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We analyse the implications of unions (efficient bargaining) for multiplicity of stationary states and welfare, local indeterminacy, bifurcations and endogenous fluctuations (deterministic and stochastic). We use an overlapping generations model with external increasing returns to scale, where capital is the unique asset. We find that a slight increase in unions power may increase the levels of capital, employment and the welfare of all agents at the steady state. However multiple steady states may exist. Moreover, our results show that increasing returns to scale are a necessary condition for the emergence of deterministic endogenous fluctuations. However, we find that union's bargaining power can dramatically influence the local stability of the system. In fact, while an increase in the bargaining power of unions reduces the scope for local indeterminacy, the emergence of endogenous fluctuations, through Hopf bifurcations may become more likely when unions are present. Therefore, if the relevant trajectory exhibits endogenous fluctuations, steady state welfare is no longer the unique important element from a social point of view. In this case, whether unions are 'good' institutions or not may well depend on the trade off between efficiency and intergenerational equity that society is willing to take.

"Enrolment rates to higher education reveal quite large variation over time which cannot be explained by productivity shocks alone. We develop a human capital investment model in an overlapping generations framework that features endogenous fluctuations in the demand for education. Agents are heterogeneous in their beliefs about future wage differentials. An evolutionary competition between the heterogeneous beliefs determines the fraction of the newborn generation having a certain belief. Costly access to information on the returns to education induces agents to use potentially destabilizing backward looking prediction rules. Only if previous generations experience regret about their human capital investment decisions, agents will choose a more sophisticated prediction rule that dampens the cycle. Access to information becomes key for stable flows to higher education." (author's abstract)

AbstractWe introduce equilibrium indeterminacy into a two‐country incomplete asset model with imperfect competition to analyze the role of self‐fulfilling expectations or beliefs in explaining international business cycles. We find that, when self‐fulfilling beliefs are correlated with technology shocks, the model can account for the countercyclical behaviour observed for the terms of trade and real net exports while simultaneously generating higher volatilities relative to output, as in the data. The choice of the labour‐supply elasticity is shown to be critical for generating a negative correlation between the real exchange rate and relative consumption, thereby resolving the Backus–Smith puzzle.

My Ph.D. thesis contributes to the growing literature investigating the role of heterogeneity in the macroeconomics volatility. Particularly, it focuses on bounded rationality and heterogeneous expectations in financial accelerator frameworks. In the first paper, I present a literature review tackling the theoretical and the empirical challenges of bounded rationality and heterogeneous expectations. More precisely, I decided to analyse the Adaptive Belief System (ABS) because it is relevant to the purpose of solving the "wilderness problem" of bounded rationality. Moreover, it introduces complex dynamical evolution in the system and it can describe many stylized financial and macroeconomics phenomena, like fat tails, unpredictable returns and excess volatility. I conclude the survey showing some experimental analyses suggesting the importance of heterogeneity and bounded rationality in the expectations formation and in the evolution of the economic system. In the other two papers, I elaborate two financial accelerator (FA) frameworks focusing on the role of heterogeneous expectations, investment decisions and macroeconomic fluctuations. In the first one, starting from the Bernanke-Gertler-Gilchrist financial accelerator (1999), I develop an Agent-Based financial accelerator introducing bounded rationality, heterogeneous expectations, actual bankruptcy and a balance sheet for the financial intermediary. I specify a setup in which the heterogeneity is inserted in the agents' wealth as well as in their heuristics. The agents make mistakes in forecasting future macroeconomic variables and update their beliefs when new information becomes available. Since they commit mistakes in their investment and borrowing decisions, the entrepreneurs may not be able to fulfil their debt and therefore go bankrupt. To account for the losses of defaults I introduce the balance sheet of the financial intermediary. Then, the bankruptcy affects the credit channel: firstly because the bank will settle an extra cost to the defaulted entrepreneur, secondly because banks with lower financial soundness will fix on average higher interest rate on loans. Finally, I explore the macroeconomic volatility running some simulations which consider different heuristics and different monetary policies. My results suggest that a monetary authority should take into account the "sentiment of the market" when designing its policy. Indeed, applying the same monetary policy may have different consequences on macroeconomic volatility when the expectations are non-identical. However, if two monetary policies are implemented in the same scenario, it seems that the strongest monetary policy will reduce the waves of optimism and pessimism better stabilizing the macroeconomic environment. In the second model, I propose a financial accelerator in which the evolution of expectations is based on the adaptive belief system. Within this framework, the entrepreneurs have cognitive limitations and are not able to forecast in advance the actual return on capital. However, when new information becomes available, they can compute their investment performance and switch to the most performing heuristic. Through this mechanism, they update their beliefs on future investment return introducing complex dynamics in the model. In the last part of the paper, I explore the macroeconomic volatility of the system considering different heuristics and monetary policies. One the one side, the core results suggest that no monetary policy is able to quickly stabilize the system completely; some fluctuations persist for many periods. Moreover, flexible inflation targeting policies yield lower fluctuations but these are more persistent. On the contrary, strict inflation targeting policies produce deeper macro-volatility but lower persistency. Finally, the stabilizing effect of the monetary policy strongly depends on the nature of the heuristics and, counterintuitively, the volatility is higher in scenarios with more sophisticated heuristics.

This paper studies the dynamic volatility properties of a monetary economy in which agents hold Rational Beliefs (see Kurz (1994), (1997)) rather than Rational Expectations. Except for this feature the examined Rational Belief Equilibrium (in short, RBE) is entirely standard: markets are competitive, prices are flexible and all information is symmetric. The paper demonstrates a) The RBE paradigm offers an integrated theory of real and financial volatility with a high volume of trade. Most volatility in an RBE is induced endogenously through the beliefs of agents.b) Although our RBE assumes fully competitive markets in which prices are fully flexible,the diverse expectations of agents can explain most of the familiar features of monetary equilibria. This includes, money non-neutrality, Phillips curve and impulse response functions with respectto monetary shocks.c) Agents with diverse but inconsistent beliefs may induce socially undesirable excess fluctuations even when the allocation is ex-ante Pareto optimal. Central bank policy should aim to reduce the endogenous component of this volatility.