Asset Prices in Stationary Rational Expectation Models

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The project continues a distinguished line of research into the concept of equilibrium in an economy. This concept is central in virtually all economic analysis, both theoretical and empirical. In essence, the idea of economic equilibrium implies that the economy can be stable in certain circumstances, that those conditions can be derived at least in a theoretical sense, that the forces in the economy will respond in some predictable way to outside influences, and that the economy will remain in balance unless forced to change. Equilibrium is also more than just a theoretical construct used to make analysis more tractable; it appears to be a realistic description of the actual workings of an economy. This is evident in that markets are typically not chaotic, at least not for long periods of time. Enormous numbers of producers supply a seemingly endless variety of products and services, which in turn are consumed by other agents in the economy. Millions of transactions are completed daily in a relatively orderly fashion. Some incorporate a high degree of government regulation, but most take place with virtually no oversight from any established institution. Even though a stabilizing influence or equilibrium appears to be a fundamental component of a viable and growing economy, modelling that process mathematically has proven to be extremely difficult, particularly if a researcher wishes to examine the growth of the economy through time. Of special complexity are the rational expectations models, which realistically allow for the fact that economic agents such as consumers, producers, and policy makers all react to each other's movements in the economic marketplace. This project extends our knowledge of the evolution of economic systems by analyzing in both a theoretical and empirical way, the conditions necessary for stationary equilibria in rational expectations models. Starting from a simple monetary economy in which debt cannot be collected, Professor Levine incorporates multiple assets and production, and examines the efficiencies in economic growth brought about by transactions costs. Included in the project are analyses of government policy, multiple asset markets, and detailed studies of the mechanisms by which changes in one sector of the economy affect the other sectors.