Dynamic analysis of economic systems

Abstract of chapter 1. This paper examines a monetary economy with financial intermediaries. Several periods of investment are necessary before output is received. To smooth consumption or augment production possibilities, agents can borrow from a competitive banking sector. Loans must be guaranteed by collateral. Thus, the capital market is imperfect. The collateral accepted by banks coincides with one kind of capital used in production. It is shown that agents may overinvest in collateral and increases in statutory reserves can reduce the allocative inefficiency and increase welfare.;Abstract of chapter 2. This paper examines the issue of whether a small random deviation from a non-random policy process will destabilize the equilibrium exchange rate in a rational expectations economy. The random deviations represent the erratic actions of government which are unobservable by agents until they occur. The degree of randomness is indexed by a parameter e∈ [0, 1], with higher values of e associated with greater random shocks. As e changes, the structure of policy changes in a nonlinear way. The random equilibrium exchange rate, xet , converges to the deterministic rate, zt, as e → 0. If agents are approximately rational, large deviations between xet and zt for small e are possible.;Abstract of chapter 3. This paper analyzes the stability of the exchange rate in an economy with noise traders. Noise trading is restricted to agents investing in the domestic stock market, who are less sophisticated than the agents pricing foreign exchange. Monetary policy is affected by the behaviour of investors in the domestic stock market. We show that small fluctuations in the parameters governing noise trading can have a profound effect on the exchange rate when foreign exchange traders have rational expectations. This shows that instability is the key feature in economies where heterogeneous agents have different levels of sophistication in processing information. Endogenous fluctuations from the stock market spill over into endogenous fluctuations in the exchange rate.