In a life-cycle model with dynastic households, parents value the transfer of tangible assets to their offspring in the event of premature death. This raises the subjective reward from investing in them relative to intangible human capital and tilts investment choice away from the latter. These effects of mortality on human capital risk and relative investment can translate into divergent growth paths, delayed transition from physical to human capital accumulation, and a dampened response to mortality shock in developing countries.

Recurring financial instabilities have led policymakers to rely on early-warning models to signal financial vulnerabilities. These models rely on ex-post optimization of signaling thresholds on crisis probabilities accounting for preferences between forecast errors, but come with the crucial drawback of unstable thresholds in recursive estimations. We propose two alternatives for threshold setting with similar or better out-of-sample performance: (i) including preferences in the estimation itself and (ii) setting thresholds ex-ante according to preferences only. Given probabilistic model output, it is intuitive that a decision rule is independent of the data or model specification, as thresholds on probabilities represent a willingness to issue a false alarm vis-à-vis missing a crisis. We provide real-world and simulation evidence that this simplification results in stable thresholds, while keeping or improving on out-of-sample performance. Our solution is not restricted to binary-choice models, but directly transferable to the signaling approach and all probabilistic early-warning models.

The purpose of this paper is to focus directly on the phase shift. For one thing, we ask whether a New Keynesian sticky-price model economy can account for both countercyclical prices and procyclical inflation. We present findings in which the price level is countercyclical and the inflation rate is procyclical. We proceed to use the model economy as an identification mechanism. What set of individual shocks are necessary to account for the phase shift? That set contains the price markup shock. Next, we ask what set of shocks are sufficient to account for the phase shift. This set contains three elements: the price markup and wage markup shocks along with the government spending shock. The results are important as a building block. We infer that price stickiness is an important model feature; without price stickiness, we are in the real business cycle economies that Cooley and Hansen studied. But, it raises further questions. For instance, is price stickiness of the Calvo form—the one used here—necessary to explain the phase shift?

Growth in total factor productivity (TFP) in the USA has slowed down significantly since the mid-2000s, reminiscent of the productivity slowdown of the 1970s. This paper investigates the implications of a productivity slowdown on macroeconomic variables using a standard real business cycle (RBC) model, extended with regime-switching in trend productivity growth and Bayesian learning regarding the growth regime. I estimate the Markov-switching parameters using US data and maximum-likelihood methods, and compute the model solution using global projection methods. Simulations reveal that, while adding a regime-switching component to the standard RBC setup increases the volatility in the system, further incorporating incomplete information and learning significantly dampens this effect. The dampening is mainly due to the responses of investment and labor in response to a switch in the trend component of TFP growth, which are weaker in the incomplete information case as agents mistakenly place some probability that the observed decline in TFP growth is due to the transient component and not due to a regime switch. The model offers an objective way to infer slowdowns in trend productivity, and suggests that macroeconomic aggregates in the USA are currently close to their potential levels given observed productivity, while counterfactual simulations indicate that the cost of the productivity slowdown to US welfare has been significant.

This paper shows that global indeterminacy may characterize the three-dimensional vector field implied by the Lucas [(1988) Journal of Monetary Economics 22, 3–42] endogenous growth model. To achieve this result, we demonstrate the emergence of a family of homoclinic orbits connecting the steady state to itself in backward and forward time, when the stable and unstable manifolds are locally governed by real eigenvalues. In this situation, we prove that if the saddle quantity is negative, and other genericity conditions are fulfilled, a stable limit cycle bifurcates from the homoclinic orbit. Orbits originating in a tubular neighborhood of the homoclinic orbit are then bound to converge to this limit cycle, creating the conditions for the onset of global indeterminacy. Some economic intuitions related to this phenomenon are finally explored.

This paper studies the macroeconomic effects of shocks to idiosyncratic business risk in an economy with endogenously incomplete markets. I develop a model in which firms face idiosyncratic risk and obtain insurance from intermediaries through contracts akin to credit lines. Insurance is imperfect due to limited commitment in financial contracts. Although steady-state capital is higher than if firms were constrained to issue only standard equity, a rise in uncertainty about idiosyncratic business outcomes leads to an endogenous reduction in risk sharing. This deterioration in risk sharing results from a general-equilibrium shortage of pledgeable assets and implies that the economy’s response to an increase in idiosyncratic business risk can be amplified by financial contracting rather than dampened. In a parametrized version of the model, a rise in idiosyncratic business risk generates a large increase in uncertainty about aggregate investment.

This paper develops an endogenous growth model with doubly differentiated R&D being the growth engine. The model incorporates dynamic structural change and heterogeneous knowledge spillovers. As a result, decentralized economy may exhibit non-monotonic growth paths and declining R&D productivity. Conditions on the knowledge spillover operator granting the existence of balanced growth for first-best and market economies are obtained. Different regulation tools helpful in achieving the sustainable path and their limits are studied.

