We develop an extended real business cycle model with financially constrained firms and non-pledgeable intangible capital. Based on a model-consistent series for firms’ borrowing conditions, we find, within a structural vector autoregression framework, that, in response to an adverse financial shock, tangible investment falls more than intangible investment. This positive co-movement between tangible and intangible investment as well as the relative resilience of intangible investment pose a challenge for the theoretical model. We show that investment-specific adjustment costs help in reconciling the model with the observed empirical evidence. The estimation of the theoretical model using a Bayesian limited information approach yields support for the presence of much larger adjustment costs for intangible investment than for tangible investment.

We employ a novel approach for analyzing the effects of relative consumption and relative wealth preferences on economic growth. In the pertinent literature, these effects are usually assessed by examining the dependence of the growth rate on the two parameters of the utility function that seem to measure the strength of the relative consumption and the relative wealth motives. Applying our fundamental factor approach, we identify specifications in which the traditional approach yields incorrect qualitative conclusions. The problematic specifications have the common unpleasant property that the parameter that seems to determine the strength of the relative consumption motive actually also affects the elasticity of intertemporal substitution of absolute consumption (and the strength of the relative wealth motive). Since the standard approach is unaware of the additional effect(s), it attributes the total change in the growth rate incorrectly to the change in the strength of the relative consumption motive.

This paper derives a new set of results that provide corrective measures of overall technical inefficiency that either have been ignored or wrongly assumed in the literature. Using directional distance functions, we argue that overall technical inefficiency is not only a function of input and output technical inefficiencies as previous studies claim but also of the interaction between them. The derivation of the interactive effects between input and output technical inefficiencies (IEIOs) solves the arbitrary decomposition of overall technical inefficiency into input and output components. We also show that the IEIO depends on the choice of the directional vector and whether quantities and prices are taken into consideration. Using exogenous and endogenous directional vectors, we prove these results theoretically and empirically using the US commercial banking data set. Using Bayesian estimation with the monotonicity conditions imposed at each observation, we estimate input and output technical inefficiencies separately using directional input and output distance functions with the three commonly used directional vectors; the unit value, the observed input−output, and the optimal directional vectors. The overall technical inefficiency is estimated using systems of equations to incorporate the interactive effect equation and to address the endogeneity of inputs and outputs. Consistent with the theoretical results, we find significant evidence of the IEIO which has a negative effect on the overall technical inefficiency. This result is robust to alternative directional vectors and model specifications, suggesting that the adjustability of both inputs and outputs is required for the improvement of the efficiency of the US commercial banks.

This paper examines the effectiveness of forward guidance shocks in the US. We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimated credibility of the Fed’s forward guidance announcements is relatively high, but anticipation effects are attenuated. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. (2) The so-called “forward guidance puzzle” arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance.

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.

Introducing susceptible-infected-recovered epidemiology dynamics with vaccines into an endogenous growth model, we investigate the impact of government infectious disease policy on macroeconomic performance. We find that any expenditure that improves health, whether to reduce the contact rate or increase the recovery rate or the vaccination rate, and regardless of whether it comes directly from the households or the government, has a positive impact on economic growth, but does not necessarily improve the welfare. The reason people’s health has improved but their welfare has fallen is because government expenditures must be covered by taxes, which will reduce their disposable income and consumption.

This paper revisits the canonical assumption of nonconvex capital adjustment costs in lumpy investment models as in Khan and Thomas [(2008) Econometrica 76(2), 395–436], which are assumed to follow a uniform distribution from zero to an upper bound, without distinguishing between the mean and the variance of the distribution. Unlike the usual claim that the upper bound stands for the size (represented by the mean) of a nonconvex cost, I show that in order to generate an empirically consistent interest elasticity of aggregate investment, both a sizable mean and a sizable variance are necessary. The mean governs the importance of the extensive margin in aggregate investment dynamics, while the variance governs how sensitive the extensive margin is to changes in the real interest rate. As a result, both the mean and the variance are quantitatively important for aggregate investment dynamics.