In this paper, I explore in an overlapping generations framework, a mechanism motivating a neurobiological poverty trap. Poverty causes stress and depression in individuals susceptible to depression. Poor and depressed individuals discount the future at a higher rate and invest less in the human capital of their children than mentally healthy or rich individuals. This gene–environment interaction generates a vicious cycle in which poor individuals inherit not only susceptibility to depression, but also stress and poverty. I show that a successful one-time intervention has the power to permanently eliminate the neurobiological poverty trap.

This study examines the influence of foreign direct investment (FDI), overseas development aid (ODA), and remittances on the enrollment of girls and boys in 103 countries over the years 1970–2011. The results suggest that remittances have a contemporaneous robust significant influence on enrollment, with the positive effect being slightly higher for girls than for boys. FDI and ODA have an influence on the enrollment of girls and boys only after a significant time lag. The results also suggest that the impact of remittances on enrollment is increased through income and a well-developed financial sector; FDI through better institutions and a well-developed financial sector; and ODA through better government policy.

Why is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank’s interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound.

We build a model that, according to the empirical evidence, gives rise to oscillations in wealth within a dynasty while keeping intergenerational persistence in education attainment. We propose a mechanism based on the interaction between wealth and effort as suggested by the Carnegie conjecture, according to which wealthier individuals devote less effort in their job occupations than poorer. Oscillations in wealth arise from changes in the occupation chosen by different generations of the same dynasty as a response to both inherited wealth and college premium. Our mechanism generates a rich social stratification with several classes in the long run due to the combination of different levels of education and occupation types. Furthermore, we generate a large mobility in wealth among classes even in the long run. Our model highlights the role played by the minimum cost on education investment, the borrowing constraints, and the complementarity between education and occupational effort.

This paper presents a multi-country version of the Ramsey growth model with cross-country technological interdependence. The results rationalize several stylized facts about growth and convergence. First, individual countries tend to converge toward country-specific balanced growth paths rather than steady-state equilibria. Second, an economy that accounts for a smaller share of the world technology distribution harnesses the “advantages of backwardness” to catch up at a faster speed. Third, countries grow at different rates during the phase of transitional dynamics. However, technological interdependence creates a force toward cross-country convergence in the growth rate and stability of world income distribution in the long run. Finally, cross-country differences in structural characteristics and initial conditions lead to divergences in the level of income per capita.

Weekly live cattle prices in various markets would be expected to share common trends, i.e., they cannot be driven by separate nonstationarities because at some point the prices will diverge sufficiently for it to be economic to cross-ship the cattle, or at least the beef. This paper extends previous bivariate work to a multivariate analysis that is capable of modeling the multiple market linkages in prices for many geographical regions. The empirical estimation represents the application of an innovation on Aoki's Linear Systems State Space model that allows determination of long- and short-run dynamics common to multiple series. The common dynamics permit characterization of the multiple markets with a limited number of states (sufficient statistics for the past), resulting in dynamic arbitrage relations between the series. A nonparametric test is used to evaluate the value of expected arbitrage forecasts implied by the structure of the model. The arbitrage relationship also is employed to generate efficient discounts/premiums for either physical delivery or cash settlement of futures contracts. The proposed settlement mechanism accounts for spatial arbitrage opportunities and therefore better represents the true geographical discounts faced by traders in individual markets.

Persistent high unemployment has fostered the employment persistency hypothesis according to which employment changes are driven by unanticipated shocks whereas anticipated shocks that potentially could change employment are absorbed by wage changes. Empirical tests of the persistency hypothesis fail to distinguish between the properties of shocks and endogenous propagation mechanism causing persistency. This paper develops a new test strategy by explicitly distinguishing between these two factors. The methodology is applied to the manufacturing sector in Denmark, and some support in favor of an endogenous propagation mechanism causing employment persistency is found.

