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This paper provides new evidence on the formation and anchoring of inflation expectations. I conduct a game experiment and analyze the adjustment as well as the impact of credible targets on expectations. In addition, I evaluate the idiosyncratic determinants on the formation of expectations. The analysis reveals six results: First, I find evidence that long-term inflation expectations are firmly anchored to a credible target. Second, a temporary deviation due to unexpected monetary policy might trigger a decline in credibility, and third a de-anchoring of expectations due to uncertainty. Fourth, I find that people change their expectations little if a credible target exists. Fifth, expectations exhibit a large degree of time-variance only in environments without a target. Sixth, the dynamic adjustment to an ‘incomplete’ equilibrium, which is theoretically unstable, is nevertheless rapid and persistent in case of credible targets. All in all, I demonstrate a unique game setup with contributions to both experimental and monetary economics.
This paper develops a linear and tractable model of financial bubbles. I demonstrate the application of the linear model and study the root causes of financial bubbles. Moreover, I derive leading properties of bubbles. This model enables investors and regulators to react to market dynamics in a timely manner. In conclusion, the linear model is helpful for the empirical verification and detection of financial bubbles.
This paper establishes a unique linkage between economic and sociological theories. I study the root causes of the euro crisis from both perspectives. I find that resolving the euro crisis requires economic and sociological insights, particularly in respect to the design of European institutions, rules, and regulations. I develop a new paradigm in attempt to tackle the euro crisis. This paper demonstrates the importance of an interdisciplinary dialogue and how this may safeguard the future of the Economic and Monetary Union.
The paper designs a quantum model of decision-making (QMDM) that utilizes neuroscientific evidence. The new model provides both normative and positive implications to economics. First, it enhances the study of decision-making which is an extension of the expected utility theory (EUT) in mathematical economics. Second, we demonstrate how the quantum model mitigates drawbacks of the expected utility theory of today.
Die Finanzkrise lies Europa und die Welt erzittern - die Staatsverschuldungskriese wurde zur Zerreißprobe für die Eurozone. Inzwischen hat sich die Situation wieder stabilisiert, doch nun steht die Eurozone vor der Herausforderung, einen Reform-Prozess anzustoßen, der das Überleben des Euros auf lange Sicht sichern soll.
Applied mathematical theory for monetary-fiscal interaction in a supranational monetary union
(2014)
I utilize a differentiable dynamical system á la Lotka-Voletrra and explain monetary and fiscal interaction in a supranational monetary union. The paper demonstrates an applied mathematical approach that provides useful insights about the interaction mechanisms in theoretical economics in general and a monetary union in particular. I find that a common central bank is necessary but not sufficient to tackle the new interaction problems in a supranational monetary union, such as the free-riding behaviour of fiscal policies. Moreover, I show that upranational institutions, rules or laws are essential to mitigate violations of decentralized fiscal policies.
This article focuses on potential economic implications of a free trade agreement (FTA) between the European Union (EU) and the Indian Federation. The economic implications are evaluated by estimating an Extended gravity model for all existing FTAs with the Indian Federation. Moreover, we control for the trade contribution of EU member countries in our econometric model during the period from 1990 until 2008. The results show a significant increase in trade, if there is a free trade agreement between India and another country. Interestingly, we find that India has the largest positive impact from FTAs with more advanced economies. Thus, we reaffirm the potential benefits of trade relationships between the EU and India.
This paper is a brief review on the book ‘Capital in the Twenty-First Century’ by the French scholar Thomas Piketty. The book has started a new debate about inequality and capital taxation in Europe. It provides interesting empirical facts and develops a theory of the functioning of capitalist economies. However, I personally think the book is less convincing than recognized in the public debate. The demonstrated theory of economic growth in the book is elusive and lacks a psychological and behavioral underpinning. In fact, I do think that the increasing inequality and economic divergence are caused by capitalism but the psychological and behavioral aspects of humans are of similar or greater significance. Therefore, Piketty’s argument does not stimulate an open and scientifically founded debate in all aspects.
Whither the german council of economic experts? The past and future of public economic advice
(2014)
The article discusses the development and impact of the German Council of Economic Experts (GCEE). Firstly, the author studies the historical origins and the institutional setup of the GCEE. In the second step, an analyse of the impact of the annual reports of the German Council is given, along with the international comparison with other advisory boards. Finally, the paper discusses the current economic challenges and the need of modernization of the GCEE in special and political advisory boards in general.
This white paper builds a new financial theory of euro area sovereign bond markets under stress. The theory explains the abnormal bond pricing and increasing spreads during the recent market turmoil. We find that the strong disconnect of bond spreads from the respective bonds’ underlying fundamental values in 2010 was triggered by an increase in asymmetric information and weak reputation of government policies. Both factors cause a normal bond market to switch into a crisis mode. Finally, those markets are prone to self-fulfilling bubbles in which the economic effects are amplified by herding behaviour arising from animal spirits. Altogether, this produces contagious effects and multiple equilibria. Thus, we argue that government bond markets in a monetary union are more fragile and vulnerable to liquidity and solvency crises. Consequently, the systemic mispricing of sovereign debt creates more macroeconomic instability and bubbles in the euro area than in a single country. In other words, financial markets are partly blind to national default risks in a currency union. Therefore, the current European institutional framework puts the wrong incentives in place and needs structural changes soon. To tackle the root causes we suggest more market incentives via consistent rules, pre-emptive austerity measures in good economic times, and a resolution scheme for heavily indebted countries. In summary, our paper enhances the bond market theory and provides new insights into the recent bond market turmoil in Europe.