Showing papers in "B E Journal of Macroeconomics in 2008"
TL;DR: In this paper, the authors explored theoretically and empirically the view that Taylor rules are often nonlinear due to asymmetric central bank preferences, and that the nature of these asymmetries changes across different policy regimes.
Abstract: This paper explores theoretically and empirically the view that Taylor rules are often nonlinear
due to asymmetric central bank preferences, and that the nature of these asymmetries changes
across different policy regimes. The theoretical model uses a standard new Keynesian framework
to establish equivalence relations between the shape of nonlinearities in Taylor rules and asymmetries
in monetary policy objectives. These relations are estimated and tested for the United
Kingdom (UK) and the United States (US) over various subperiods by means of smooth transition
regressions.
There is often evidence in favor of nonlinear rules in both countries, and their character changes
substantially over subperiods. The period preceding inflation targeting in the UK is characterized
by a concave rule supporting dominant recession avoidance preferences, while the inflation targeting
period is characterized by a convex rule supporting dominant inflation avoidance preferences
on the part of policymakers. Dominant inflation avoidance appears during the Vietnam War in
the US while, during the Burns/Miller and the Greenspan periods, recession avoidance dominates.
Under Volcker the Taylor rule is linear. This is consistent with an offset by inflation avoidance of
the more prevalent recession avoidance of the Fed.
Findings from both countries support the view that reaction functions and the asymmetry properties
of the underlying loss functions change in line with the regime and the main macroeconomic
problem of the day.
195 citations
TL;DR: In this article, the authors found that about half of credit extended by banks to the private sector in a sample of 45 developing and developed countries is to households and that the share of household credit in total credit increases as countries grow richer and financial systems develop.
Abstract: While the theoretical and empirical finance literature has focused almost exclusively on enterprise credit, about half of credit extended by banks to the private sector in a sample of 45 developing and developed countries is to households. The share of household credit in total credit increases as countries grow richer and financial systems develop. Cross-country regressions, however, suggest a positive and significant impact on GDP per capita growth only of enterprise but not household credit. These two findings together partly explain why previous studies, such as Aghion et al. (2005), have found a small or insignificant effect of finance on growth in high-income countries. We also find that countries with a lower share of manufacturing, a higher degree of urbanization and more market-oriented financial systems, have a higher share of household credit. It is thus mostly socio-economic trends that determine credit composition, while policies influencing banking market structure and regulatory policies are not robustly related to credit composition.
151 citations
TL;DR: This paper explored the determinants of workers' remittances using a novel dataset of bilateral remittance flows and found that some of the variables commonly used in gravity equations are very powerful in explaining remittance flow.
Abstract: This paper explores the determinants of workers' remittances using a novel dataset of bilateral remittance flows. The paper finds that some of the variables commonly used in gravity equations are very powerful in explaining remittance flows. The evidence on the motives to remit is mixed, but altruism may be less of factor than commonly believed. Most strikingly, remittances do not seem to increase in the wake of a natural disaster and appear aligned with the business cycle in the home country, suggesting that remittances may not play a major role in limiting vulnerability to shocks. To encourage remittances and maximize their economic impact, policies should be directed at reducing transaction costs, promoting financial sector development, and improving the business climate.
111 citations
TL;DR: In this article, the authors explored the existence of downward nominal wage rigidity in 19 OECD countries, over the period 1973•1999, using data for hourly nominal wages at industry level.
Abstract: This paper explores the existence of downward nominal wage rigidity (DNWR) in 19 OECD countries, over the period 1973‐1999, using data for hourly nominal wages at industry level. Based on a novel nonparametric statistical method, which allows for country and year specific variation in both the median and the dispersion of industry wage changes, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 70 percent in the 1970s to 11 percent in the late 1990s, but the number of industries a ected by DNWR has increased. DNWR is more prevalent when inflation is high, unemployment is low, union density is high and employment protection legislation is strict.
