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7967 results in Economic theory

Page 147 of 399

  • 4 - Financial Fragility and Macroeconomic Dynamics I: Heterogeneity and Interaction

  • from Part II - Applications to HIA Based Models
  • Corrado Di Guilmi, University of Technology, Sydney, Mauro Gallegati, Simone Landini
  • Book:
    Interactive Macroeconomics
    Published online:
    23 July 2017
    Print publication:
    23 December 2016, pp 73-132

  • Summary

    The ME introduced in Chapter 3 is applied to a financial fragility ABM with heterogeneous and interacting firms. The ABM is considered as the DGP of macro-variables: by using the ME technique, the impact of micro-variables is analytically assessed by means of an inferential method. The whole dynamics of the economy is described by a system of dynamic equations that well mimics the evolution of a numerical simulation with the same features.

    The identification of the ME requires the specification of the transition rates, which are obtained from the ABM by following the lines developed in Appendix C. The solution of the ME provides the solution to the ABM-DGP and requires some methodological tools that are presented in Appendixes B and C.

    This chapter has the following structure: Section 4.1 briefly introduces the chapter and frames the contribution within the existing literature on financial fragility; Section 4.2 presents the behavioural assumptions of the ABM; Section 4.3 details the inference process through which the ME provides an analytical representation of the ABM; Section 4.4 illustrates the results of the Monte Carlo simulations and Section 4.5 concludes.

    Introduction

    This chapter develops a model of financial fragility along the lines of Delli Gatti et al. (2010, 2012); Di Guilmi (2008); Di Guilmi et al. (2010). The degree of financial soundness of firms is modelled à la Greenwald and Stiglitz (1993) (GS henceforth) and it is assumed as a clustering criterion to qualify firms on a state space (see Chapter 2) of financial states.

    Algebraic aggregation of the simulation outcomes provides the state of the world, that is, the macrostate of the system. Analytic inference is specified by means of the ME technique.

    The specification of the ME requires modelling the transition rates, which implement the mean-field interaction among subsystems of robust (RB) and fragile (FR) firms. Transition rates refer to the switching of firms between the two financial states. The solution to the ME yields the dynamic estimator of the expected trend of the number of firms that are RB and FR together with endogenous fluctuations. Since the evolution of the macroeconomy depends on the proportion of firms in the two conditions, the solution will also identify the trend and cycle components of the macroeconomic time-series. It is worth remarking that these aggregate functional forms will embody the transition rates and, consequently, firm-level variables.

  • Appendix B - Solving the ME to Solve the ABM

  • from Part IV - Appendices and Complements
  • Corrado Di Guilmi, University of Technology, Sydney, Mauro Gallegati, Simone Landini
  • Book:
    Interactive Macroeconomics
    Published online:
    23 July 2017
    Print publication:
    23 December 2016, pp 211-241

  • Summary

    As described in Chapter 3, once the ME is set up, the problem is to find that W (·, t) which satisfies the ME: as noticed, this is not always an easy and feasible task. By further inspection, in the end, the aim of solving the ME is addressed to finding that W (·, t) which allows for inference on dynamic estimators of the expected value and the volatility of the underlying process. Therefore, two ways are open: (a) solve the ME to use it, (b) use the ME without solving it (Section 3.3).

    Unless approximation methods are involved, the first way is often unfeasible while the second way provides the needed dynamic estimators of interest, in exact (Section 3.4.2) or mean-field approximated (Section 3.4.3) form. The results obtained in Chapter 3 are specific to the case of jump Markov processes and follow from purely probabilistic reasoning. However, there is no need to assume that the process underlying the ME obeys the Markov property. Moreover, there are methods to deal with analytic inferential modelling even under more sophisticated hypothesis than the simplest nearest-neighbourhood structure.

    This appendix gives an interpretation of a well-established method, known as the van Kampen system size expansion, to deal with the second way mentioned earlier in the attempt to provide what is called the solution of an ABM-DGP. Originally, the so-called van Kampen method was developed in the fields of statistical physics and chemistry. However, it can almost easily be presented from a generic mathematical point of view to accommodate for application in other fields. The method requires several calculations, detailed in separate sections to let the interested reader follow all the needed steps. In what follows, the reader is assumed to be familiar with the basics of calculus, mainly computing derivatives, integration and the Taylor theorem.