Credibility is elusive, but Blinder [(2000) American Economic Review 90, 1421–1431.] generated a consensus in the literature by arguing that “A central bank is credible if people believe it will do what it says.” To implement this idea, we first measure people’s beliefs by using survey data on inflation’s expectations. Second, we compare beliefs with explicit (or tacit) targets, taking into account the uncertainty in our estimate of beliefs (asymptotic 95% robust confidence intervals). Whenever the target falls into this interval we consider the central bank credible. We consider it not credible otherwise. We apply our approach to study the credibility of the Brazilian Central Bank (BCB) by using a world-class database—the Focus Survey of forecasts. Using monthly data from January 2007 until April 2017, we estimate people’s beliefs of inflation 12 months ahead, coupled with a robust estimate of its asymptotic 95% confidence interval. Results show that the BCB was credible 65% of the time, with the exception of a few months in the beginning of 2007 and during the interval between mid-2013 throughout mid-2016.

We analyze the role of the lending-deposit interest rate spread in the dynamics of the current account in developing countries. For that purpose, we extend the standard perfect-foresight intertemporal model of the current account for the existence of the interest rate spread and simulate the convergence path of developing economies. This model helps explain why in many cases it is optimal for a fast-growing, low-income country to run a balanced current account.

This paper studies asymmetric dynamics of real GDP growth by estimating linear and nonlinear quantile persistence over different parts of the conditional distribution for six major developed economies. Several novel quantile-based hypotheses are motivated in this paper and tested for the steepness asymmetry of real GDP growth that hypothesizes that contractions are steeper than expansions. The empirical results show that quantile persistence is generally high at far lower tails, thus requiring much longer half-lives to reverting negative deviations to the mean of real GDP growth and hence leading to gradual economic recoveries. By contrast, less persistence in far upper tails tends to generate sharp and short economic downturns that adjust positive deviations towards the mean of real GDP growth so as to cause abrupt economic recessions. In particular, this asymmetry in quantile persistence strongly supports the steepness asymmetry conjecture, robust to the presence of structural breaks and potential nonlinearities in real GDP growth.

This paper presents a new testing method for the scapegoat model of exchange rates. A number of steps are implemented to determine whether macro-fundamentals are scapegoats for the evolution of exchange rates. Estimation is conducted using a Bayesian Gibbs sampling approach applied to eight countries (five developed and three emerging) versus the USA over the period 2002Q1–2014Q4. The macro-fundamentals that we consider are real GDP growth, the inflation rate, the long-run nominal interest rate, and the current account to GDP ratio. We calculate the posterior probabilities that these macro-fundamentals are scapegoats. For the inflation rate, these probabilities are considerably higher than the imposed prior probabilities of ½ in five out of eight countries (in particular, the Anglo-Saxon economies).

Evolutionary game theory provides a fresh perspective on the prospect that agents with heterogeneous expectations might eventually come to agree on a single expectation corresponding to the efficient markets hypothesis. We establish conditions under which agreement on a unique forecast is stable, but also show that persistent heterogeneous expectations can arise if those conditions do not hold. The critical element is the degree of curvature in the payoff weighting functions agents use to value forecasting performance. We illustrate our results in the context of an asset pricing model where a martingale solution competes with the fundamental solution for agents' attention.

We develop an overlapping generations model to study how the interplay between social and human capital affects fertility. In a framework where families face a trade-off between the quantity and quality of children, we incorporate the assumption that social capital plays a key role in the accumulation of human capital. We show how the erosion of social capital can trigger a chain of reactions leading households to base their childbearing decisions on quantity, instead of quality, resulting in higher fertility.

We revisit the Friedman rule in a labor search model and extend Heer (2003), Cooley and Quadrini (2004), and Wang and Xie (2013) to one that allows for endogenous growth. We show that, even without a liquidity effect or a CIA constraint on firms’ wage payment, our model offers a different channel for moderate money growth to increase welfare. Intuitively, in a one-sector endogenous growth economy, the technology is of constant returns with respect to capital. When the labor market is frictional, a moderate increase in money growth induces an expansion in vacancy and employment. Labor and capital are complements in production. With an increase in employment, when the technology is neoclassical, the decreasing return in capital leads to a lower marginal product of labor. However, in an endogenous growth framework wherein the technology exhibits socially constant returns in capital, the marginal product of labor is constant. Due to a constant marginal product of labor, modest inflation raises employment, enlarges economic growth, and increases welfare. Moreover, the optimal long-run inflation rate departs from the Friedman rule, even when the Hosios rule holds. Finally, we find that our model with sustainable growth fits the data better than that without sustainable growth.

