Throughout the second half of the 20th century, women in the United States decided to move increasingly into the labor market. This paper investigates the growth of the service sector as an explanation for the increase in women's employment. It develops an economic model that can account for the increase in women's employment and the growth of the service sector at the same time. A growth model with two sectors and a home production technology is constructed in order to quantitatively assess the contribution of sectoral productivity differences to the change in women's employment decision. The sectoral productivities are taken from the data. This model demonstrates that a higher rate of productivity growth in market services compared to home services can account for a large fraction of the observed increase in women's labor supply from 1950 to 2005.

This paper suggests that we need an alternative approach to economic modeling in general, and macroeconomic modeling in particular, if we are to capture salient characteristics of recent economic developments. Rather than focusing on models built on the basis of isolated, rational, optimizing agents, we should recognize that much simpler individuals following basic rules can collectively generate complex behavior. We have lessons to learn from studying the behavior of social insects for example. Noisy systems of interactive agents can generate aggregate phenomena such as sudden changes in the state of an economy or market, with no external shock. I give two examples of simple models of financial markets to illustrate this but would argue more generally that such models are indispensible if we are to understand aggregate economic phenomena.

This paper examines the effects of various structural shocks in the passive monetary-active fiscal regime in which the fiscal theory of the price level is valid, and compares these effects to those suggested by conventional theory (the active monetary-passive fiscal regime), within a framework of the New Keynesian sticky price model. The results suggest that the effects of structural shocks are substantially different in the passive monetary-active fiscal regime. First, a monetary contraction (an increase in the interest-rate) increases the inflation rate persistently, and increases output with lags. Second, a positive government spending shock leads to a consumption rise in the model that predicts a consumption fall based on conventional theory. Third, in response to aggregate-demand and aggregate-supply shocks, a period of inflation above (or below) the steady-state is followed by a period of inflation below (or above) the steady-state. This inflation reversal is also found in the impulse responses of the estimated VAR models during the 1940's and 1950's, which suggests that the passive monetary-active fiscal regime seems to be actually in place during that period.I thank the editor, an associate editor, and two anonymous referees for constructive suggestions, Christopher Sims for discussion on earlier drafts, Minjung Chae for research assistance, and Clayton Reck for editorial help. All remaining errors are mine.

This study provides a unified growth theory to correctly predict the initially negative and subsequently positive relationship between child mortality and net reproduction observed in industrialized countries over the course of their demographic transitions. The model captures the intricate interplay between technological progress, mortality, fertility, and economic growth in the transition from Malthusian stagnation to modern growth. It not only provides an explanation for the demographic observation that fertility rates response with a delay to lower child mortality, but also identifies a number of turning points over the course of development, suggesting a high degree of complexity in the relationships between various economic and demographic variables.

We examine asset prices and returns in the context of a pure exchange economy. Our purpose is to identify the key channels by which changes in preferences affect the equity premium and the risk-free rate and to develop intuition that is useful for understanding asset pricing in more complicated economies. Our analysis suggests that capital gains play a crucial role in generating empirically plausible mean equity premia.

This paper examines an agent's choice of forecast method within a standard asset pricing model. A representative agent may choose: (1) a fundamentals-based forecast that employs knowledge of the dividend process, (2) a constant forecast that is based on a simple long-run average, or (3) a time-varying forecast that extrapolates from the last observation. I show that an agent who is concerned about minimizing forecast errors may inadvertently become “locked-in” to an extrapolative forecast. In particular, the initial use of extrapolation alters the law of motion of the forecast variable so that the agent perceives no accuracy gain from switching to one of the alternative forecast methods. The model can generate excess volatility of stock prices, time-varying volatility of returns, long-horizon predictability of returns, bubbles driven by optimism about the future, and sharp downward movements in stock prices that resemble market crashes.

