Money and credit are ubiquitous in actual economies, but there is an active theoretical debate on whether they are both necessary if they can both be used in all transactions. Recently, Gu et al. (2016) have shown that money and credit cannot be simultaneously essential and debt limits do not matter for the determination of real allocations in a class of monetary economies. In this paper, we revisit their irrelevance result in a monetary economy based on Lagos and Wright (2005), which exhibits a misallocation of liquidity that is common in search models of money. We show that monetary loans, which naturally require the use of both money and credit, implement Pareto superior allocations in which the size of debt limits matters.

We estimate the effects of government spending shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound (ELB). Using a panel VAR model for 17 advanced countries, we find that both the government consumption and investment multipliers are significantly higher, and exceed unity, when interest rates are persistently low. Distinguishing between construction- and equipment-related government investments, we find that only the former raises output by significantly more when the ELB binds. This result can be explained by existing New Keynesian models featuring time-to-build constraints on government investment.

This paper examines correlation and dependence structures between money and the level of economic activity in the USA in the context of a Markov-switching copula vector error correction model. We use the error correction model to focus on the short-run dynamics between money and output while accounting for their long-run equilibrium relationship. We use the Markov regime-switching model to account for instabilities in the relationship between money and output, and also consider different copula models with different dependence structures to investigate (upper and lower) tail dependence.

Knowledge creation has been a pivotal ingredient of endogenous growth theory to understand differences in standards of living across countries. Yet, the identification of key drivers explaining cross-country differences in knowledge creation still remains a topic of central interest in this research field. In this paper, I provide a framework to hypothesize and empirically test the persistent effects of novelty-seeking traits on cross-country differences in scientific knowledge creation. The results suggest a positive and statistically significant relationship between both outcomes that is consistent with the hypothesis that the prevalence of novelty-seeking traits in society facilitates scientific knowledge creation through beneficial human behaviors related to risk-taking and explorative behavior. The empirical findings remain qualitatively unaffected when controlling for additional historical, biogeographical, and socioeconomic factors that appear as additional important determinants in the creation of scientific knowledge in society.

We investigate the presence of nonlinear effects of government spending shocks during good and bad times in a panel of 17 emerging markets through the lens of a Bayesian panel threshold VAR model. We find that the responses of gross domestic product, consumption, investment, trade balance, real exchange rate, and real interest rates vary depending on the state of the economy. Particularly, in slump periods, both consumption and investment may respond negatively to a government purchase stimulus, unlike in normal times. Our estimated government spending multipliers are less than one in the two regimes and can be zero in bad times.

In the discrete-time new-Keynesian model with public debt, Ramsey optimal policy eliminates the indeterminacy of simple-rules multiple equilibria between the fiscal theory of the price level versus new-Keynesian versus an unpleasant equilibrium. If public debt volatility is taken into account into the loss function, the interest rate responds to public debt besides inflation and output gap. Else, the Taylor rule is identical to Ramsey optimal policy when there is zero public debt. The optimal fiscal-rule parameter implies the local stability of public-debt dynamics (“passive” fiscal policy).

For a developing economy transitioning into knowledge-intensive sectors, the lack of capacity for advanced education poses a natural challenge. Many successfully industrialized countries used high-skilled foreign teachers to overcome this challenge. I present a stylized quantitative model of trade in high-skilled human capital, in which colleges in a developing country can hire high quality teachers from a developed country. In the model, the use of foreign teachers is proposed as a possible mechanism to build domestic capacity for advanced education. Quantitative calibrations of the model show two main results. First, there are significant frictions in human capital trade, as measured by the wedge between the level of human capital observed in the data versus the level simulated under the assumption of no frictions. Removal of the wedge can narrow the average income gap between the USA and other countries by about 14–24%. Second, relative to countries with the lowest and highest incomes, middle-income countries appear to gain the most from removing the wedge.

One of the most important advantages of an inflation target is that it helps to reduce uncertainty about future inflation. However, this confidence may be undermined if actual inflation continuously deviates from the target level. We examine how inflation uncertainty relates to the presence of an inflation target and deviations of inflation from the targeted level. Inflation uncertainty is quantified by means of an unobserved components stochastic volatility model that allows to distinguish between permanent and transitory inflation uncertainty. While long-term inflation appears largely stable in most economies, the short-term inflation uncertainty is found to be time-varying. Most notably, short-term inflation uncertainty is high if inflation rates are below the target level. This is particularly relevant for economies which are currently confronted with the presence of persistently low-inflation rates. Our findings suggest that announcing higher inflation targets as it is currently discussed may be costly in terms of provoking higher inflation uncertainty.

The global financial crisis was characterized by heightened financial risk in the USA, which spread to the rest of the world, including emerging economies. This paper constructs a core–periphery model with a global banking network and financial frictions. Due to a common-lender effect, when global banks lend to an emerging economy, heightened financial risk in the center depresses cross-border lending to the emerging economy, reducing real activities, and exacerbating monetary policy trade-offs. As financial markets become more integrated, exchange rate flexibility becomes less welfare enhancing and active capital account policy becomes more welfare enhancing.

