This paper builds a macroeconomic model of equilibrium unemployment in which firms persistently face difficulties in selling their production, and this affects their decisions to create jobs. We show that the competitive search equilibrium is not efficient and that inflation is detrimental to unemployment.

In this paper we assess the effects of increasing competition in the service sector in one country of the euro area. We focus on Italy, which, based on cross-country comparisons, stands out as the country with the highest markups in nonmanufacturing industries among the OECD countries. We propose a two-region (Italy and the rest of the euro area) dynamic stochastic general equilibrium model where we introduce nontradable goods as a proxy for services and we allow for monopolistic competition in labor, manufacturing, and services markets. We then use the model to simulate the macroeconomic and spillover effects of increasing the degree of competition in the Italian services sector. According to the results, reducing the markups in services to the levels prevailing in the rest of the euro area induces in the long run an increase in Italian GDP equal to 11% and an increase in welfare (measured in terms of steady state consumption equivalents) of about 3.5%. Half of the GDP increase would be realized in the first three years. The spillover effects to the rest of the euro area are limited: consumption, investment, and GDP increases are relatively small.

This paper presents an equilibrium explanation of the inter- and intrasectoral mobility of workers. Analyses of our samples from the Panel Study of Income Dynamics and the National Longitudinal Survey of Youth show that, other things being equal, the initial wage decline is greater for intersectoral movers than for intrasectoral movers. Intersectoral movers, however, enjoy higher wage growth in subsequent years on postunemployment jobs than intrasectoral movers do, and hence are compensated for their initial wage decline. Our estimates suggest that, other things being constant, the additional short-term wage loss associated with sector shifts is overturned in no more than four years by the greater wage growth of intersectoral movers in subsequent years. The findings in the current study clearly show that the true economic costs of intersector mobility tend to be overstated in existing studies and are significantly lowered in the long-term perspective. Calibration of a simple lifetime utility model demonstrates that inter- and intrasectoral movements of workers are quantitatively consistent with an equilibrium framework, at least for a major group of workers who move with longer term perspectives. Evidence also shows that job seekers consider not only the initial wage rate but also the subsequent wages received from the postunemployment job when deciding whether to recommence employment or switch sectors.

Structural breaks and switching processes are known to induce apparent long memory in a time series. Here we show that any significant time variation in the mean renders the sample correlogram (and related spectral estimates) inconsistent. In particular, smooth time variation in the mean—i.e., even a weak trend, either stochastic or deterministic—induces apparent long memory. This apparent long memory can be eliminated by either high-pass filtering or by detrending. Here we demonstrate the effectiveness in this regard of nonlinear detrending via penalized-spline nonparametric regression. A time-varying mean can be of economic interest in its own right. This suggests that isolating out and separately examining both a local mean (i.e., a nonlinear trend or the realization of a stochastic trend) and deviations from it is preferable as a modeling strategy to simply estimating a fractionally integrated model. We illustrate the superiority of this strategy using stock return volatility data.

The effects of inflation are studied for a small open economy with a cash-in-advance constraint on consumption in which the representative agent has preferences with habit persistence. An increase in the inflation rate requires a fall in the steady state living standards. On impact, to maintain living standards, the representative agent reduces his savings and labor supply. Investment falls and the current account turns into a deficit. In support of this model, we provide evidence from eight high-inflation countries suggesting that after an increase in the inflation rate, output and investment fall, and the net foreign asset position deteriorates over time.

This paper investigates the intergenerational sharing of shocks on the permanent income of new entry cohorts when prior-to-entry markets are missing. When Lucas trees are traded among generations, procyclical cohort-specific shocks are shared partially via the movement of asset prices; cohorts with lower endowments may benefit more from asset pricing dynamics than cohorts with higher endowments. Given a reasonable set of parameters concerning the Japanese labor market, the evaluated welfare loss ranges from 1% to 3% in terms of the certainty equivalence consumption level. The first-best outcome may be achieved by either a combination of subsidies and taxes or the introduction of prior-to-entry markets.

This paper analyzes the aggregate growth and distributional effects of tax policy using an endogenous growth model with heterogeneous agents having “catching up with the Joneses” (CUJ) types of preferences. We characterize the aggregate equilibrium of this economy, as well as its distributional properties, and show that the consumption externality present with CUJ preferences produces greater income inequality than is obtained with conventional time-separable preferences. The consumption externality substantially alters the effects of tax policy, mostly quantitatively, but in some cases qualitatively as well. Extensive numerical simulations are conducted and used to compare the consequences of different modes of taxation, highlighting the tradeoffs involved.