We examine minimal sufficient state spaces for equilibria in a Lucas asset pricing model with heterogeneous agents and incomplete markets. It is clear that even if all fundamentals of the economy follow a first-order Markov process, equilibrium prices and allocations generally will depend not only on the current exogenous shock but also on the distribution of wealth among the heterogeneous agents. The main contribution of this paper is to give an example of an infinite-horizon economy with Markovian fundamentals, where the joint process of equilibrium asset holdings and exogenous shocks does not constitute a sufficient state space either.

Models with heterogeneous interacting agents explain macro phenomena through interactions at the micro level. We propose genetic algorithms as a model for individual expectations to explain aggregate market phenomena. The model explains all stylized facts observed in aggregate price fluctuations and individual forecasting behaviour in recent learning-to-forecast laboratory experiments with human subjects (Hommes et al. 2007), simultaneously and across different treatments.

This paper explores the macroeconomic consequences of preferences displaying a subsistence point. It departs from the existing related literature by assuming that subsistence points are specific to each variety of goods rather than to the composite consumption good. We show that this simple feature makes the price elasticity of demand for individual goods procyclical. As a result, markups behave countercyclically in equilibrium. This implication is in line with the available empirical evidence.

We develop a growth model with unemployment due to imperfections in the labor market. In this model, wage inertia and balanced budget rules cause a complementarity between capital and employment capable of explaining the existence of multiple equilibrium paths. Hysteresis is viewed as the result of a selection between these different paths. We use this model to arguea that, in contrast to the United States, those fiscal policies followed by most of the European countries after the shocks of the 1970s may have played a central role in generating hysteresis.

This paper assesses the empirical relevance of financial frictions in the Euro Area (EA) and the United States (US). It provides a comprehensive set of comparisons between two models: (i) a Smets and Wouters (SW) [F. Smets and R. Wouters, Shocks and frictions in US business cycles: A Bayesian DSGE approach, American Economic Review 97(3), 586–606 (2007)] model with financial frictions originating in nonfinancial firms and (ii) a SW model with frictions originating in financial intermediaries. The introduction of financial frictions in either way improves the models' fit compared to a standard SW model, and the empirical comparisons reveal that the latter model outperforms the former both in the euro area and in the United States. Two main factors explain this result: first, the magnitude of the financial accelerator effect, and second, the role of the investment-specific technology shock in affecting financial variables.

We quantify what drives the rise in medical expenditures over the life-cycle using a stochastic dynamic overlapping generations model of health investment. Three motives for health investment are considered. First, health delivers a flow of utility each period (the consumption motive). Second, better health enables people to allocate more time to productive or pleasurable activities (the investment motive). Third, better health improves survival prospects (the survival motive). We find that, overall, the consumption motive plays a dominant role, whereas the investment motive is more important than the consumption and survival motives until the forties. The survival motive is quantitatively less important when compared to the other two motives. We also conduct a series of counter-factual policy experiments to investigate how government policies impacting health insurance coverage, Social Security, and health care technological progress affect the behavior of medical expenditures, and social welfare.

A noisy rational expectations model of asset trading is extended to incorporate costs of information acquisition and expectation formation. Because of the information costs, how much information to acquire becomes an important decision. Agents make this decision by choosing an expectations strategy about the future value of information. Because expectation formation is costly, agents often choose strategies that are simpler (and thus cheaper) than rational expectations. The model's dynamics can be expressed in terms of the market precision, which represents the amount of information acquired by the average agent. Under certain conditions, market precision follows an unstable and highly irregular time path. This irregularity directly affects observable market quantities. In particular, simulated time series for return volatility and trading volume display a copersistence similar to that found in actual financial data.

In Mankiw, Romer, and Weil's augmented Solow model [Quarterly Journal of Economics 107 (2) 407–437 (1992)], the marginal product of human capital accrues to three factors of production: directly to human capital, and as an external effect to physical capital and labor. This paper estimates national stocks of human capital in 1990 created from prior investment in schooling and shows that for 36 countries the (macro) marginal product of human capital accruing to workers in 1990 is consistent with estimates of the (micro) marginal return on investment in schooling in workers' earnings studies. This reconciliation provides empirical evidence for the augmented Solow model.