    This appendix provides advanced analytic and methodological insights in the ME approach to solve the ABM-DGP. It can be considered as the description of a methodological technique to deal with the applications developed in Part II of this book. The structure of this appendix is described as follows.

    Section B.1 provides a generic description of the discrete ME. Section B.2 presents the ME as an inferential problem about the evolution of the underlying ABM.

  • 6 - Conclusive Remarks

  • from Part III - Conclusions
  • Corrado Di Guilmi, University of Technology, Sydney, Mauro Gallegati, Simone Landini
  • Book:
    Interactive Macroeconomics
    Published online:
    23 July 2017
    Print publication:
    23 December 2016, pp 195-202

  • Summary

    Non siete, non foste e non sarete

    nè la prima nè l'ultima

    Leporello to Donna Elvira, in “Don Giovanni”

    and this is also true for the approach of this book.

    This chapter briefly revisits the reasons of this book outlined in the introduction in the light of the tools and applications presented in the previous chapters. Section 6.1 highlights the relevance of the statistical physics (SP) approach for the current macroeconomic theory. Section 6.2 presents some existing developments of this approach and suggests a few possibilities for further applications in macroeconomics.

    The Relevance of this Book

    Aggregation can be considered as one of the core problems of macroeconomic modelling. The short-cut adopted by mainstream economic theory has led to a misleading approach with the consequences that were made evident by the recent crises. The RA hypothesis, with its necessary corollaries of market order, coordination and agents’ equilibrium, led to a misrepresentation of reality, inspiring improper policy measures. These implications have not been overcome by the introduction of heterogeneity in general equilibrium models. The econometric models adopted by central banks reassure policy makers that after the downturn, the system will return to its optimal growth path, so that the only task of policy makers is to shorten recession periods,

    boosting economy with the minimum cost in terms of inflation (given that unemployed workers are just enjoying their spare time, as Lucas (1977) suggested, and do not deserve attention).

    Some economists, not being fully satisfied by the simple role of stating that when the storm is past, the ocean is flat again (Keynes, 1924), have investigated different solutions to the aggregation issue that allow macroeconomic theory to be of some utility in the real world. This book follows the approach inspired by SP (statistical physics) and tries to expand it. To this aim, in order to popularize the approach among economists, its mathematical foundations are illustrated, the analytical instruments that are of direct utility in modelling are derived, and the approach enhanced. All in all, the book presents a new framework that can represent an actual alternative to the current mainstream modelling approach.

  • Appendix C - Specifying Transition Rates

  • from Part IV - Appendices and Complements
  • Corrado Di Guilmi, University of Technology, Sydney, Mauro Gallegati, Simone Landini
  • Book:
    Interactive Macroeconomics
    Published online:
    23 July 2017
    Print publication:
    23 December 2016, pp 242-272

  • Summary

    Chapter 3 and Appendix B present a detailed description of the ME while developing a solution method. Remarks B.1, B.3 and B.4 give evidence that the most important issue in developing and solving the ME is the specification of the transition rates. This is due to two reasons exposed in Appendix B:

  • • Section B.2: the transition rates provide a micro-foundation to the mean-field interaction;

  • • Section B.7.2: the equations that solve the ME depend on the transition rates.

    • Nevertheless, as relevant as it is, at present, there is no precise set of rules to follow in specifying the transition rates. Sometimes their functional forms follow from theoretical deductions while, in other cases, they come from repeated experimental inductions: it depends on the phenomenon under scrutiny. It therefore seems there is some degree of subjectivity and arbitrariness with this issue: the following sections give proof that, at least under given circumstances, a unified and generic methodology is possible.