The aim of this paper is to examine whether the development of waste recycling activities can be a source of economic fluctuations. We assume that the recycling sector has four fundamental characteristics. (i) The production factors are restricted by the production of the last period. (ii) These production factors are waste for which the price determination is noncompetitive. (iii) The sector produces a recycled good, which is a perfect substitute for the primary good. (iv) It reduces the waste stream. We consider the simplest economy, with an infinitely lived agent and a life-cycle hypothesis for the goods. We show that the equilibrium is unique and is always determinate. In spite of the lack of indeterminacy, however, our economy can display cyclical behavior, depending on some usual conditions on parameters. Namely, the steady state may undergo a flip bifurcation or a Hopf bifurcation.

In this paper we investigate the growth implications of relative wealth preferences in a small open economy model. Domestic capital accumulation, subject to installation costs, is the engine of economic growth in this framework. Crucial in deriving the balanced growth rate is the effective rate of return that arises from agents' status preferences. This results not only in a common balanced growth rate for consumption, the domestic capital stock, and net international financial assets, but also saddle-path dynamics in response to structural shifts. We investigate the short- and long-run dynamics of the model by considering the following standard fiscal shocks: (i) government expenditure, (ii) capital tax, (iii) tax on international financial assets, (iv) consumption tax. Among our results, we find that a permanent fiscal expansion leads to a temporary increase in growth and that a rise in the consumption tax results in a temporary decrease in growth.

A monetary cash-in-advance model is known to be prone to real indeterminacy if the intertemporal elasticity of substitution in consumption is sufficiently low. Moreover, if the model features habit formation in consumption, the scope of indeterminacy increases substantially. This paper shows that many of the nominal frictions and real rigidities commonly used in the New Keynesian paradigm act to decrease the scope of this indeterminacy. These frictions include stickiness in prices and wages, adjustment costs in investment, and variable capacity utilization. When they are all used together in the model, the problem of indeterminacy nearly vanishes, even when habit formation in consumption is allowed.

Roger Guesnerie is a prominent economic theorist. Among his many honors and distinctions, he is a Foreign Member of the American Academy of Arts and Science and an Honorary Foreign Member of the American Economic Association; he has been a President of the European Economic Association and of the Econometric Society. Currently a Professor at the College de France, he has made fundamental contributions to second-best theory and public economics, information economics, and rational expectation theory.

Guesnerie was one of the founding fathers of second-best theory. His contributions to public economics, addressing issues such as nonconvex economies and especially taxation in a second-best context, remain absolute references on these topics; more recently, he has provided an in-depth analysis of issues related to climate change and global warming from a public economics perspective. Regarding contract theory, his work with Jean Jacques Laffont has considerably extended our understanding of the properties of the basic models, as well as the set of tools that economists can use to address these problems. Finally, Guesnerie's work has been influential in the critical reassessment of rational expectation theory that took place over the last decades. On one hand, he has been a prominent figure in the development of so-called “sunspot” models, which reconcile the Keynesian notion of “animal spirits” with the formal requirements of rational expectations. On the other hand, he has provided path-breaking discussions of the theoretical relevance of rational expectation theory, based on a detailed assessment of the coordination between individual expectations that is implicit in the concept. In some classes of models, Guesnerie argues, rational expectation equilibria constitute a natural outcome, because coordination can be achieved either through “eductive” reasoning (for which common knowledge of individual rationality is sufficient) or as the product of simple evolutionary or learning dynamics (and in general in both ways). In other cases, however, such arguments do not appear to support the rational expectations solution, and its relevance is therefore much less obvious. On a more institutional side, Guesnerie has created the doctoral program “Analyse et Politique Economique” at the Ecole des Hautes Etudes en Sciences Sociales; besides this program, in 1989, several related research centers in Paris merged into Delta, which Guesnerie chaired between 1992 and 2000, and then into the Paris School of Economics (PSE), at which Guesnerie is Chairman of the Board.

This interview with Roger Guesnerie gives an opportunity to discuss further the current situation of economic theory and economics in general, as well as to compare the European and American traditions in economics.

We examine the nexus between land transfers and human capital formation. A sequence of land redistributions enables the beneficiaries to educate their children and thus to escape from poverty. A successful land reform allows the transition of a society from an agriculture-based state of poverty to a human capital–based developed economy. We find that a temporary state of inequality among the poor is unavoidable. Finally, we discuss the political economy of land reform, whether access to land markets should be allowed for beneficiaries of land reforms, and property rights issues.

