This paper examines how wealth and income inequality dynamics are related to fluctuations in the functional income distribution over the business cycle. In a panel estimation for OECD countries between 1970 and 2016, although inequality is, on average countercyclical and significantly associated with the capital share, one-third of the countries display a pro- or noncyclical relationship. To analyze the observed pattern, we incorporate distributive shocks into an RBC model, where agents are ex ante heterogeneous with respect to wealth and ability. We find that whether wealth and income inequality behave countercyclically or not depends on the elasticity of intertemporal substitution and the persistence of shocks. We match the model to quarterly US data using Bayesian techniques. The parameter estimates point toward a non-monotonic relationship between productivity and inequality fluctuations. On impact, inequality increases in response to TFP shocks but subsequently declines. Furthermore, TFP shocks explain 17% of inequality fluctuations.

The deleterious effect of debt restructuring on banks’ balance sheets and, consequently, on the economy as a whole has been a key policy issue. This paper studies how post-default fiscal policy interacts with this sovereign-bank loop and shape the response of a model economy. Calibration of the model matches characteristics of the Greek economy at the time of the bond exchange. Debt restructuring in place of higher lump-sum taxation or lower nonproductive government spending harms the economy even if no other cost of default is considered. However, the sovereign-debt loop is less costly to the economy than increases in labor or capital taxes to service debt. Even so, if fiscal policy is too responsive, a crowding-out effect inhibits the recovery of capital markets, hence a more conservative fiscal stance is desirable. Thus, how diabolic the post-default sovereign-bank loop is depends to a large extent on the way fiscal policy responds.

This paper investigates optimal capital taxation in an innovation-driven growth model. We examine how the optimal capital tax rate varies with externalities associated with R&D and innovation. Our results show that the optimal capital tax rate is higher when (i) the “stepping on toes effect” is smaller, (ii) the “standing on shoulders effect” is stronger, or (iii) the extent of creative destruction is smaller. The optimal capital tax rate is more likely to be positive when there is underinvestment in R&D. Moreover, the optimal capital tax rate and the monopolistic markup exhibit an inverted-U relationship. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 6.6%. Finally, we consider a number of extensions and find that the result of a positive optimal capital tax is robust.

Income drops permanently after an involuntary job displacement, but it has never been clear what happens to long run wealth in the USA. Upon displacement, wealth falls 14% relative to workers of the same age and similar education from the Panel Study of Income Dynamics (PSID). Their wealth is still 18% lower 12 years after the event. A standard life cycle model calibrated to US data with permanent decreases in income after displacement behaves differently than these findings. The agents in the model also experience a large drop in wealth but they recover. The biggest culprit for these differences is small and statistically insignificant changes to consumption in the PSID whereas agents in the model decrease their consumption considerably. Extending the model to include habit formation reconciles some of these differences by generating similar long run effects on wealth. This allows for the examination of wealth at death through the lens of the model.

This article examines if professional forecasters form their expectations regarding the policy rate of the European Central Bank (ECB) consistent with the Taylor rule. In doing so, we assess micro-level data including individual forecasts for the ECB main refinancing operations rate as well as inflation and gross domestic product (GDP) growth for the Euro Area. Our results indicate that professionals indeed form their expectations in line with the Taylor rule. However, this connection has diminished over time, especially after the policy rate hit the zero lower bound. In addition, we also find a relationship between forecasters’ disagreement regarding the policy rate of the ECB and disagreement on future GDP growth, which disappears when controlling for monetary policy shocks proxied by changes in the policy rate in the quarter the forecasts are made.

Since at least the mid-2000s, many advanced economies have experienced low productivity growth. This development is often related to declining productivity gains at the technology frontier, which is largely determined by the US. We challenge this explanation by studying the effects of US technology shocks on productivity levels in advanced economies. We find positive but small spillovers of US technology shocks. For many countries, the elasticity of their productivity with respect to a 1% increase in the US technology level is significantly lower than 1. Thus, the recent US productivity slowdown must have had a limited effect on productivity developments in advanced economies. Nevertheless, after 5 years, the degree of productivity spillovers varies across countries. Therefore, we analyze the role of institutions in shaping these results. Our findings suggest that isolated institutional characteristics are not able to explain the observed various spillover degrees.

We explore how tax evasion by firms affects the growth- and welfare-maximizing rates of corporate income tax (CIT) in an endogenous growth model with productive public service. We show that the negative effect of CIT on growth is mitigated in the presence of tax evasion. This increases the benefit of raising the CIT rate for public service provision. Thus, in contrast to Barro [(1990) Journal of Political Economy 98, 103–125], the optimal tax rate is higher than the output elasticity of public service. Through numerical exercises, we demonstrate that the role of tax evasion by firms is quantitatively significant.

This study investigates the time-varying effects of international uncertainty shocks. I use a global vector autoregressive model with drifting coefficients and factor stochastic volatility in the errors to model the G7 economies jointly. The measure of uncertainty is constructed by estimating a time-varying scalar driving the innovation variances of the latent factors, which is also included in the conditional mean of the process. To achieve regularization, I use Bayesian techniques for estimation, and rely on hierarchical global–local priors to shrink the high-dimensional multivariate system towards sparsity. I compare the obtained econometric measure of uncertainty to alternative indices and discuss commonalities and differences. Moreover, I find that international uncertainty may differ substantially compared to identically constructed domestic measures. Structural inference points towards pronounced real and financial effects of uncertainty shocks in all considered economies. These effects are subject to heterogeneities over time and the cross-section, providing empirical evidence in favor of using the flexible econometric framework introduced in this study.

This study examines the driving forces behind the strong decline in German unemployment from 2005 onwards and the exceptionally small increase during the Great Recession. Structural vector autoregressions (VARs) with sign restrictions show that wage moderation in the aftermath of labor market reforms was the dominant factor of the unemployment decline, and that improved matching and shrinking labor supply also contributed to it. The adjustment to business cycle shocks (Great Recession), on the other hand, is to a large extent borne by the intensive margin, which can be explained by institutional aspects of the German labor market.

Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage private-sector expectations by means of publishing one-period ahead inflation projections in a New Keynesian learning-to-forecast experiment. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage private-sector expectations and that this management strongly supports monetary policy in stabilizing the economy. Moreover, published central bank inflation projections drastically reduce the probability of a deflationary spiral after strong negative shocks to the economy.

We introduce contraceptives and social norms in an overlapping generations growth model of fertility and human capital. Parents can use costly modern contraceptives to control their family size, and each household’s fertility decision is influenced by the decisions made by others. Given the number of children born, parents decide how much education to provide and how much to save out of their income. We characterize the local dynamics of a stable steady-state equilibrium. Around this steady state, family planning interventions, which reduce the price of modern contraceptives, decrease fertility and increase human and physical capital. The effects of family planning interventions are larger when reproductive externalities are stronger.