100 citations
TL;DR: The authors investigated the impact of differential productivity growth on the health of different sectors and on the overall economy using industry data for the period 1948-2001 and found that technologically stagnant sectors clearly have rising relative prices and declining relative real outputs, while technologically progressive sectors tend to have slower hours and employment growth outside of manufacturing.
Abstract: William Baumol and his co-authors have analyzed the impact of differential productivity growth on the health of different sectors and on the overall economy. They argued that technologically stagnant sectors experience above average cost and price increases, take a rising share of national output, and slow aggregate productivity growth. Using industry data for the period 1948-2001, the present study investigates Baumol%u2019s diseases for the overall economy. It finds that technologically stagnant sectors clearly have rising relative prices and declining relative real outputs. Additionally, technologically progressive sectors tend to have slower hours and employment growth outside of manufacturing. Finally, sectoral shifts have tended to lower overall productivity growth as the share of stagnant sectors has risen over the second half of the twentieth century.
96 citations
TL;DR: This paper found that proximity to higher-tiered urban centers continues to be an important positive determinant of local job growth, all the way from the smallest to the largest urban centers.
Abstract: New information technologies and reductions in transportation costs have led pundits to pronounce the "death of distance." These claims would suggest that distance is no longer a barrier to growth for remote areas and small urban centers. Despite extensive research on the localized effects of agglomeration, very few studies have empirically investigated the broader spillover effects of proximity and location in the urban system. This study attempts to fill this void using U.S. county level employment data. A primary innovation is that urban centers, from which distance is measured, are differentiated by their position within six tiers (rural plus 5 urban) of the American urban hierarchy. Net agglomeration economies can thus originate from multiple sources throughout the entire 360° span. Our findings indicate that proximity to higher-tiered urban centers continues to be an important positive determinant of local job growth, all the way from the smallest to largest urban centers.
95 citations
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TL;DR: This paper investigated the empirical validity of different classes of 'development trap' models of economic growth and showed that the productivity residual has a more prominent and more robust lower peak than output. But they did not examine the relationship between human capital accumulation and productivity.
Abstract: This paper investigates the empirical validity of different classes of 'development trap' models of economic growth. Quah (1993) finds that the cross country distribution of per capita income is moving toward a twin peaked distribution. This finding has supported and encouraged a large theoretical literature on development traps that produce twin peaks through physical and human capital accumulation. Contrary to these models, physical and human capital are found to be moving toward single peaked distributions. The productivity residual is moving toward a twin peaked distribution that mirrors that of per capita income. Quah's result appears to be driven by productivity differences rather than factor accumulation. The importance of productivity is consistent with cross sectional results by Klenow & Rodriguez-Clare (1997) and Hall & Jones (1999). Kremer, Onatski & Stock (2001) and Jones (1997) have questioned the robustness of the lower peak in output. This paper shows that the productivity residual has a more prominent and more robust lower peak than output. A further examination suggests that dynamic interaction between human capital accumulation and productivity may act in the long run to eliminate the low peak in productivity.
80 citations
TL;DR: The authors investigated the relevance of the Carroll's sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom) using survey data on household and expert inflation expectations.
Abstract: We investigate the relevance of the Carrolls sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.
48 citations
TL;DR: This article showed that the MortensenPissarides search and matching model implies that unemployment and job vacancies would be much less responsive to changes in labor productivity than what we observe in the business cycles of the Canadian labor market.
Abstract: As long as workers do not value their leisure much, the MortensenPissarides search and matching model implies that unemployment and job vacancies would be much less responsive to changes in labor productivity than what we observe in the business cycles of the Canadian labor market. These …ndings parallel the work of Shimer (2005) for the United States. The combined data from both countries present an additional di¢ culty for the model. Even if the unobserved value of leisure is allowed to be as high as required to …t the business cycle in the United States or in Canada, as proposed by Hagedorn and Manovskii (2007), another failure arises. The model cannot reconcile the similar labor
29 citations
TL;DR: In this article, a model with uninsurable shocks to earnings and student loan rates was developed to explain the repayment pattern in U.S. data: college graduates with lower debt will lock-in interest rates, while those with higher debt will switch to an income-contingent plan.
