Many tests have rejected the implications of the consumption CAPM fordata on U.S. asset returns. All of the tests, though, assume that thepricing errors satisfy the Central Limit Theorem. I provide empiricalevidence that the marginal distributions of the pricing errors are so heavy-tailed that they do not satisfy the Central Limit Theorem. Usingrecent work on jackknifing, I construct a method of testing asset pricing models with heavy-tailed errors. Using this procedure, I find that theconsumption CAPM is not rejected by annual U.S. data.

We study learning in Bayesian games (or games with differentialinformation) with an arbitrary number of bounded rational players,i.e., players who choose approximate best response strategies[approximate Bayesian Nash Equilibrium (BNE) strategies] and who alsoare allowed to be completely irrational in some states of the world.We show that bounded rational players by repetition can reach a limitfull information BNE outcome. We also prove the converse, i.e., givena limit full information BNE outcome, we can construct a sequence ofbounded rational plays that converges to the limit full informationBNE outcome.

This paper develops a dynamic model of seigniorage in whicheconomies' equilibrium paths reflect the ongoing strategicinteraction between an optimizing government and a rational public.The model extends existing positive models of monetary policy andinflation by explicitly incorporating the intertemporal linkagesamong budget deficits, debt, and inflation. A central finding is thatthe public's rational responses to government policies may wellcreate incentives for the government to reduce inflation and thepublic debt over time. A sufficiently myopic government may, however,provoke a rising equilibrium path of inflation and public debt.

Public capital subject to congestion is introduced into an endogenousgrowth model and the transitional dynamic paths under alternativefiscal policies are characterized. Several new insights are obtainedfrom this more general framework. During the transition, the twocapital stocks always approach their common equilibrium growth ratefrom opposite directions. Government policy induces the more volatileresponse in the capital stock upon which it impinges most directly:private capital in the case of a tax, public capital in the case ofexpenditure. Finally, we characterize a time-varying income tax thatenables the decentralized economy to replicate both the first-besttransitional dynamics and steady-state equilibrium of a centrallyplanned economy. The steady-state component corrects forexternalities that arise when government expenditure deviates fromits social optimum, and the effects of congestion. The transitionalcomponent corrects for myopic behavior by the representative agentalong the adjustment path.

There exist a variety of reasons for the failure to find a uniquecointegrating relationship between economic time series where onewould normally be expected on the basis of economic theory. Amongthese are the testing procedure, the span of the data set, the choiceof lag length in generating the test statistic, the presence ofstructural breaks, and the presence of cointegration only beyond somethreshold. We propose the concept of regime-sensitive cointegrationwhereby the underlying series need not be cointegrated at all times.We show that cointegration can be switched off when a commonstochastic trend is added. Alternatively, cointegration can beswitched on or off because series normally believed to contain a unitactually do not. This implies that a linear combination of suchvariables need not be cointegrated. To illustrate the conceptempirically, we test the hypothesis of interest-rate parity, andrelated hypotheses, using daily Eurorates for the United States andCanada.

The credibility criterion commonly used in the strategicmacroeconomic policy literature, subgame perfection or its variants,ignores a critical problem concerning intertemporal consistency ofpolicy announcements.To capture this additional credibilityconstraint,this note applies two distinct notions ofRenegotiation-Proof, originally proposed in the context of two-personrepeated games.Macroeconomic policy games, where thebenevolentgovernment interacts with atomistic private agents, offers a newtestingground for these criteria to be evaluated.This notediscusses the relative strengths andweaknesses of thesecriteria.