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Estimating the Price of ROCs
Get PDFThe UK government introduced the Renewable Obligation (RO), a system of tradable quotas, to encourage the installation of renewable electricity capacity. Each unit of generation from renewables created a renewable obligation certificate (ROC). Electricity generators must either; earn ROCs through their own production, purchase ROCs in the market or pay the buy-out price to comply with the quota set by the RO. A unique aspect of this regulation is that all entities holding ROCs receive a share of the buy-out fund (the sum of all compliance purchases using the buy-out price). This set-up ensures that the difference between the market price for ROCs and the buy-out price should equal the expected share of the buy-out fund, as regulated entities arbitrage these two compliance options. The expected share of the buy-out fund depends on whether enough renewable generation is available to meet the quota. This analysis tests whether variables associated with renewable generation or electricity demand are correlated with, and thus can help predict, the price of ROCs
Spillovers of Equal Treatment in Wage Offers
Get PDFWe analyse a labour matching model with wage posting, where re flecting institutional constraints firms cannot differentiate their wage offers within certain subsets of workers. Inter alia, we find that the presence of impersonal
wage offers leads to wage compression, which propagates to the wages for high productivity workers who receive personalised offers
Expectations Traps and Coordination Failures with Discretionary Policymaking
Get PDFDiscretionary policymakers cannot manage private-sector expectations and cannot coordinate
the actions of future policymakers. As a consequence, expectations traps and coordination
failures can occur and multiple equilibria can arise. To utilize the explanatory power of
models with multiple equilibria it is first necessary to understand how an economy arrives to a particular equilibrium. In this paper we employ notions of learnability and self-enforceability to motivate and identify equilibria of particular interest. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our methods for identifying equilibria of interest. Importantly, unless the Pareto-preferred equilibrium is learnable by private agents, we find little reason to expect coordination on that equilibrium
A New Index of Financial Conditions
Get PDFWe use factor augmented vector autoregressive models with time-varying
coefficients to construct a financial conditions index. The time-variation in the parameters allows for the weights attached to each financial variable in the index to evolve over time. Furthermore, we develop methods for dynamic model averaging or selection which allow the financial variables entering into the FCI to change over time. We discuss why such extensions of the existing literature are important and show them to be so in an empirical application involving a wide range of financial variables
Self-Fulfilling Price Cycles
Get PDFThis paper presents a model of a self-fulfilling price cycle in an asset
market. Price oscillates deterministically even though the underlying
environment is stationary. The mechanism that we uncover is driven by
endogenous variation in the investment horizons of the different market
participants, informed and uninformed. On even days, the price is high;
on odd days it is low. On even days, informed traders are willing to
jettison their good assets, knowing that they can buy them back the
next day, when the price is low. The anticipated drop in price more
than offsets any potential loss in dividend. Because of these asset sales,
the informed build up their cash holdings. Understanding that the market
is flooded with good assets, the uninformed traders are willing to pay a
high price. But their investment horizon is longer than that of the
informed traders: their intention is to hold the assets they purchase,
not to resell. On odd days, the price is low because the uninformed
recognise that the informed are using their cash holdings to cherry-pick
good assets from the market. Now the uninformed, like the informed, are
investing short-term. Rather than buy-and-hold as they do with assets
purchased on even days, on odd days the uninformed are buying to sell.
Notice that, at the root of the model, there lies a credit constraint.
Although the informed are flush with cash on odd days, they are not deep
pockets. On each cherry that they pick out of the market, they earn a
high return: buying cheap, selling dear. However they don't have enough
cash to strip the market of cherries and thereby bid the price up
The Inflation Risk Premium on Government Debt in an Overlapping Generations Model
Get PDFThis paper presents a general equilibrium model in which nominal government debt pays an
inflation risk premium. The model predicts that the inflation risk premium will be higher in
economies which are exposed to unanticipated inflation through nominal asset holdings. In
particular, the inflation risk premium is higher when government debt is primarily nominal,
steady-state inflation is low, and when cash and nominal debt account for a large fraction of
consumers' retirement portfolios. These channels do not appear to have been highlighted in
previous models or tested empirically. Numerical results suggest that the inflation risk
premium is comparable in magnitude to standard representative agent models. These findings
have implications for management of government debt, since the inflation risk premium
makes it more costly for governments to borrow using nominal rather than indexed debt.
Simulations of an extended model with Epstein-Zin preferences suggest that increasing the
share of indexed debt would enable governments to permanently lower taxes by an amount
that is quantitatively non-trivial
Cyclical and Welfare Effects of Public Sector Unions in a Real-Business-Cycle Model
Get PDFMotivated by the highly-unionized public sectors, the high public shares in total employment, and the public sector wage premia observed in Europe, this paper examines
the importance of public sector unions for macroeconomic theory. The model generates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is a signifi cant improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary e ffect of contractionary tax reforms by generating greater tax rate changes, thus producing signi ficantly higher welfare losses
Efficient Nash Equilibrium under Adverse Selection
Get PDFThis paper revisits the problem of adverse selection in the insurance market of Rothschild and
Stiglitz [28]. We propose a simple extension of the game-theoretic structure in Hellwig [14] under
which Nash-type strategic interaction between the informed customers and the uninformed firms
results always in a particular separating equilibrium. The equilibrium allocation is unique and
Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson [22]
UK House Prices: Convergence Clubs and Spillovers
Get PDFThis paper uses the log t test to analyse the convergence of house prices across UK regions
and the presence of spillovers e ects. We nd that UK house prices can be grouped into four
clusters. Moreover we document the dynamics of the house price spillovers across regions
Imperfect Attention and Menu Evaluation
Get PDFWe model the choice behaviour of an agent who suffers from imperfect attention.
We define inattention axiomatically through preference over menus and endowed alternatives: an agent is inattentive if it is better to be endowed with an alternative
a than to be allowed to pick a from a menu in which a is is the best alternative.
This property and vNM rationality on the domain of menus and alternatives imply that the agent notices each alternative with a given menu-dependent probability (attention parameter) and maximises a menu independent utility function over the alternatives he notices. Preference for flexibility restricts the model to menu independent attention parameters as in Manzini and Mariotti [19]. Our theory explains anomalies (e.g. the attraction and compromise effect) that the Random Utility Model cannot accommodate