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The Bad Government: A Source of Uncertainty and Business Fluctuations

  • Taiji Harashima

    (The Cabinet Office of the Japanese Government)

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
Date of revision:
Handle: RePEc:wpa:wuwpmi:0407010
Note: Type of Document - pdf; pages: 39
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  1. Asli Demirgüç-Kunt & Enrica Detragiache, 1997. "The Determinants of Banking Crises: Evidence From Developing and Developed Countries," IMF Working Papers 97/106, International Monetary Fund.
  2. Hamilton, James D & Gang, Lin, 1996. "Stock Market Volatility and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 573-93, Sept.-Oct.
  3. 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.
  4. Frederic S. Mishkin, 2001. "Prudential Supervision: Why Is It Important and What Are the Issues?," NBER Chapters, in: Prudential Supervision: What Works and What Doesn't, pages 1-30 National Bureau of Economic Research, Inc.
  5. 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.
  6. Michael M. Hutchison, 1997. "Financial crises and bank supervision: new directions for Japan?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec12.
  7. 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.
  8. Grossman, Sanford J, 1981. "An Introduction to the Theory of Rational Expectations under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 48(4), pages 541-59, October.
  9. Mordecai Kurz & Maurizio Motolese, . "Endogenous Uncertainty and Market Volatility," Working Papers 99005, Stanford University, Department of Economics.
  10. 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(2), pages 1-74.
  11. Michael Francis, 2003. "Governance and Financial Fragility: Evidence from a Cross-Section of Countries," Staff Working Papers 03-34, Bank of Canada.
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