    More precisely, in the ME approach to the ABM solution, that is, when an ABM is the DGP of an extensive, transferable and conservative aggregate quantity X of interest, this appendix provides a generic methodology to specify transition rates of the ME under the nearest-neighbourhood hypothesis, so providing a structural and phenomenological micro-foundation of the mean-field interaction involved in the ME for W (X (t),t). The following sections do not provide a general method to specify transition rates for any kind of ME; nevertheless, the methodology developed here can be considered as an initial route: chapters of Part II provide applications.

    The structure of this appendix is as follows. Section C.1 defines migrations of agents on a state space as the main causes of the movements of a stochastic process on its support. Section C.2 introduces the two perspectives in the interpretation of transition rates. Section C.3 provides a unified methodology to combine the structural interpretation of transition rates with a phenomenological interpretation. Section C.4 provides some comments on the interpretation of the unified method and Section C.5 describes how to implement the phenomenological interpretation into the structural description of transition rates. Section C.6 ends this appendix with comments.

  • 5 - Financial Fragility and Macroeconomic Dynamics II: Learning

  • from Part II - Applications to HIA Based Models
  • Corrado Di Guilmi, University of Technology, Sydney, Mauro Gallegati, Simone Landini
  • Book:
    Interactive Macroeconomics
    Published online:
    23 July 2017
    Print publication:
    23 December 2016, pp 133-192

  • Summary

    This chapter adds learning to heterogeneity and interaction: agents are firms who do not only adaptively survive a system's changes, they also aim to improve their condition with anticipatory and reflexive capabilities. Agents shape the macroeconomic environment, adapt to its changes and also make decisions to fulfill this goal. From this perspective, the main aim of agents is to survive and to improve their capacity of withstanding changes in the environment.

    This chapter provides another example of the usefulness of the ME approach as it demonstrates how the ME is able to mimic the behaviour of a dynamical system with a large number of equations, which cannot be analytically treated.

    The structure of the chapter is as follows. Section 5.1 introduces the model and frames it within the literature, stressing the relevance of the reflexivity and anticipatory theory for a macro-model with learning agents. Section 5.2 presents the ABM model, detailing the behavioural rules for firms. Section 5.3 illustrates how the ME is built from the behavioural assumptions in order to make inferences based on the ABM. Section 5.4 provides the results of the simulations, contrasting the ABM and the ME solution. Finally, Section 5.5 offers some concluding remarks.

    Introduction

    This chapter considers agents that are not only adaptive but, to some extent, also able to think or, more generally, to learn, particularly with reference to the theory of George Soros (2013) on reflexive systems and of Robert Rosen (1985) on anticipatory systems.

    The reflexivity principle applies only to systems of thinking agents and, briefly, it states that interpretations of reality have a deep influence on the behaviour of the agents participating in that reality. Such influence is so effective that changes in behaviours may modify the reality, creating uncertainty. As an example: if investors believe that markets are efficient, then that belief will change the way they invest, which in turn will change the nature of the markets in which they are participating (though not necessarily making them more efficient) (Soros, 2013, p.310).

    The synthesis then comes with the human uncertainty principle: The uncertainty associated with fallibility and reflexivity is inherent in the human condition. To make this point, I lump together the two concepts as the human uncertainty principle (Soros, 2013, p.310).

  • 9 - The Early Escape from the Golden Fetters, 1928–1940

  • from PART III - WORLDWAR I AND TURBULENT INTERWAR YEARS, 1914–1940
  • Øyvind Eitrheim, Jan Tore Klovland, Lars Fredrik Øksendal
  • Book:
    A Monetary History of Norway, 1816–2016
    Published online:
    09 February 2017
    Print publication:
    22 December 2016, pp 348-384

  • Summary

    Introduction

    The Norwegian krone was back on the prewar gold parity in May 1928. This was achieved only after a protracted period of deflationary monetary policy. However, the restored gold standard regime did not last more than three and a half years before Norway once again went off gold together with Britain and the other Scandinavian countries in September 1931. This decision may have been seen as a financial disaster at the time it happened, but it was widely acknowledged that following its main trading partners off gold was the only viable option for Norway.

