tag:blogger.com,1999:blog-4979477022008569617.post8254530084395027949..comments2023-05-02T06:38:35.510-07:00Comments on Roger Farmer's Economic Window: More on Rational Agents and Irrational Markets: A Wonkish Response to Andy HarlessRoger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-4979477022008569617.post-78814555426994930722014-01-26T15:10:13.452-08:002014-01-26T15:10:13.452-08:00Daniels: Thats a fair comment. My research agenda ...Daniels: Thats a fair comment. My research agenda involves progressing as far as possible under the rational agent assumption. If at some point, I hit a macro fact that cannot be explained with that assumption, I will branch out and explore non von-Neuman-Morgenstern preferences. I'm not read to go there yet.Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-12161612339513085222014-01-26T15:04:37.182-08:002014-01-26T15:04:37.182-08:00Apologies Nick for my delayed response -- I was t...Apologies Nick for my delayed response -- I was traveling and am only now finding time to blog again. Your conjecture is interesting - but not quite right. Duration doesn't matter because the model has a complete set of Arrow securities. Each individual agent faces a single lifetime budget constraint. The multiplicity arises from the fact that newborn agents are unable to insure against the states of nature into which they are born.Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-7804253656648253182014-01-22T22:42:45.790-08:002014-01-22T22:42:45.790-08:00Roger, maybe it's just me but your results see...Roger, maybe it's just me but your results seem to have some similarity to the rational bubble in Townsend's turnpike model of money and other models assets that have a role of relaxing credit/liquidity constraints. The question then becomes quantitative. What proportion of asset price volatility can be explained under rational expectations, and what proportion comes from things like overextrapolative expectations and other forms of misperceptions(David Laibson and co's papers on natural expectations have a simple model that goes quite far on this). Realistically, both types of explanations play an important role (even though an economic theorist would say the rational bubble story is more elegant in some way- but empirically that's not a sufficient criterion, you have to allow for deviations from RE and ideally come up with models that allow you to quantitatively disentangle the effects).danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-85913290079870714682014-01-21T04:51:17.649-08:002014-01-21T04:51:17.649-08:00I *think*, that if risk-averse agents could *choos...I *think*, that if risk-averse agents could *choose* the duration of the bonds they buy and sell, they would choose bonds with the same duration as their own expected lives, in order to eliminate the uncertainty of those wealth effects.<br /><br />Plus, those bonds would have exactly the right time-profile of dividends to deliver agents their desired time-profile of consumption. Each agent would sell all his wealth to the bank, then buy a life annuity with exactly the right rising (for patient agents) or falling (for impatient agents) time profile of consumption. This eliminates uncertainty from future interest rates. And I *think* it eliminates sunspot equilibria.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-31170089612606031822014-01-21T04:23:02.754-08:002014-01-21T04:23:02.754-08:00With both patent and impatient agents, the equilib...With both patent and impatient agents, the equilibrium interest rate will be a weighted average of the rates of time preference of patient and impatient agents. But those weight depend on the relative wealth of the patient and impatient agents. And their relative wealth (if the bonds are longer-lived than the agents) will depend on the rate of interest.<br /><br />With exactly the right duration of the bonds, relative to the lives of the agents, and their preferences, an increase in interest rates will have zero effect on the demand for bonds.<br /><br />By having a mix of one-period bonds and perpetuities in the model, you can get the right average duration of bonds to make this happen.<br /><br />But why would that exact mix of one-period bonds and perpetuities be an *equilibrium* feature of the model?<br /><br />(I haven't read your paper. Because, as you remember from the olden days, i never could do math, and always had to try to figure things out my own way!)Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-20819021453256310602014-01-21T04:06:04.785-08:002014-01-21T04:06:04.785-08:00The only thing my intuition can come up with (whic...The only thing my intuition can come up with (which I think is the same as what Andy Harless is saying) is that substitution and income (wealth) effects of interest rate changes must be exactly cancelling out somehow, so you get multiple equilibria?<br /><br />Since the perpetuities live longer than the agents, a fall in perpetuity prices would make the patient agents less wealthy, and the impatient agents more wealthy, which might (given the right preferences) increase demand for goods and reduce demand for perpetuities, so the equilibrium is unstable. But one-period bonds would not have this wealth effect. With exactly the right mix of perpetuities and one-period bonds, the equilibrium would be on the border between stable and unstable, so you get multiple equilibria.<br /><br />Yes, I *think* that is what is going on.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-38617918388506523112014-01-21T03:46:33.910-08:002014-01-21T03:46:33.910-08:00I'm not getting this yet Roger.
Does each age...I'm not getting this yet Roger.<br /><br />Does each agent get one unit of endowment each period he is alive?<br /><br />"In the special example in this post, there is no fundamental uncertainty. I will also assume, in this post, that there are only two shocks."<br /><br />Does that mean there are two different types of sunspots? (a sunspot and a moonspot?)<br /><br />I don't see why there would be two types of bonds. If there were only one-period bonds in the model, would the effect of sunspots disappear?<br /><br />Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com