Stationary Economy Research Articles

Maquila, currency misalignment and export-led growth in Mexico

The paper argues that the weak effect of exports on GDP growth in Mexico is partly explained by two features of the Mexican economy that arose subsequent to trade liberalization: the peso's continued real appreciation and the large and rising share of the maquila sector in manufacturing exports. The argument is developed through an analytical example for a stationary economy with no investment. As motivation for the example's main assumptions, the paper presents empirical evidence gathered from the country's Annual Industrial Survey and the estimation of cointegration equations for maquila and non-maquila intermediate imports. The empirical evidence shows that (a) exports are highly dependent on imports and thus benefit from trade liberalization, and (b) while real exchange rate changes can induce substitution between local and imported intermediate goods generally, this is not the case in the maquila sector.

Asset prices, debt constraints and inefficiency

Abstract We consider (possibly non-stationary) economies with endogenous solvency constraints under uncertainty over an infinite horizon, as in Alvarez and Jermann (2000) [5] . A sort of Cass Criterion (Cass, 1972 [10] ) completely characterizes constrained inefficiency under the hypothesis of uniform gains from risk-sharing (which is always satisfied in stationary economies when the autarchy is constrained inefficient). Uniform gains from risk-sharing also guarantee a finite value of the intertemporal aggregate endowment at a constrained optimum. Hence, no equilibrium exhibits a null interest rate in the long run. Finally, constrained inefficiency occurs if and only if there exists a feasible redistribution producing a welfare improvement at all contingencies.

Fair Demographic Risk Sharing in Defined Contribution Pension Systems

In this article we formulate and solve the optimal design problem of a defined contribution public pension fund, in a highly stylized but still rather general non stationary framework. We adopt the viewpoint of a benevolent social planner who aims at treating in a fair manner the successive overlapping generations participating to such a long-term mandatory system. Using the approach of El Karoui and Jeanblanc (1998) for the optimal consumption and portfolio choice problem with random income in a complete market, we exhibit a solution to our intertemporal stochastic control problem where each generation receives a fair (lumpsum) retirement benefit: it is proportional to the contributions she has paid during her active worklife and follows a fixed common rule (although her pension value itself may depend on variables only observable at her retirement time). We next relax the assumption that the collective pension system is mandatory and investigate the performance of individual investment plans in the market. Comparing the outcomes of both alternatives, we derive a condition under which the collective fund can be expected to overperform the individual plan. In the special case of a stationary economy, such a possibility has been pointed out by Gollier (2008). In fact this effect results from the possibility for the collective fund to borrow today against contributions of future generations, which allows to implement riskier strategies and may improve its performance.

NEOCLASSICAL GROWTH AND THE DISTRIBUTION OF CONSUMPTION

Abstract. The neoclassical growth model is used to compare an economy with growing per capita income with an economy with stationary per capita income, in terms of equity in distribution of consumption. The economies have the same initial conditions including the same initial wealth distribution. The outcome of the comparison depends on the nature of structural differences between the economies. Even with convergence in wealth distribution in the growing economy, the consumption distribution there may be less equitable and dynasties with least initial levels of wealth may be worse off than dynasties with same initial wealth levels in the stationary economy.

What did Thünen really maximize?

No one can deny the important contributions made by Johann Heinrich von Thunen (1783-1850), a pioneer of the marginal revolution in economics, as an independent discoverer of the marginal productivity theory and as the father of the economics of space. Commemorating the two hundredth anniversary of his birth, Samuelson (1983) analyzed these contributions beautifully and skillfully. Von Thunen is, however, also known by the formula of natural wage inscribed on his grave stone. Classical economists before the marginal revolution explained the wage as the subsistence wage, while modern economists after the revolution emphasized the importance of the labor productivity in their theory of wage. In between, Thunen demonstrated the natural wage as the geometric mean of the subsistence wage and the average product of a laborer. Samuelson, who evaluated Thunen's positivistic economics (the marginal productivity theory and the economics of space) very high, interpreted the natural wage of Thunen as the socially optimal wage from the point of view of the welfare economics, and criticized that it is a major felony and a crime against normative economics.In Negishi (1990), we defended Thunen against Samuelson. Following an interpretation suggested by Yamada (1934), a pioneering study of Thunen in Japan, the natural wage is derived as an equilibrium wage in a competitive stationary economy, which Thunen himself studied in his famous Der isolierte Staat. In other words, we defended the theory of natural wage as a positive theory against Samuelson's criticism which regarded it as a normative theory. To be more decisive, however, as a rejoinder to Samuelson's critical comment that Thunen maximized a strange, irrational social welfare function, we have to argue further that the so-called Thunen's social welfare function itself is a rational, reasonable function, given his own model of a competitive stationary economy. In other words, what Thunen did can be interpreted as an early, pioneering attempt to use the so-called Negishi method, Negishi approach, or Negishi theorem, which is now intensively used for the proof of the existence of a general equilibrium and the numerical calculation of a general equilibrium. See Negishi (1960), Kehoe (1991), Mas-Colell and Zame (1991) and Ginsburgh and Keyzer (1997).