    After an interlude of nearly two years of managed float in the summer of 1933 it was decided to peg the international value of the Norwegian krone to pound sterling. This monetary regime prevailed until the onset of World War II in the autumn of 1939, when the US dollar was substituted for the pound. The exchange rate peg against the pound was fixed at 19.90 kroner to the pound, implying a 10 per cent devaluation compared with the gold standard parity of 18.16 kroner. The trade-weighted nominal exchange rate index shows a depreciation of the Norwegian krone of about 20 per cent from 1929 to the late autumn of 1931. Apart from the first year of the sterling peg beginning in the summer of 1933, there were few problems with maintaining the exchange rate at the target level. In fact, the balance of payments was in surplus during the 1930s and the stock of foreign reserves at Norges Bank rose appreciably.

    On the background of the fierce controversies associated with the resumption of gold in the 1920s it may be wondered why the golden fetters were so easily broken in 1931. We believe that the main approach to this issue must be founded on the notion that the basic motive of Governor Rygg was a quest for monetary stability, rather than a desire to fix the price at which the central bank bought and sold gold per se. The latter served only as a means to enjoy the benefits of a well-established international regime of fixed exchange rates, ensuring orderly conditions on international capital markets. When the most important trading partners left the gold standard, it no longer represented the best instrument for preserving monetary stability.

  • Preface

  • Øyvind Eitrheim, Jan Tore Klovland, Lars Fredrik Øksendal
  • Book:
    A Monetary History of Norway, 1816–2016
    Published online:
    09 February 2017
    Print publication:
    22 December 2016, pp xxiii-xxvi

  • Summary

    The writing of this book actually started many years ago when a senior policymaker at Norges Bank, Jan F. Qvigstad, was inspired by the work published at the Bank of England around the time of their 1994 tercentenary, covering hundreds of years of monetary history. He then initiated work at Norges Bank to collect and provide documentation of a similar set of historical time series for Norway. This resulted in three books published by Norges Bank on Historical Monetary Statistics, 2004–2007.

    A Monetary History of Norway 1816–2016 provides a historical narrative which places these two hundred years of historical data in perspective. This book presents a broad overview of monetary developments in Norway over two centuries, using a rich variety of graphical illustrations, and we have endeavoured to put these illustrations in a broader historical narrative, providing the necessary institutional context in some detail. The extended set of historical monetary statistics which is a by-product of writing this book will be documented and made available at Norges Bank website. We hope this dataset, together with similar historical datasets for other countries, will be viewed as valuable additions to be applied in future research. The availability of such datasets will certainly encourage a host of modelling exercises and applications of modern econometric techniques to be undertaken.

    For the authors the publication of this study constitutes – at least for the time being – the end of a collaboration on monetary history that in various forms and with varying intensity spans more than a decade. Our collaboration – in particular the writing phase during the last few years – has challenged us to derive insights and qualities which go beyond what we brought to the table at the outset. As authors we all have an equal stock in this book. We share responsibility for its weaknesses as well as for whatever praise it might receive. Stating this is more than mere form, but genuinely reflects how we as a team have approached the project. Together we have discussed the data and how to assess the insights they provide, developed the overall analytical framework and formed the narrative outline. In the process we have read (and reread many times over) each other's drafts, given extensive comments and provided, at times quite substantial, text contributions to manuscripts drafted by the other(s).

  • PART I - THE LONG PROMISE, 1816–1850

  • Øyvind Eitrheim, Jan Tore Klovland, Lars Fredrik Øksendal
  • Book:
    A Monetary History of Norway, 1816–2016
    Published online:
    09 February 2017
    Print publication:
    22 December 2016, pp 47-53

  • Summary

    The first half of the nineteenth century was a period of political upheaval and formative nation-building in Norway. At the dawn of the century, Norwegians could look back on more than four hundred years of attachment to the Danish king's dynastic conglomerate state. Within this conglomerate Norway had played a subordinated political role, governed from Copenhagen more like a set of Danish provinces than as a partner in the dual monarchy of Denmark-Norway. Following the endgame of the Napoleonic Wars all this changed. In the Kiel peace treaty of January 1814, the king of Denmark was forced to cede Norway to the king of Sweden.

