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The Bad Government: A Source of Uncertainty and Business Fluctuations

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Author Info
Taiji Harashima (The Cabinet Office of the Japanese Government)

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Abstract

Uncertainty represented by volatilities in equity markets has been observed to be time-variable and lead output fluctuations. In the rational expectation framework, uncertainty with this nature needs exogenous variables with time-varying volatilities, but technology, tastes and fiscal and monetary policies do not seem suitable for such variables. The paper contends that supervisions and law enforcement that reduce cheatings in contracts is one of the ultimate sources of uncertainty. The cheating plays an important role for uncertainty since it is the origin of noisy price observations that makes an economy uncertain in the framework of rational expectation approximate equilibria.

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Paper provided by EconWPA in its series Microeconomics with number 0407010.

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Length: 39 pages
Date of creation: 23 Jul 2004
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Handle: RePEc:wpa:wuwpmi:0407010

Note: Type of Document - pdf; pages: 39
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Web page: http://129.3.20.41

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Related research
Keywords: Uncertainty; Rational expectation approximate equilibria; Imperfect commitment; Supervision; Business fluctuations;

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Find related papers by JEL classification:
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Michael Francis, 2003. "Governance and Financial Fragility: Evidence from a Cross-Section of Countries," Working Papers 03-34, Bank of Canada. [Downloadable!]
  3. John Y. Campbell & Martin Lettau, 1999. "Dispersion and Volatility in Stock Returns: An Empirical Investigation," NBER Working Papers 7144, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. George A. Akerlof & Paul M. Romer, 1993. "Looting: The Economic Underworld of Bankruptcy for Profit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1993-2), pages 1-74. [Downloadable!]
  5. James D. Hamilton & Gang Lin, 1996. "Stock Market Volatility and The Business Cycle," University of California at San Diego, Economics Working Paper Series 96-18, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  6. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  7. Enrica Detragiache & Asli Demirgüç-Kunt, 1997. "The Determinants of Banking Crises - Evidence from Developing and Developed Countries," IMF Working Papers 97/106, International Monetary Fund.
  8. Michael Hutchison, 1997. "Financial crises and bank supervision: new directions for Japan?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Dec 12. [Downloadable!]
  9. Grossman, Sanford J, 1981. "An Introduction to the Theory of Rational Expectations under Asymmetric Information," Review of Economic Studies, Blackwell Publishing, vol. 48(4), pages 541-59, October. [Downloadable!] (restricted)
  10. Frederic S. Mishkin, 2000. "Prudential Supervision: Why Is It Important and What are the Issues?," NBER Working Papers 7926, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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