Attempts by governments to finance a substantial proportion of expenditure by seigniorage can lea... more Attempts by governments to finance a substantial proportion of expenditure by seigniorage can lead to multiple inflationary equilibria. Theoretical models suggest that, in these circumstances, inflation follows a non‐linear process with up to three steady states and that the stability characteristics of these depend on the process by which expectations are formed. In this paper we show that the exponential smooth transition autoregression (ESTAR) model is capable of exhibiting the required characteristics and so provides a suitable vehicle for analysing inflation in high inflation economies. We estimate ESTAR models for three well‐known inflationary episodes—the German hyperinflation of the early 1920s and post‐Second World War inflations in Argentina and Brazil. Our results imply that, during the periods in question, each of these economies possessed a stable low‐level equilibrium rate of inflation but that the variances of inflation shocks were large enough to drive each economy i...
This is the first paper to provide a comprehensive theoretical analysis of the third and fourth o... more This is the first paper to provide a comprehensive theoretical analysis of the third and fourth order lottery preferences implied by cumulative prospect theory (CPT). We consider the lottery choices from three alternative reference points: the status quo, the expected payout and the MaxMin. We report a large number of new results given the standard assumptions about probability weighting. We demonstrate, for example, the general result that from the status quo reference point there is no third order reflection effect but there is a fourth order reflection effect. When the average payout or the MaxMin is the reference point, we lose generality but can demonstrate that representative individuals with power value functions can make prudent or imprudent, temperate or intemperate choices depending on the precise magnitude of lottery payoffs. In addition to this, we show that these representative CPT individuals can exhibit some surprising combinations of second with third and fourth orde...
Risk-averse Expected Utility (EU) decision makers with wealth-dependent utility functions may fin... more Risk-averse Expected Utility (EU) decision makers with wealth-dependent utility functions may find themselves indifferent between accepting and rejecting an indivisible risky prospect. Bell (1988) showed that under these circumstances it is EU-enhancing for the decision maker to engage in a pre-decision side bet, accepting the indivisible risky prospect conditional upon winning the side bet. The side bet places the decision maker on the convex hull between the initial-wealth utility function and the utility function with risky-prospect-augmented wealth. We show that decision makers restricted to actuarially unfair side bets engage in a sequence of individually EU-enhancing side bets. This occurs because optimal stake size is modest for actuarially unfair side bets, whereby wealth remains within the interval of interim convexity upon losing the side bet. As optimal stake size falls strongly with each successive side-bet round, wealth remains within the interval of interim convexity. ...
ABSTRACT Despite the widespread application of finite mixture models, the decision of how many cl... more ABSTRACT Despite the widespread application of finite mixture models, the decision of how many classes are required to adequately represent the data is, according to many authors, an important, but unsolved issue. This work aims to review, describe and organize the ...
Attempts by governments to finance a substantial proportion of expenditure by seigniorage can lea... more Attempts by governments to finance a substantial proportion of expenditure by seigniorage can lead to multiple inflationary equilibria. Theoretical models suggest that, in these circumstances, inflation follows a non‐linear process with up to three steady states and that the stability characteristics of these depend on the process by which expectations are formed. In this paper we show that the exponential smooth transition autoregression (ESTAR) model is capable of exhibiting the required characteristics and so provides a suitable vehicle for analysing inflation in high inflation economies. We estimate ESTAR models for three well‐known inflationary episodes—the German hyperinflation of the early 1920s and post‐Second World War inflations in Argentina and Brazil. Our results imply that, during the periods in question, each of these economies possessed a stable low‐level equilibrium rate of inflation but that the variances of inflation shocks were large enough to drive each economy i...
This is the first paper to provide a comprehensive theoretical analysis of the third and fourth o... more This is the first paper to provide a comprehensive theoretical analysis of the third and fourth order lottery preferences implied by cumulative prospect theory (CPT). We consider the lottery choices from three alternative reference points: the status quo, the expected payout and the MaxMin. We report a large number of new results given the standard assumptions about probability weighting. We demonstrate, for example, the general result that from the status quo reference point there is no third order reflection effect but there is a fourth order reflection effect. When the average payout or the MaxMin is the reference point, we lose generality but can demonstrate that representative individuals with power value functions can make prudent or imprudent, temperate or intemperate choices depending on the precise magnitude of lottery payoffs. In addition to this, we show that these representative CPT individuals can exhibit some surprising combinations of second with third and fourth orde...
Risk-averse Expected Utility (EU) decision makers with wealth-dependent utility functions may fin... more Risk-averse Expected Utility (EU) decision makers with wealth-dependent utility functions may find themselves indifferent between accepting and rejecting an indivisible risky prospect. Bell (1988) showed that under these circumstances it is EU-enhancing for the decision maker to engage in a pre-decision side bet, accepting the indivisible risky prospect conditional upon winning the side bet. The side bet places the decision maker on the convex hull between the initial-wealth utility function and the utility function with risky-prospect-augmented wealth. We show that decision makers restricted to actuarially unfair side bets engage in a sequence of individually EU-enhancing side bets. This occurs because optimal stake size is modest for actuarially unfair side bets, whereby wealth remains within the interval of interim convexity upon losing the side bet. As optimal stake size falls strongly with each successive side-bet round, wealth remains within the interval of interim convexity. ...
ABSTRACT Despite the widespread application of finite mixture models, the decision of how many cl... more ABSTRACT Despite the widespread application of finite mixture models, the decision of how many classes are required to adequately represent the data is, according to many authors, an important, but unsolved issue. This work aims to review, describe and organize the ...
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Papers by David Peel