Arbitrage between consumption and saving occurs in a context of an aging society where family solidarity is deteriorating. Maximizing inter-temporal utility makes it possible to calculate the preference for saving. The arbitrage involves subjective satisfaction with the quality of life, anticipated survival, and consumption profiles. Simultaneous equations based on the Korean Longitudinal Study on Aging, 2006–2014 (10,205 adults aged 45 and over) show that the preference for saving is determined only by and through these endogenous variables, with no other direct socioeconomic effects. People spending more money in education are those with the highest preference for saving. Socioeconomic variables influence the preference for saving in agreement to the economic theory of the life cycle, but through the structured filter of endogenous subjective variables and consumption profiles.

This paper estimates an enriched version of the mainstream medium-scale dynamic stochastic general equilibrium model, which features nonseparability between consumption and real money balances in utility and a systematic response of the policy rate to money growth. Estimation results show that money is a significant factor in the monetary policy rule. As a consequence, econometric analysis that omits money from Taylor rules may lead to biased estimates of the model parameters. In contrast to earlier studies that rely on small-scale models, the paper stresses the merits of using a sufficiently rich model. First, it delivers different results, such as the role of nonseparability between consumption and money in utility. Second, the rich dynamics embedded in the model allow us to explore the responses of a larger set of macroeconomic variables, making the model more informative on the effects of shocks and more useful for understanding the sources of business cycles. Third and most importantly, it reveals the possible pitfalls of relying on small-scale models when studying money’s role in business cycles.

We reassess the evidence for (or against) a key implication of the basic real business cycle model: that aggregate hours worked increase in response to a positive technology shock. Two novel aspects are the scope (14 OECD countries) and the inclusion of data on both labor supply margins to analyze the key margin of adjustment in aggregate hours. The short-run response of aggregate hours to a positive technology shock is remarkably similar across countries, with an impact fall in 13 out of 14 countries. In contrast, its decomposition into intensive and extensive labor supply margins reveals substantial heterogeneity in labor market dynamics across OECD countries. For instance, movements in the intensive margin are the dominant channel of adjustment in aggregate hours in 6 out of 14 countries of our sample, including France and Japan.

We examine the effect of sovereign credit default swaps (CDS) trading initiation on the occurrence of sovereign debt crises (SDC). Estimations on a large sample of 141 countries for 1980–2013 reveal that, by affecting the fiscal stance, CDS initiation increases by around 1.5 percentage points on average the probability of SDC in countries with CDS compared to the other countries. This result holds for different robustness tests and is found to be stronger for developing countries, for countries with initial lower creditworthiness, and when the degrees of central bank independence and public sector transparency are low. Consequently, compared to existing work emphasizing favorable effects, CDS trading initiation is found to have adverse effects, by increasing the occurrence of SDC. These opposite effects should fuel the literature on measuring the consequences of CDS trading initiation, and its design and implementation from a policy perspective.

We study the implications of patents in an overlapping generations model with horizontal innovation of differentiated physical capital. We show that within this demographic structure of finitely lived agents, weakening patent protection generates two contradicting effects on innovation and growth. Weakening patent protection lowers the (average) price of patented machines, thereby increasing machine utilization, output, aggregate saving, and investment. However, a higher demand for machines shifts investment away from the R&D activity aimed at inventing new machine varieties toward the formation of physical capital. The growth-maximizing level of patent protection is incomplete. Shortening patent length is more effective than loosening patent breadth in spurring growth, due to an additional positive effect on growth, that is decreasing investment in old patents. Welfare can be improved by weakening patent protection beyond the growth-maximizing level.

We evaluate the global macroeconomic effects of cross-country-coordinated fiscal and monetary policies to counterbalance secular stagnation by simulating a five-region New Keynesian model of the world economy, calibrated to the United States (US), the euro area, Japan, China, and the rest of the world. The model includes investment in research and development (R&D) as a key factor affecting global growth. Our main findings are as follows. First, unfavorable technology developments may have played a nontrivial role in the global growth slowdown. Second, secular stagnation can be more effectively counterbalanced by coordinating global fiscal and monetary measures encouraging R&D accumulation. Third, these coordinated measures provide a larger welfare gain relative to a unilateral fiscal expansion.

In this paper, I investigate the conditional contributions of the ins and outs of unemployment from both empirical and theoretical perspectives. Based on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) theoretical framework, I estimate a sign restriction Vector Auto Regressive (VAR) model using French data. To identify the origins of unemployment dynamics in terms of worker transition rates, I simulate two shocks: one on the supply side (technology) and the other on the demand side (monetary). The VAR model reveals that the contributions of transition rates in explaining unemployment differ across shocks. After a technology shock, unemployment fluctuations are mainly explained by the job finding process, while the contributions of the two margins are more balanced for the monetary shock. The theoretical model is not able to reproduce the underlying mechanisms inducing unemployment. In particular, the conditional contributions of the job separation margin are overestimated each time. For instance, after a technology shock, 60% of unemployment changes are generated by this margin, while the data suggest a contribution of 28%. This paper strongly indicates that, in its standard formulation, a search and matching DSGE model featuring endogenous job separations is not able to replicate the dominating influence of the outflow process.

