In models with external economies, there are often two or more long run equilibria. Which equilibrium is chosen? Much of the literature presumes that "history" sets initial conditions which determine the outcome, but an alternative view stresses the role of "expectations", i.e. of...

This paper investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. The idea is that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets. This...

The possibility that movements in market prices of assets or goods may be caused by self-fulfilling prophecies, called bubbles or sunspots, has long intrigued market observers. If bubbles or sunspots exist, market prices differ from their fundamental values, and markets do not necessarily...

This paper analyzes the panel data of bi-weekly surveys, conducted by the Japan Center for International Finance, on the yen/dollar exchange rate expectations of forty-four institutions for two years. There are three major findings in this paper. First, market participants are found to be...

This paper examines the endogenous implementation of capital controls in the context of a fixed exchange rate regime. It is shown that if there exists a non-zero probability that the policymaker's response to a speculative attack on official foreign reserves will be the introduction of controls,...

Survey data on interest rate expectations are used to separate the forward interest rate into an expected future rate and a term premium. These components are used to test separately two competing alternative hypotheses in tests of the term structure: that the expectations hypothesis does not...

This paper investigates the effects of imperfectly credible trade liberalization programs on welfare and the allocation of real resources. We present a rational expectations model in which a government, with limited access to international financial markets may be forced to abort a...

partial-adjustment-to-target behavior typically postulated in the monetary approach literature. The existence of a rational expectations equilibrium in which the distribution of international reserves among central banks is stationary is established

There is an extensive empirical literature on political business cycles, but its theoretical foundations are grounded in pre-rational expectations macroeconomic theory. Here we show that electoral cycles in taxes, government spending and money growth can be modeled as an equilibrium signaling...