The Strong Sequential Core in a Dynamic Exchange Economy

Dynamic exchange economies with uncertainty are considered in which information is released over infinite time. The strong sequential core of such an economy consists of those consumption processes where no coalition of agents wishes to deviate at any moment for the rest of time. Comparable to the optimality principle in dynamic programming, necessary and sufficient conditions for non-emptiness of the strong sequential core in stationary economies are derived, based on non-emptiness of classical cores of certain static economies. The main result of the paper is an existence result for stationary economies based on the presence of a competitive equilibrium in an associated limit economy, given a high enough discount factor. Moreover, sufficient conditions are given under which the strong sequential core contains only time and history independent processes.

On the Time Variation of the Market Risk Premium

Motivated by the empirical observation that there exists some degree of predictability in asset returns, this paper investigates the theoretical constraints on the time variation in the risk premia of the market portfolio in a continuous-time, finite horizon pure exchange economy. By characterizing the equilibrium conditions as nonlinear partial differential equations, closed-form solutions can be obtained. It is shown that in a stationary economy, the presence of intermediate consumption can have a drastic effect on the possible kinds of time-varying behaviour of the risk premia.

Quota‐Induced Cycles

We present a new framework to compare the dynamic effect of tariffs and quotas in the presence of oligopoly. Suppose that the domestic and the foreign firm play a quantity‐setting game over time in a perfectly stationary economy. A Markov‐perfect equilibrium has the foreign firm exporting at the constant rate under a tariff. In contrast, under the quota the rate of exports changes monotonically over the course of each year, causing seasonal fluctuations in domestic production. Quota‐induced cycles can make dynamic market segmentation possible and raise profits for both the firms above what they earn under the equal‐import tariff.

A discrete stochastic model for investment with an application to the transaction costs case

This work consists of two parts. In the first one, we study a model where the assets are investment opportunities, which are completely described by their cash-flows. Those cash-flows follow some binomial processes and have the following property called stationarity: it is possible to initiate them at any time and in any state of the world at the same condition. In such a model, we prove that the absence of arbitrage condition implies the existence of a discount rate and a particular probability measure such that the expected value of the net present value of each investment is non-positive if there are short-sales constraints and equal to zero otherwise. This extends the works of Cantor–Lippman [Cantor, D.G., Lippman, S.A., 1983. Investment selection with imperfect capital markets. Econometrica 51, 1121–1144; Cantor, D.G., Lippman, S.A., 1995. Optimal investment selection with a multitude of projects. Econometrica 63 (5) 1231–1241.], Adler–Gale [Alder, I., Gale, D., 1997. Arbitrage and growth rate for riskless investments in a stationary economy. Mathematical Finance 2, 73–81.] and Carassus–Jouini [Carassus, L., Jouini, E., 1998. Arbitrage and investment opportunities with short sales constraints. Mathematical Finance 8 (3) 169–178.], who studied a deterministic setup. In the second part, we apply this result to a financial model in the spirit of Cox–Ross–Rubinstein [Cox, J.C., Ross, S.A., Rubinstein, M., 1979. Option pricing: a simplified approach. Journal of Financial Economics 7, 229–264.] but where there are transaction costs on the assets. This model appears to be stationary. At the equilibrium, the Cox–Ross–Rubinstein's price of a European option is always included between its buying and its selling price. Moreover, if there is transaction cost only on the underlying asset, the option price will be equal to the Cox–Ross–Rubinstein's price. Those results give more information than the results of Jouini–Kallal [Jouini, E., Kallal, H., 1995. Martingales and arbitrage in securities markets with transaction costs. Journal of Economic Theory 66 (1) 178–197.], which where working in a finite horizon model.

The robustness of optimal equilibrium among overlapping generations

Summary. We combine and strengthen optimality and robustness theorems for the overlapping-generations model of money. Roughly, we find a Pareto-optimal monetary equilibrium of a generic stationary economy that is near an optimal monetary equilibrium of each nearby non-stationary economy. Since the nearby equilibria are monetary, the general problem of macroeconomic stabilization re duces to maintaining the money supply. And since the nearby equilibria are optimal, stabilization is socially desirable.

Manifolds of golden rule and balanced steady state equilibria

We show that the set of balanced steady state (resp. golden rule) equilibria, parameterized by endowments, of stationary overlapping-generations economies are smooth manifolds diffeomorphic to Euclidean spaces. These properties extend similar properties of the Walrasian equilibria and enable one to apply the natural projection approach to the study of these equilibria.