Abstract: I study repayment behavior for college graduates who borrow under the U.S. Federal Student Loan Program to finance higher education. I develop a dynamic model with uninsurable shocks to earnings and student loan rates that explains the repayment pattern in U.S. data: college graduates with lower debt will lock-in interest rates, while those with higher debt will switch to an income-contingent plan. Default does not occur among the most financially constrained group of college graduates. I use the model to quantify the effects of a reform introduced in 2006 that eliminates the possibility to lock-in interest rates for student loans. The reform induces a significant increase in default rates, which is largely accounted for by low-income borrowers.
27 citations
TL;DR: In this article, the authors propose a method for estimating household income uncertainty that does not impose restrictions on the underlying income shocks or assumptions about household behaviors, and measure uncertainty as the variance of linear projection errors at various future horizons, up to 25 years ahead, conditional on only the information available to households when the projection is made.
Abstract: We propose a method for estimating household income uncertainty that does not impose restrictions on the underlying income shocks or assumptions about household behaviors. We measure income uncertainty as the variance of linear projection errors at various future horizons, up to 25 years ahead, conditional on only the information available to households when the projection is made. Our uncertainty estimates change substantially over the life cycle. We calibrate an income process to match our estimates, allowing the variances of both transitory and persistent shocks to change over the life cycle. Relative to previous studies, we find lower and less persistent income uncertainties that call for a life cycle consumption profile with a less pronounced hump.
TL;DR: In this paper, the performance of monetary policy under alternative flscal regimes in a dynamic New Keynesian optimizing general equilibrium model with wealth effects was studied, showing that the preferred monetary-flscal regime for in∞ation stabilization consists of a generalized Taylor rule with a low degree of inertia coupled with a public debt-GDP ratio targeting rule.
Abstract: This paper studies the performance of monetary policy under alternative flscal regimes in a dynamic New Keynesian optimizing general equilibrium model with wealth efiects. The interactions between flscal policy and interest rate rules are shown to have relevant implications for the existence of a unique rational expectations equilibrium. When calibrated to Euro Area quarterly data, the model simulation results show that the preferred monetary-flscal regime for in∞ation stabilization consists of a generalized Taylor rule with a low degree of inertia coupled with a public debt-GDP ratio targeting rule.
TL;DR: In this article, the out-of-sample forecasting performance of a dynamic stochastic general equilibrium (DSGE) model improves by taking its nonlinear rather than its linear approximation to the data, and the value of nonlinearities in terms of predictive power depends crucially on whether the model is well specified.
Abstract: This paper studies whether the out-of-sample forecasting performance of a dynamic stochastic general equilibrium (DSGE) model improves by taking its nonlinear rather than its linear approximation to the data. We address this question within a New Keynesian monetary economy, considering both environments of simulated and real data. Precisely, we estimate our model based on its linear respectively quadratic approximate solution, generate out-of-sample forecasts for three observables (output, inflation, and the nominal interest rate), and compare the quality of forecasts by several statistical measures of accuracy. We find that the value of nonlinearities in terms of predictive power depends crucially on whether the model is well specified. For simulated data, the nonlinear model indeed forecasts noticeably better as compared to its linearized counterpart, whereas for real data, we find no substantial differences in predictive abilities.
TL;DR: In this article, an analytical analysis of the determinacy properties of the New Keynesian model with both staggered wages and prices is possible, despite the high dimensional nature of this model, if it is appropriately reformulated in continuous time.