It has been shown that progressive income taxation may stabilize an otherwise standard representative-agent real business cycle model with an indeterminate steady state against aggregate fluctuations caused by agents’ animal spirits. By contrast, within an identical model that allows for sustained economic growth, progressive taxation could lead to equilibrium indeterminacy and sunspot-driven fluctuations. In the context of household heterogeneity that gives rise to income and asset inequality, the fiscal authority has (at least) two options of setting the baseline level of taxable income: (i) the economy-wide average level of income and (ii) the economy’s steady-state level of per capita income. I show that the adoption of a fiscal rule (i) invalidates the effects that a progressive tax can exert on the model’s local stability properties. Progressive income taxation thus no longer operates as an automatic stabilizer that mitigates belief-driven cyclical fluctuations in a no-growth economy, nor as an automatic destabilizer that leads to local indeterminacy in a sustained-growth economy. If a tax policy rule (ii) is instead adopted, then the existing literature’s findings of the (de)stabilizing roles of progressive taxation are robust to the inclusion of household heterogeneity.

This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet. We construct a general equilibrium model where agents have rational expectations, and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet affects equilibrium asset prices and economic activity. We prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is self-financing and leads to a Pareto efficient outcome.

Imperfections in the credit market can hamper the flow of factors from less productive to more productive firms and result in a lower aggregate total factor productivity (TFP). Depth of such misallocation will depend on per capita income, the level of imperfections in the credit market, and the distribution of entrepreneurial productivity. Under some parameter configurations, we find that per capita income and TFP may affect each other so that an economic boom may cause higher resource misallocation, lower TFP, and economic recession. At the same time, an economic recession may have a “cleansing effect” on TFP leading to a lower resource misallocation, higher TFP, and economic boom. In other words, economic success may breed the failure and the failure can become a precondition for success so that the boom-bust cycles in resource misallocation, TFP, and per capita income may become endogenous.

We use nonparametric and parametric demand analysis to empirically estimate a credit card-augmented monetary asset demand system, based on the Minflex Laurent flexible functional form, and a sample period that includes the 2007–2009 global financial crisis and the COVID-19 pandemic. We also use multivariate copulae in an attempt to capture various patterns of dependence structures. In doing so, we relax the joint normality assumption of the errors of the demand system and estimate the model without having to delete one equation as is usually the practice. We show that the Minflex Laurent copula-based demand system produces a higher income elasticity for credit card transaction services and higher Morishima elasticities between credit card transaction services and monetary assets compared to the traditional estimation of the Minflex Laurent demand system. We also show that credit cards are substitutes for monetary assets and that there is lower tail dependence between the demand for credit card transaction services and transaction balances.

Based on a behavioral stock-flow housing market model in which the expectation formation behavior of boundedly rational and heterogeneous investors may generate endogenous boom-bust cycles, we explore whether central banks can stabilize housing markets via the interest rate. Using a mix of analytical and numerical tools, we find that the ability of central banks to tame housing markets by increasing the base (target) interest rate, thereby softening the demand pressure on house prices, is rather limited. However, central banks can greatly improve the stability of housing markets by dynamically adjusting the interest rate with respect to mispricing in the housing market.

The aim of this paper is to study the role of the distribution of income by age group on the existence of speculative bubbles. A crucial question is whether this distribution may promote a bubble associated to a larger level of capital, that is a productive bubble. We address these issues in an overlapping generations model where agents live three periods and productive investment done in the first period of life is an illiquid investment whose return occurs in the following two periods. A bubble is a liquid speculative investment that facilitates intertemporal consumption smoothing. We show that the distribution of income by age group determines both the existence and the effect of bubbles on aggregate production. We also show that fiscal policy, by changing the distribution of income, may facilitate or prevent the existence of bubbles and may also modify the effect that bubbles have on aggregate production.

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.

Does wage setting exhibit strategic complementarity and produce multiple equilibria? This study constructs a discrete-time New Keynesian model in which households choose the timing of their wage adjustments endogenously subject to fixed wage-setting costs. I explore steady-state equilibrium of the state-dependent wage-setting model both analytically and numerically. For reasonable parameter values, complementarity in wage setting is weak and the steady-state equilibrium is unique.

This study empirically examines whether shock size matters for the US monetary policy effects. Using a nonlinear local projection method, I find that large monetary policy shocks are less powerful than smaller monetary policy shocks, with the information effect being the potential source of the observed asymmetry in monetary policy efficacy.

This paper investigates how a combination of monetary and macroprudential policies might affect the dynamics of a small open economy (SOE) with financial frictions under alternative discretionary shocks. Discretionary shocks in productivity and domestic and foreign monetary policies identify the roles of alternative interest rate and reserve requirement rules to stabilize the economy. The model is calibrated for the Brazilian economy. The exchange rate channel of transmission is relevant for foreign but not for domestic shocks. The interest rate rule should target domestic inflation and should not react to the exchange rate. The countercyclical reserve requirements rule, in its turn, should aggressively react to the credit-gap and not include a fixed component. Under both domestic and foreign shocks, the countercyclical effectiveness of the macroprudential policy improves when the degree of openness increases. There is a complementarity between monetary and macroprudential policy rules to stabilize the SOE.

Traditionally identified monetary shocks in a structural vector autoregression (SVAR) model typically result in long-lasting effects on output and total factor productivity (TFP). In this paper, I argue that the typical monetary shock has been confounded with the news shock about future technology. I propose and implement a novel SVAR approach that effectively “cleans” the technology component from the traditional Cholesky monetary shock. With the new identification, I find that a monetary shock exerts smaller and less persistent effects on output and the level of measured TFP than a traditionally identified monetary shock. Finally, I show that the SVAR impulse responses can be replicated by augmenting the standard New Keynesian model with a time-varying inflation target and a non-Ricardian fiscal policy regime.