    In reality the Danish king freed the Norwegian people from the old oath of allegiance sworn by their forefathers under the personal union with Denmark, but the king could not transfer this allegiance to another sovereign without asking the people for consent. The Norwegian elites revolted, with large popular support, and hastily called for a constituent assembly. During the course of 1814, arguably the most eventful year in its political history, Norway declared independence, held a constituent assembly that gave a liberal constitution and elected a Danish prince as king, fought a short futile war with Sweden, accepted defeat, rewrote the constitution to accommodate a personal union with Sweden and acknowledged the Swedish king as head of state. The outcome of 1814 was very different from what was envisaged at the beginning of the year. Norway was not added to the Swedish realm but retained most of the political framework established by the constituent assembly. Most significantly, Norway was to enjoy full sovereignty in all domestic questions, including monetary affairs. Foreign policy, however, was to be decided in a Swedish-dominated joint council.

    A new nation resurfaced from its previous subordinated state. But this could easily have become a short-lived episode. The pivotal year 1814 constituted in a sense a giant leap into the unknown where the key challenge was to turn visions about a sovereign Norway into a well-functioning nation-state. Establishing credible legal, political and economic institutions played a key role in the subsequent nation-building, which aimed at both knitting the people together and gaining international recognition.

  • 5 - Volatility and Stability in the Time of Gold, 1870–1892

  • from PART II - THE RISE OF PRIVATE DEPOSIT-TAKING BANKS, 1850–1914
  • Øyvind Eitrheim, Jan Tore Klovland, Lars Fredrik Øksendal
  • Book:
    A Monetary History of Norway, 1816–2016
    Published online:
    09 February 2017
    Print publication:
    22 December 2016, pp 175-217

  • Summary

    Introduction

    The previous chapter told the history of two international financial crises that tested the commitment of the monetary authorities to maintaining currency convertibility and a well-functioning monetary system. In turn, the crises influenced their understanding of their task. Moreover, the chapter covered the breakthrough of deposit banking, which transformed the financial landscape of Norway and provided a new important channel for monetary growth. Furthermore, we discussed the beginning of the prolonged process in which Norges Bank came to develop features that resemble modern central banking, not least the shift away from long-term lending to discounting and a more active approach to bank rate setting.

    The two decades covered here, the 1870s and 1880s, lack the dramatic financial crises that shaped the time around the middle of the century. The financial sector continued to grow along the lines established earlier, but no fundamental shift took place. It was growth in scale, foremost through a geographical dispersion of banking, not in scope, a widening of type of business undertaken or of source of funding.

    Lack of financial crises proper does not imply a lack of drama. Indeed, the 1870s and 1880s witnessed some of the most dramatic shifts in fortune in modern Norwegian economic history. The period started off with a flourishing boom only to be arrested by a most severe recession 1877–1879. The volatility continued into the 1880s. This was not unique for Norway but reflected an international period of deflation, sluggish growth and high volatility. For obvious reasons these movements play centre stage in this chapter with an emphasis on the relationship between international business cycles, the domestic economy and monetary development.

    Although it was a time of great volatility, the international monetary regime was stable. In the course of the 1870s, the gold standard became the first truly international monetary regime. A stable regime, however, does not necessarily translate into monetary (i.e. price) stability. In a steadily more integrated world economy, an open regime will serve as a transmitter of price movements and business cycles, reducing the already low barrier between international and domestic money. In these decades, the Norwegian money supply was subject to abrupt shifts originating from abroad. How this affected Norway and influenced monetary policy will be an important theme of this chapter.