Abstract: This paper shows that an analytical analysis of the determinacy properties of the New Keynesian model with both staggered wages and prices is possible, despite the high dimensional nature (4D) of this model, if it is appropriately reformulated in continuous time. Our analysis supports Gali's (2008) numerical findings on the determinacy frontier and its reformulated Taylor principle, where a generalized Taylor rule that employs a weighted combination of wage and price inflation as a measure of the inflation gap is used.
TL;DR: The authors studied the Japanese depression in the interwar period using the business cycle accounting methodology and a general equilibrium model with time-varying markups, and found that the initial slowdown of the economy can be explained by a decline in productivity.
Abstract: This paper studies the Japanese depression in the interwar period using the business cycle accounting methodology and a general equilibrium model with time-varying markups. I find that the initial slowdown of the economy can be explained by a decline in productivity. However, I also find that when only productivity change is taken into account, a prototype neoclassical growth model predicts that in the 1930s, output recovers more rapidly than is actually supported by the data. Using restrictions from theory, I quantify the contribution of an increase in markups in the manufacturing and mining sectors and find that a substantial fraction of the weak recovery can be explained by this factor. I argue that this increase in markups is caused by government-promoted cartelization.
TL;DR: In this article, the authors present a group of exercises of level and growth decomposition of output per worker using cross-country data from 1970 to 2000, and show that the reversal of relative importance of productivity vis-a-vis factors is explained by the very good (bad) performance of productivity of fast- (slow-) growing economies.
Abstract: This article presents a group of exercises of level and growth decomposition of output per worker using cross-country data from 1970 to 2000. It is shown that in the early seventies factors of production (capital and education) were the main source of output dispersion across economies and that productivity variance was considerably smaller than in later years. Only after the mid-eighties did the prominence of productivity start to show up in the data, as the majority of the literature has found. The growth decomposition exercises show that the reversal of relative importance of productivity vis-a-vis factors is explained by the very good (bad) performance of productivity of fast- (slow-) growing economies. Although growth in the period, on average, is mostly due to factor accumulation, its variance is explained by productivity.
TL;DR: In this paper, the authors develop a New Keynesian model with a staggered price and wage setting where downward nominal wage rigidity (DNWR) arises endogenously through the wage bargaining institutions.
Abstract: We develop a New Keynesian model with staggered price and wage setting where downward nominal wage rigidity (DNWR) arises endogenously through the wage bargaining institutions. It is shown that the optimal (discretionary) monetary policy response to changing economic conditions then becomes asymmetric. Interestingly, in our baseline model we find that the welfare loss is actually slightly smaller in an economy with DNWR. This is due to that DNWR is not an additional constraint on the monetary policy problem. Instead, it is a constraint that changes the choice set and opens up for potential welfare gains due to lower wage variability. Another finding is that the Taylor rule provides a fairly good approximation of optimal policy under DNWR. In contrast, this result does not hold in the unconstrained case. In fact, under the Taylor rule, agents would clearly prefer an economy with DNWR before an unconstrained economy ex ante.
TL;DR: In this article, the authors extend the class of quality-ladder growth models (Grossman and Helpman, 1991, Segerstrom, 1998 and others) to encompass an economy with asymmetric fundamentals, in contrast to the standard framework, in their model industries may differ in terms of their innovative potential (quality jumps and arrival rates) and consumers' preferences.
Abstract: We extend the class of quality-ladder growth models (Grossman and Helpman, 1991, Segerstrom, 1998 and others), to encompass an economy with asymmetric fundamentals. In contrast to the standard framework, in our model industries may differ in terms of their innovative potential (quality jumps and arrival rates) and consumers' preferences. This extension allows us to bring industrial policy back into the realm of the growth policy debate. We first show that it is always possible to raise the long-run growth rate and the social welfare of the economy through a costless tax/subsidy scheme reallocating resources towards the relatively more promising industries. We then prove that, in certain economies, even a mere profit taxation policy increases economic growth and social welfare above the laissez-faire.
TL;DR: This article found that the case for foreign aid to Africa is weak and that the cost of policy interventions needed to trigger development in stagnant economies is small, despite the low estimated costs, suggesting political hurdles to reform.