Since 1900, annual working hours per worker have been generally declining in the United States and in the main European economies. During this simultaneous decline the Europeans initially worked fewer hours than their American counterparts, worked more than the Americans starting in the early 1930s, and once again worked less than the American from the early 1970s on. Using a two-country model, this article argues that this dynamic pattern can be brought about by differences in the valuation of leisure by individuals in the compared economies.

In this article, we show how tests of nonlinear serial dependence can be applied to high-frequency time series data that exhibit high volatility, strong mean reversion, and leptokurtotis. Portmanteau correlation, bicorrelation, and tricorrelation tests are used to detect nonlinear serial dependence in the data. Trimming is used to control for the presence of outliers in the data. The data that are employed are 161,786 half-hourly spot electricity price observations recorded over nearly a decade in the wholesale electricity market in New South Wales, Australia. Strong evidence of nonlinear serial dependence is found and its implications for time series modeling are discussed.

During the typical recovery from U.S. postwar period economic downturns, employment recovers to its prerecession level within months of the output trough. However, during the past two recoveries, employment has taken up to three years to achieve its prerecession benchmark. We propose a formal empirical model of business cycles with recovery periods to demonstrate that the past two recoveries have been statistically different from previous experiences. We find that this difference can be attributed to a shift in the speed of transition between business cycle regimes. Moreover, we find this shift results from both durable and nondurable manufacturing sectors losing their cyclical characteristics. We argue that this finding of acyclicality in post-1980 manufacturing sectors is consistent with previous hypotheses (e.g., improved inventory management) regarding the reduction in macroeconomic volatility over the same period. These results suggest a link between the two phenomena, which have heretofore been studied separately.

Evidence suggests that durable goods and residential housing are more flexibly priced than nondurables and services. Using a standard sticky price general equilibrium model, Barsky, House, and Kimball [American Economic Review 97(3) (2007), 984–998] demonstrate that if durable goods are flexibly priced and nondurables are sticky, then a monetary contraction leads to an expansion in production in the durable sector. This is wildly at odds with the empirical evidence. This paper demonstrates that if three features are added to the model (sticky nominal wages, housing construction adjustment costs, and habit persistence in consumption), it delivers sectoral implications that are broadly consistent with the data.

This paper investigates the possible formation of informational cascades by traders in a random sample of 8,000 NYSE stock-days experiencing extreme price changes during 1998–2001. Our cascade measure is designed to detect informational cascades in high-frequency stock market prices. First, we find evidence of cascades on approximately 12% of the days when the NYSE experiences, on average, large price increases. This percentage increases to about 20% on days experiencing large price decreases, on average. Second, we find evidence that the interarrival times of trades in those stocks exhibiting significant informational cascades are generated by a nonlinear stochastic process. Third, the evidence supporting cascades is largely confined to smaller stocks and to stocks followed by fewer security analysts. Last, the occurrence of cascades appears to correlate with the incorporation of fundamental information into security prices.

Recently, several researchers have succeeded in producing expectation–driven cycles by balancing the tension between the wealth effect and the substitution effect stemming from the higher expected future productivity. Especially, seminal research by Christiano et al. (“Monetary Policy and Stock Market Boom–Bust Cycles,” mimeo, Northwestern University, 2007), explains “stock market boom–bust cycles,” characterized by increases in consumption, labor inputs, investment, and stock prices relating to high expected future technology levels. We, however, show that such expectation–driven cycles are difficult to generate based on “growth expectation,” which reflects expectations of higher productivity growth rates.

This paper modifies a Townsend turnpike model by letting agents stay at a location long enough to trade some consumption loans, but not long enough to support a Pareto-optimal allocation. Monetary equilibria exist that are nonoptimal in the absence of a scheme to pay interest on currency at a particular rate. Paying interest on currency at the optimal rate delivers a Pareto-optimal allocation, but a different one than the allocation for an associated nonmonetary centralized economy. The price level remains determinate under an optimal policy. We study the response of the model to “helicopter drops” of currency, steady increases in the money supply, and restrictions on private intermediation.

This paper develops a dynamic stochastic general equilibrium (DSGE) model with sticky prices and sticky wages, in which agents have imperfect information on the stance and direction of monetary policy. Agents respond by using Kalman filtering to unravel persistent and temporary monetary policy changes in order to form optimal forecasts of future policy actions. Our results show that a New Keynesian model with imperfect information and real rigidities can account for several key effects of an expansionary monetary policy shock: the hump-shaped increase in output, the delayed and gradual rise in inflation, and the fall in the nominal interest rate.