In this paper, the location patterns of Multinational Enterprises are modeled by an evolutionary two-country model in which producing in a developed economy offers strong cost-reducing externalities of within-country spillovers and opting for a developing economy entails cheap labor but also extra operational costs due to the undersupply of public goods. The offshoring process, that is, manufacturing activity outsourced in the developing economy, increases the bargaining power of its workers and, with it, its labor cost. The investigation underlines that an increasing labor-productivity remuneration in the developing economy may spark a reshoring process that depends on the agglomeration and endowment drivers characterizing an industry. The reshoring process can be narrowed by a flexible labor remuneration scheme, with wages indexed to the domestic concentration of manufacturing activity. The presence of sub-optimal location patterns points out the existence of a trade-off between stability and efficiency, which underlines that policy measures designed to make a country a more efficient location are neither sufficient nor necessary for preventing offshoring or ensuring reshoring.

We analyze the welfare effects of asset bubbles in a model with income inequality and financial friction. We show that a bubble that emerges in the value of housing, a durable asset that is fundamentally useful for everyone, has regressive welfare effects. By raising the housing price, the bubble benefits high-income savers but negatively affects low-income borrowers. The key intuition is that, by creating a bubble in the market price, savers’ demand for the housing asset for investment purposes imposes a negative externality on borrowers, who only demand the housing asset for utility purposes. The model also implies a feedback loop: high-income inequality depresses the interest rates, facilitating the existence of housing bubbles, which in turn has regressive welfare effects.

Recent work on optimal monetary and fiscal policy in New Keynesian models has tended to focus on policy set by an infinitely lived benevolent policy maker, often with access to a commitment technology. In this paper, we explore deviations from this ideal, by allowing (time-consistent) policy to be set by a process of bargaining between two political players with different weights on elements of the social welfare function. We characterize the (linear) Markov perfect equilibrium and, in a series of numerical examples, we explore the resultant policy response to shocks which cannot be perfectly offset with the available instruments due to their fiscal consequences. We find that, even although the players, on average, have the socially desirable objective function, the process of bargaining implies an outcome which deviates from the time-consistent policy chosen by the benevolent policy maker. Moreover, the range of instruments available mean that policy makers will bargain across the entire policy mix, sometimes implying outcomes which are quite different from those that would be chosen by a single policy maker. These policy outcomes depend crucially on the nature of the conflict and also the level of government debt.

Rapid growth in large emerging economies has been spread unequally across their regions leading to growing income disparities. This paper examines the distribution of regional output per capita and the evolution of its shape in Brazil, China, India, and Russia from the mid-1990s to the mid-2010s. A comparative analysis of convergence is conducted using a nonparametric methodology. The results reveal different distribution dynamics across the four economies. Chinese regions with below-median output per capita have the highest probability of transitioning toward higher-income levels, while their Brazilian counterparts are trapped at the bottom of the distribution. Although India has the lowest and Russia one of the highest regional income inequalities, they display similar divergence patterns exemplified by high persistence at both ends of the distribution. Our findings indicate that government spending and the rule of law are the major driving forces behind regional convergence, except in Russia where they have the opposite effect. Innovation and property rights also promote convergence in China, but cause regional divergence in India.

Many studies have stressed that human activities may cause the extinction of single species. Anthropogenic activities, however, may affect not only the number of individuals of single species, but also their behavior. To investigate this issue, we propose a growth model in which agents may care not only for the species’ survival but also for the typicality of their behavior. We assume that the environmental defensive expenditures can protect the species avoiding their extinction, but can induce the species to modify their behavior. Results emerging from the model suggest that if the social planner cares for typicality of species behavior, then an infinite growth process may no longer be optimal. Numerical simulations, moreover, show the possible existence of a trade-off between number and behavior of the species, leading the system to a high number of species’ members that behave in an atypical way or to few members behaving very typically.

In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely lived households, under the hypothesis of spirit of capitalism (SOC). I consider heterogeneous households in terms of preferences, endowments, and initial wealth, and capture the SOC through preferences for wealth. Preferences for wealth are the key element of this paper in a twofold aspect. First, they explain the occurrence of asset price fluctuations driven by self-fulfilling changes in expectations. Second, heterogeneity in endowments affects asset price level and dynamics only if preferences are heterogeneous. For instance, if agents with the strongest SOC are also the rich in terms of endowments, heterogeneity in endowments heightens the asset price level in the long run and destabilizes by enlarging the range of parameter values for which expectation-driven asset price fluctuations occur.