Abstract: We address the poverty trap rationale for aid to Africa. We calibrate models that embody typical explanations for stagnation: coordination failures, ineffective mix of occupational choices and imperfect capital markets, and insufficient human capital accumulation coupled with high fertility. Calibration is ideally suited for this evaluation given the paucity of high-quality data, the high degree of model nonlinearity, and the need for conducting counterfactual policy experiments. We find that calibrations that yield multiple equilibria -- one being prosperity and the other stagnation -- are not particularly robust in capturing the African situation. This tempers optimism about foreign aid typically prescribed based on models of multiplicity. Moreover, conditional on multiplicity, the calibrated models indicate that the cost of policy interventions needed to trigger development in stagnant economies is small. The lack of reforms in Africa, despite the low estimated costs, suggests political hurdles to reform. It is not clear that foreign aid would be able to circumvent these. Taken together, we conclude that the case for foreign aid to Africa is weak.
TL;DR: In this paper, the authors argue that increased efficiency of the labor market may help explain both features of the data, arguing that increases in labor market efficiency or equivalently reduced search frictions increase wage inequality by increasing the degree of positive assortive matching.
Abstract: In the 1980s there was an increase in cross-sectional wage inequality while simultaneously there was a decrease in the time series volatility of aggregate output. This paper argues that increased efficiency of the labor market may help explain both features of the data. Increases in labor market efficiency or equivalently reduced search frictions increase wage inequality by increasing the degree of positive assortive matching. Simultaneously, aggregate volatility of output decreases as labor market efficiency increases since reduced frictions insulate the economy from shocks that affect employment. In a calibrated model the improvement in labor market efficiency explains around 20 percent of the decline in output volatility and roughly 40 percent of the increase in wage inequality after 1985.
TL;DR: This article examined the quantitative predictions of a consumption-based asset pricing model for shifts in the unconditional average of U.S. interest rates and found that such shifts probably were related to changes in average inflation rather than to moderations in inflation and consumption growth.
Abstract: Working Paper 2008-1 January 2008 Abstract: The Great Moderation refers to the fall in U.S. output growth volatility in the mid-1980s. At the same time, the United States experienced a moderation in inflation and lower average inflation. Using annual data since 1890, we find that an earlier, 1946 moderation in output and consumption growth was comparable to that of 1984. Using quarterly data since 1947, we also isolate the 1969-83 Great Inflation to refine the asset pricing implications of the moderations. Asset pricing theory predicts that moderations--real or nominal--influence interest rates. We examine the quantitative predictions of a consumption-based asset pricing model for shifts in the unconditional average of U.S. interest rates. A central finding is that such shifts probably were related to changes in average inflation rather than to moderations in inflation and consumption growth. JEL classification: E32, E43, N12 Key words: Great Moderation, asset pricing, interest rate 1. Introduction The great moderation (GM) generally is defined as a drop in the variance of output growth in the US during the 1980s. This drop was large; by some measures the variance fell by 50 percent. It seems to have been sudden. And it can be dated to early 1984 according to studies by Kim and Nelson (1999) and McConnell and Perez-Quiros (2000). Another notable fact about the GM is that it coincided with decreases in the volatility of inflation and the average level of inflation. Cecchetti et al (2007) describe how the average US inflation rate rose during the late 1960s then fell during the GM. We put the 1984 GM in historical perspective by comparing it to an earlier one, the drop in business-cycle volatility after 1945, and to an even earlier immoderation, the increase in volatility in the interwar period. These shifts affected the means and variances of inflation and real consumption growth, moments which are related to the general level of interest rates, according to asset pricing theory. We use the theory to predict the effects of these changes on the average interest rate within each period. Studying these unconditional moments has the advantage that we do not need to model the time-series properties or predictability of these growth rates. Thus the moderations provide a new form of evidence on our understanding of interest rates. Our main finding is that shifts in the