REVIEW ARTICLE: GROWTH, RETURNS TO SCALE AND THE CLASSICAL THEORY OF VALUE AND DISTRIBUTION

Kurz and Salvadori's thoroughly accounts for the recent developments in the classical theory of value and distribution. The authors, however, claim that long-period classical analysis can only deal with stationary economies, or economies in balanced growth, and restrict their theoretical treatment accordingly. This aspect of the book is singled out for comments, and it is argued that Kurz and Salvadori's perception of the limits to the use of the 'long-period method' in classical analysis does not seem to rely on convincing foundations. Some critical remarks are also offered concerning the 'alternative analytical framework' suggested in the book.

Arbitrage and Growth Rate for Riskless Investments in a Stationary Economy

A sequential investment is a vector of payments over time, (a0, a1, ... ,an), where a payment is made to or by the investor according as ai is positive or negative. Given a collection of such investments it may be possible to assemble a portfolio from which an investor can get “something for nothing,” meaning that without investing any money of his own he can receive a positive return after some finite number of time periods. Cantor and Lipmann (1995) have given a simple necessary and sufficient condition for a set of investments to have this property. We present a short proof of this result. If arbitrage is not possible, our result leads to a simple derivation of the expression for the long–run growth rate of the set of investments in terms of its “internal rate of return.”

Arbitrage-Based Pricing When Volatility is Stochastic

Keywords: Mathematical Finance Reference SFI-PB-WORKING-1997-001 Record created on 2008-03-12, modified on 2017-05-12

The Theory of Value, Capital and Interest: A New Approach.

The Theory of Value, Capital and Interest: A New Approach. The Theory of Value, Capital and Interest: A New Approach. By Horvat(Branko) . (Aldershot and Brookfield, VT: Edward Elgar, 1995. Pp. xiv + 281. £59-95 hardback. ISBN 1 85898 055 0.) The Economic Journal, Volume 106, Issue 438, 1 September 1996, Pages 1447–1449, https://doi.org/10.2307/2235551 Published: 01 September 1996

Existence of a Pareto-optimal equilibrium in nearly-stationary overlapping-generations economies

In overlapping-generations models of fiat money, the existence of a Pareto-optimal equilibrium — which defines an optimal quantity of money — is more general than well-known counter-examples suggest. Those examples, having no optimal equilibrium just because there are small variations in households' tastes and endowments across generations, are not typical. On the contrary: For an open-dense, full-measure subset of smooth stationary economies and an open-dense subset of continuous stationary economies, introducing small variations in tastes and endowments across generations preserves the existence of an optimal equilibrium. Put simply, optimal equilibria generically exist for nearly-stationary economies.

Information, stabilité des prix et bien-être

In the context of a stationary economy, where markets for long-lived real assets open periodically, we analyze the welfare effect of the information structure. At each period, agents receive a signal related to the future dividends of assets. Whenever the quality of the information increases, the price volatility increases. Assets dividends are more predictable but at the expense of a higher capital risk, since future prices are less predictable. The global risk on assets returns may then increase, resulting in a lower welfare level. The paper exhibits an example where, due to this effect, agents prefer a structure where nobody receives any information to any other stationary information structure.

Endogenous transfer institutions in overlapping generations

We characterize the set of equilibrium transfers between overlapping generations when transfer institutions are endogenous. In stationary economies, Pareto-improving transfers require institutions cost as much to construct as they convey — even if less costly institutions exist that make the same transfer. If institutions can be built upon, they may cost less and convey more, but transfers may become excessive. Interpreting such institutions as social security, we introduce private saving. With time, social security crowds out savings. Still, the potential to save limits any excess transfer. Endogenous costly-to-create ‘gold’ money institutions are examined, and the role of compulsion in evolving to costless-to-create fiat currency detailed.

Davidson and Hayek on the role of effective money in transforming the cumulative process into a real theory of growth

Davidson and Hayek used the rudiments of Wicksell’s theory of the inflationary cumulative process to develop a real theory of economic expansion. They dropped Wicksell's assumption of a full employment stationary economy and also added to Wicksell's analysis. Davidson focused on productivity increases to yield continuous and non-inflationary growth. Hayek separated the capital and credit markets, and focused on how the real economy may expand without price changes. Both analyses also implied the method of comparative statics, for which the return to equilibrium meant stable real income. The Wicksellian idea of how loans from the banking system would increase virtual velocity by increasing effective money was also important to both writers.

Equilibria of a stationary economy with recursive preferences

We consider an intertemporal stationary economy in discrete time, where agents have recursive preferences. Using dynamic programming, we show that equilibrium consumption trajectories from a capital stock are interior Pareto optima and are characterized by a strictly positive parameter in △n−1, the set of agents' initial weights. We then exhibit prices that support the Pareto optima and use the Negishi method to characterize the parameters corresponding to equilibria. Finally, we prove the existence of equilibria and show that the number of regular equilibria is odd.