  • 2 - What Came Before: Dano-Norwegian Experience, Monetary Upheaval and a New Bank of Issue

  • from PART I - THE LONG PROMISE, 1816–1850
  • Øyvind Eitrheim, Jan Tore Klovland, Lars Fredrik Øksendal
  • Book:
    A Monetary History of Norway, 1816–2016
    Published online:
    09 February 2017
    Print publication:
    22 December 2016, pp 54-82

  • Summary

    Introduction

    The chartering of Norges Bank in 1816 heralded what became a new era in Norwegian monetary and financial history. For the first time since the Middle Ages Norway gained a viable domestic currency separate from that of its union partner. This step was important. Not only as a political demarcation vis-à-vis Sweden but maybe even more important in terms of the economic and financial structures that monetary stabilisation on Norway's own keel brought about. Without entering deeply into the counterfactual, a common currency in the years after 1814 would have altered the monetary history of both countries and arguably also enhanced the sustainability of the institutions that bound them together. Instead 1816 became year 1 in the modern monetary history of Norway.

    This chapter, in essence, is about what came before: the monetary experience of the Dano-Norwegian realm, the prevailing financial and economic structures at work and the devastating deterioration of the domestic currency system after 1807. Our study here will not track the monetary history back to the beginning of human exchange of goods and services. Nor will we offer much for those appreciating numismatic detail. Our aim is to provide a context, establishing a sense of the time in which Norway took the first, tentative steps into what can be described as the modern money world. As such the chapter points forward; the criterion for what is covered is in which way what came before can enlighten our understanding of what came after.

    In the last half of the eighteenth century paper money became the primary medium of exchange and unit of account in Norway. By 1814, Norwegians ‘talked and counted’ in notes. Although paper failed utterly as a store of value during the years of war-induced monetary expansion from 1807 onwards, for most of the Danish era paper money maintained fairly stable values in terms of silver. This reflected partly that inconvertibility was not the same as amonetary policy freed from constraints. The king had an interest in providing stability, as a common good, for the benefit of his own tax system and not least in order to preserve his own credibility and access to future credit. Although putting the printing press in the hands of an absolute monarch is a bad idea, most of the time the king behaved with restraint at least when war was not looming.

  • 3 - The Birth of Norges Bank and the Thorny Road to Resumption

  • from PART I - THE LONG PROMISE, 1816–1850
  • Øyvind Eitrheim, Jan Tore Klovland, Lars Fredrik Øksendal
  • Book:
    A Monetary History of Norway, 1816–2016
    Published online:
    09 February 2017
    Print publication:
    22 December 2016, pp 83-112

  • Summary

    Introduction

    This chapter analyses in broad terms how the monetary restoration was carried out and eventually materialised in the form of a stable currency and an embryonic monetary system that served the needs of the economy. The centre stage of the chapter is occupied with the thorny road to resumption. The legislation introduced in 1816 laid down a principle, that the note issue should be backed by specie and that notes should be freely convertible into silver. From the beginning this was a weak pledge, a commitment for the future. The year set for the resumption of specie payments, 1819, passed without Norges Bank being anywhere near the objective. In 1822, a course was adopted where Norges Bank started paying out in silver, but at a discount for the note holders. Gradually the premium commanded by silver was reduced, bringing the value of notes closer and closer to their promised par value in silver. Although far from their ultimate target, this change of course in effect promoted monetary stability by securing a lower limit below which the exchange rate, i.e. the silver value of the bank notes, would not depreciate. Resumption took time. Not until 1842 did the weak pledge finally materialise in the tangible conversion of one speciedaler note into one speciedaler silver coin.

    That resumption would take more than twenty years reflected the fact that monetary restoration was not only a question of monetary stability. In essence, Norway was in strong need of a well-functionin gmonetary system. An early move to specie payments might have jeopardised the vital role Norges Bank had in supplying credit and means of payments. As the case is today, monetary authorities of the past had to balance different and at times conflicting objectives. In this case, taking time provided the answer. Over these years the Norwegian economy grew into its monetary coat. This chapter also describes the fiscal prudence of Norwegian governments after 1814 and provides a brief comparison of the Scandinavian countries’ divergent roads to resumption.

    In the final section of the chapter we take a closer look at the early credit market in Norway and the role of Norges Bank in the credit economy. From the beginning Norges Bank was the only institutional provider of credit in the country and would remain in a dominant position throughout the period in question.

Page 147 of 399