New Essentials of Economic Theory II. Economic Transactions, Expectations and Asset Pricing

Abstract

This paper presents further development of our economic model (see Part I). We describe economic and financial transactions between agents as factors that define evolution of economic variables. We show that change of risk ratings of agents as their coordinates on economic space due to their economic activity or other reasons induce flows of economic transactions that contribute significantly to macroeconomic evolution. Transactions are made under numerous expectations of agents and agents establish their expectations on base of economic variables, transactions, other factors that impact economic evolution. We argue that economic value of expectations should be regarded proportionally to economic value of transactions made under these expectations. We describe transition from modeling transactions and expectations of separate agents to description of density functions of transactions and expectations on economic space. We derive systems of equations that describe density functions of transactions, expectations and their flows. We explain how transactions and expectations determine asset pricing and derive price equations. In Part III we use our model equations on economic variables, transactions, expectations and their flows for description of particular economic problems.

Keywords: Economic Theory, Risk Ratings, Economic Space, Economic Transactions, Expectations, Asset Pricing

JEL Classification: C00, C02, C5, E00, E3, E7, G12