This paper examines the dynamic implications of different preference formulations in open-economy business-cycle models with incomplete asset markets. In particular, we study two preference formulations: a time-separable preference formulation with a fixed discount factor, and a time-nonseparable preference structure with an endogenous discount factor. We analyze the moment implications of two versions of an otherwise identical open-economy model—one with a fixed discount factor and the other with an endogenous discount factor—and study impulse responses to productivity and world real-interest-rate shocks. Our results suggest that business-cycle implications of the two models are quite similar under conventional parameter values. We also find that the approximation errors associated with the solutions of these two models are of the same magnitude.

We estimate a number of macroeconomic variables as logistic smooth transition autoregressive (LSTAR) processes with uncertainty as the transition variable. The notion is that the effects of increases in uncertainty should not be symmetrical with the effects of decreases in uncertainty. Nonlinear estimation allows us to answer several interesting questions left unanswered by a linear model. For a number of important macroeconomic variables, we show that (i) a positive shock to uncertainty has a greater effect than a negative shock and (ii) the effect of the uncertainty shock is highly dependent on the state of the economy. Hence, the usual linear estimates for the consequences of uncertainty are underestimated in circumstances such as the recent financial crisis.

The Beveridge–Nelson decomposition calculates trend and cycle for an integrated time series. However, there are two ways to interpret the results from the decomposition. One interpretation is that the optimal long-run forecast (minus any deterministic drift) used to calculate the Beveridge–Nelson trend corresponds to an estimate of an unobserved permanent component. The other interpretation is that the optimal long-run forecast defines an observable permanent component. This paper examines some issues surrounding these two interpretations and provides empirical support for interpreting the Beveridge–Nelson trend as an estimate when considering macroeconomic data.

This paper employs the rolling bicorrelation test to measure the degree of nonlinear departures from a random walk for aggregate stock price indices of fifty countries over the sample period 1995–2005. We find that stock markets in economies with low per capita GDP in general experience more frequent price deviations than those in the high-income group. This clustering effect is not due to market liquidity or other structural characteristics, but instead can be explained by cross-country variation in the degree of private property rights protection. Our conjecture is that weak protection deters the participation of informed arbitrageurs, leaving those markets dominated by sentiment-prone noise traders whose correlated trading causes stock prices in emerging markets to deviate from the random walk benchmarks for persistent periods of time.

We use a log-normal framework to examine the effect of preferences on the market price for risk, that is, the Sharpe ratio. In our framework, the Sharpe ratio can be calculated directly from the elasticity of the stochastic discount factor with respect to consumption innovations as well as the volatility of consumption innovations. This can be understood as an analytical shortcut to the calculation of the Hansen–Jagannathan volatility bounds, and therefore provides a convenient tool for theorists searching for models capable of explaining asset-pricing facts. To illustrate the usefulness of our approach, we examine several popular preference specifications, such as CRRA, various types of habit formation, and the recursive preferences of Epstein–Zin–Weil. Furthermore, we show how the models with idiosyncratic consumption shocks can be studied.

This study develops a monetary Schumpeterian model with endogenous market structure (EMS) to explore the effects of monetary policy on the number of firms, firm size, economic growth, and social welfare. EMS leads to different results from previous studies in which market structure is exogenous. In the short run, a higher nominal interest rate reduces the growth rates of innovation, output, and consumption and decreases firm size through reduction in labor supply. In the long run, a higher nominal interest rate reduces the equilibrium number of firms but has no steady-state effect on economic growth and firm size because of EMS. Although monetary policy has no long-run growth effect, increasing the nominal interest rate permanently reduces the levels of output, consumption, and employment. Taking transition dynamics into account, we find that welfare is decreasing in the nominal interest rate and the Friedman rule is optimal in this economy.