The Bad Government: A Source of Uncertainty and Business Fluctuations

Taiji Harashima

Microeconomics from EconWPA

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.

Keywords: Uncertainty; Rational expectation approximate equilibria; Imperfect commitment; Supervision; Business fluctuations (search for similar items in EconPapers)
JEL-codes: D50 D80 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-reg and nep-sea
Date: 2004-07-23
Note: Type of Document - pdf; pages: 39
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpmi:0407010

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