of Monetary Economics, Vol. 26, No. 1, pp. 45–75.
Parkin, Michael. (1988) “A Method for Determining Whether Parameters in Aggregative Models Are Structural,” Carnegie-Rochester Conference Series on Public Policy, Vol. 29, No. 1, pp. 215–252.
Pissarides, Christopher A. (1985) “Short-Run Equilibrium Dynamics of Unemployment, Vacancies, and Real Wages.” American Economic Review, Vol. 75, No. 4, pp. 676–690.
Romer, Christina D. (1990) “The Great Clash and the Onset of the Great Depression,” The Quarterly Journal of Economics, Vol. 105, No. 3, pp. 597–624.
Samuelson, Paul. (1937) “A Note on Measurement of Utility,” Review of Economic Studies, Vol. 4, No. 2, pp. 155–161.
Schumpeter, Joseph Alois. (1912/1934) Theorie der Wirtschaftlichen Entwicklung, Duncker & Humblot, Leipzig; English translation published in 1934 as The Theory of Economic Development, Harvard University Press, Cambridge, MA.
Shaw, Edward S. (1973) Financial Deepening in Economic Development, Oxford University Press, New York.
Shimer, Robert. (2004) “The Consequences of Rigid Wages in Search Models,” Journal of the European Economic Association, Vol. 2, No. 2–3, pp. 469–479.
Shimer, Robert. (2005) “The Cyclical Behavior of Equilibrium Unemployment and Vacancies,” American Economic Review, Vol. 95, No. 1, pp. 25–49.
Temin, Peter. (1989) Lessons from the Great Depression, MIT Press, Cambridge, MA.
Temple, Jonathan. (2000) “Summary of an Informal Workshop on the Causes of Economic Growth,” OECD Economics Department Working Papers, No. 260.
Uzawa, Hirofumi. (1968) “Time Preference, the Consumption Function, and Optimal Asset Holdings,” J. N. Wolfe, ed., Value, Capital, and Growth: Papers in Honour of Sir John Hicks, University of Edinburgh Press, Edinburgh, Scotland.
Wachtel, Paul. (2003) “How Much Do We Really Know About Growth and Finance?” Federal Reserve Bank of Atlanta Economic Review, Q1, pp. 33–47.
Yashiv, Eran. (2007) “Labor Search and Matching in Macroeconomics,” European Economic Review, Vol. 51, No. 8, pp. 1859–1895.
Available Versions of this Item
Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path. (deposited 03. Dec 2009 05:43)
- Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path. (deposited 03. Dec 2009 17:38) [Currently Displayed]