average US interest rate in the 20th century probably were due to shifts in average inflation, rather than to those in volatility. Section 2 provides some research background by reviewing work that identifies the GM, that seeks to explain it, and that measures its economic effects. Section 3 documents the moderations and other changes in moments. Section 4 outlines a standard, asset pricing model and derives the predicted links between average interest rates and the unconditional moments of consumption growth and inflation. Focusing on unconditional moments means that our findings apply whether a moderation is due to a fall in conditional variance or to a fall in persistence. We exploit the breaks in these unconditional moments across time periods to identify preference parameters. Section 5 uses annual data from 1889 to 2006 to estimate parameters, test the asset pricing model, and decompose changes in interest rates into components due to moderations and those due to changes in mean inflation. Section 6 does the same with postwar quarterly data. Section 7 argues that extending the asset pricing model by using alternative pricing kernels based on habit persistence or recursive utility does not alter the conclusions of our study. Section 8 summarizes our findings and offers suggestions for further research. 2. Background: Timing, Explanations, and Effects The fall in the volatility of US GDP growth during the 1980s has been documented by Zim and Nelson (1999), McConnell and Perez-Quiros (2000), Blanchard and Simon (2001), and Stock and Watson (2003). …
TL;DR: In this paper, the authors used information from U.S. states to determine the social return to schooling, and found that the return was 9 to 16 percent, which matches estimates of the private return found in the labor literature.
Abstract: In this paper, we use information from U.S. states to determine the social return to schooling. We estimate a macro-Mincerian model where aggregate earnings (or income) depend upon physical capital, labor, average years of schooling and average labor force experience. We find that the social return to U.S. schooling is 9 to 16 percent, which matches estimates of the private return found in the labor literature. Our results therefore provide evidence that U.S. schooling is indeed productive, but generates no positive externalities.
TL;DR: The authors carried out a meta-analysis on the frequency of unit-roots in macroeconomic time series with a dataset covering 249 variables for the G7 countries and found that rejection of the null of a unit root in the macro dataset is substantially higher for non-linear than linear models.
Abstract: We carry out a meta-analysis on the frequency of unit-roots in macroeconomic time series with a dataset covering 249 variables for the G7 countries. We use linear tests and the three popular non-linear tests (TAR, ESTAR and Markov Switching). In general, the evidence in favour of the random walk hypothesis is weaker than in previous studies. This evidence against unit roots is stronger for real and nominal asset prices. Our results show that rejection of the null of a unit root in the macro dataset is substantially higher for non-linear than linear models. Finally, the results from a Monte Carlo experiment show that rejection frequencies are very close to the nominal size of the test when the DGP is a linear unit root process. This leads us to reject the hypothesis that overfitting deterministic components explains the higher rejection frequencies of nonlinear tests.
TL;DR: The authors generalizes the monopolistic competition trade model of Helpman and Krugman (1985), providing a basis for growth-led exports without declining terms of trade, showing that fast-growing countries are able to develop new varieties of products that can be exported without pushing down the prices of existing products.
Abstract: Fast-growing countries tend to experience rapid export growth with little secular change in their terms of trade. This contradicts most international macroeconomic models, which predict that productivity and labor-supply shocks can affect exports only through changes in the terms of trade. This paper generalizes the monopolistic competition trade model of Helpman and Krugman (1985), providing a basis for growth-led exports without declining terms of trade. The key mechanism behind this result is that fast-growing countries are able to develop new varieties of products that can be exported without pushing down the prices of existing products. There is strong support for the new model in the long-run export growth of many countries in the post-war era. These results have major implications for the analysis of supply shocks in international macroeconomic models.
TL;DR: In this paper, the authors estimate a model where inflation, a measure of de facto central bank independence and an index of the de facto exchange rate regime are simultaneously determined by a set of economic, political and institutional variables.