We show that the introduction of a constant tariff or subsidy levied on foreign energy can lead to a rich set of endogenous fluctuations around the unique steady state, including stable 2-, 4-, 8-, and 15-cycles, quasiperiodic orbits, and chaos. This is demonstrated in a standard neoclassical growth model with social increasing returns to scale. Numerical exercises could be viewed from a methodological perspective as illustrating that capital income taxes and tariffs are equivalent in generating endogenous fluctuations because Guo and Lansing [Guo, J.T. and K.J. Lansing (2002) Fiscal policy, increasing returns and endogenous fluctuations. Macroeconomic Dynamics 6, 633–664] show that a constant capital tax or subsidy has the same effect on the model dynamics in a one-sector closed economy.

When the returns to scale of a production process vary with the intensity it is operated at, an AK model with constant returns to scale in production arises endogenously due to replication driven by profit maximization. If replication occurs at the efficiency-maximizing scale, as with perfect competition, the result applies also when the number of production processes must be discrete, thus, overcoming the so-called integer problem. When competition is imperfect, there is only convergence toward the AK model for large enough input use, so an economy is more prone to stalling in a steady state without growth, the smaller and less competitive it is.

Zhang [Tariff and Equilibrium Indeterminacy, available at http://mpra.ub.uni-muenchen.de/13099/ (2009)] shows that endogenous tariffs (or energy taxes) and endogenous labor income taxes are equivalent in generating local indeterminacy. Using methods developed by Stockman [Journal of Economic Theory 145 (2010), 1060–1085], we extend Zhang's analysis to prove that endogenous tariffs and endogenous labor income taxes are also equivalent in generating global indeterminacy (chaotic equilibria) under a balanced-budget rule. More precisely, we show that the existence of Euler equation branching in an arbitrarily small neighborhood of a steady state can imply topological chaos in the sense of Devaney. In addition, Euler equation branching occurs regardless of the local uniqueness of the equilibrium around the steady state.

We investigate the sectoral and the distributional effects of a food subsidy program, where food consumption in the economy is subsidized by taxing the manufacturing good producers. In a two-agent model comprising of farmer and industrialist households, agents consume food to accumulate health. Simulations indicate that while the subsidy program increases food output and agents’ health both in the short run and the long run, manufacturing output and aggregate real GDP appear to fall in the short run and increase only in the long run. The program does not make both agents better off and exhibits social welfare gains for a limited range of subsidies.

This paper incorporates an education signaling mechanism into a dynamic model of production and asks if “higher education as a signal” helps explain the simultaneous increase in the supply and price of skilled relative to unskilled labor in the United States since 1980. The key mechanism is that if college degrees serve as a signal of unobservable talent and talent is productive at the workplace, then improved access to college will enable a higher fraction of the population to signal talent by completing college, resulting in degrees being a better signal about talent and a widening skill premium. When I assess the contribution of signaling in the model calibrated to the US economy from 1980 to 2003, I find that about 10% of the increase in the skill premium can be attributed to the signaling mechanism, after adjusting for the potential decline in the quality of college graduates.

We study a New Keynesian model with bounded rationality, where agents choose their expectations heterogeneously from a discrete choice set. The range of their set of possible expectation values can be interpreted as the anchoring of expectations. In the model, multiple locally stable steady states can arise that reflect coordination on particular expectation values. Moreover, bad shocks to the economy can trigger a self-reinforcing wave of pessimism, where the zero lower bound on the nominal interest rate becomes binding, and agents coordinate on a locally stable liquidity trap steady state. When we let the anchoring of expectations evolve endogenously, it turns out that the anchoring of expectations at the time the bad shocks hit the economy is crucial in determining whether the economy can recover from the liquidity trap. Finally, we find that a higher inflation target makes it less likely that self-reinforcing liquidity traps arise.