Abstract: In this paper we estimate a model where inflation, a measure of de facto central bank independence and an index of de facto exchange rate regime are simultaneously determined by a set of economic, political and institutional variables. De facto central bank independence is hampered by socio-political turbulence and benefits from the balance of powers between the executive and the parliament. Inflation is explained by de facto central bank independence, by the level and volatility of public expenditure and by the de facto exchange rate regime. Openness (real and financial) affects inflation through the exchange rate regime channel. Success in controlling inflation, in turn is crucial to sustain central bank independence and exchange rate stability.
TL;DR: In this article, the authors examine the growth effects of inflation at alternative stages of financial development and propose an endogenous growth model where intermediated savings generate capital, where banks to ration credit and hold liquid assets offering (real) returns that vary inversely with inflation.
Abstract: This paper examines the growth-effects of inflation at alternative stages of financial development. We propose an endogenous growth model where intermediated savings generate capital. Informational problems cause banks to ration credit and hold liquid assets offering (real) returns that vary inversely with inflation. Inflation therefore acts like a tax on capital accumulation. However financial development lessens credit-rationing, which reduces the demand for these liquid assets and softens the incidence of the inflation tax. Sizeable and statistically significant interactions between inflation and measures of financial development in cross-country and panel regressions provide empirical support for our model.
TL;DR: In this paper, the role of equity markets in the determination of money demand was investigated and it was shown that expected equity returns are significant determinants of money demands in the long run.
Abstract: This paper investigates the role of equity markets in the determination of money demand. Expected equity returns are found to be significant determinants of money demand in the long run. We also uncover a strong positive drift in the elasticity of money demand with respect to expected equity returns. Moreover, this elasticity has recently become positive. We explain the puzzle of positive interest elasticity by modifying a conventional model of money demand. We show that if equities are also allowed to provide some liquidity, then the model can support both positive and negative elasticities with respect to expected returns.
TL;DR: In this article, the authors examine a model in which the utility function has been engineered so that it is optimal for consumers to aim for a fixed target level of retirement resources, where consumption displays excess sensitivity to current income as well as perfect old age insurance.
Abstract: We examine a model in which the utility function has been engineered so that it is optimal for consumers to aim for a fixed target level of retirement resources. In this case, consumption displays excess sensitivity to current income as well as perfect old age insurance. In an overlapping generations model, this leads naturally to multiple and unstable equilibria. Under static expectations, it also leads to a well-defined dynamics, including possible historical traps, implosions involving ever-diminishing capital stock and ever-increasing interest rates, and the feasibility of optimal one-time interventions.
TL;DR: The authors developed a human-capital-based endogenous growth scenario in which an economy initially produces the agricultural good, characterized by diminishing returns to scale, then produces traditional manufacturing under constant-returns and finally produces modern manufacturing under increasing returns.
Abstract: This paper develops a human-capital-based endogenous growth scenario in which an economy initially produces the agricultural good, characterized by diminishing returns to scale, then produces `traditional manufacturing' under constant-returns and finally produces `modern manufacturing' under increasing-returns. Transition dates are endogenous and depend on the non-essentiality of the industrial goods in preferences and fixed costs in the technology of the modern manufacturing. Each transition is followed by a jump in the long-run growth rate of real income. The theoretical model is calibrated to U.S. historical data. It `predicts' the first transition to occur around 1820s and the second transition to happen around 1900.
TL;DR: In this article, the authors build a model with a micro-foundation to understand how productivity changes in the manufacturing and the agricultural sectors impact the relative size of a city and the surrounding rural area, both in terms of physical area and population.
Abstract: I build a model with a microfoundation to understand how productivity changes in the manufacturing and the agricultural sectors impact the relative size of a city and the surrounding rural area, both in terms of physical area and population. I also examine rural-urban differentials in land rentals. I find that the "Green Revolution" is more important than the Industrial Revolution in terms of the impact on the urbanization process. Government policies on the optimal sizes of cities are discussed.