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Showing papers in "Handbook of Macroeconomics in 2016"


Book ChapterDOI
TL;DR: This article reviewed and synthesized our current understanding of the shocks that drive economic fluctuations and concluded that we are much closer to understanding the shocks in economic fluctuations than we were 20 years ago.
Abstract: This chapter reviews and synthesizes our current understanding of the shocks that drive economic fluctuations. The chapter begins with an illustration of the problem of identifying macroeconomic shocks, followed by an overview of the many recent innovations for identifying shocks. It then reviews in detail three main types of shocks: monetary, fiscal, and technology. After surveying the literature, each section presents new estimates that compare and synthesize key parts of the literature. The penultimate section briefly summarizes a few additional shocks. The final section analyzes the extent to which the leading shock candidates can explain fluctuations in output and hours. It concludes that we are much closer to understanding the shocks that drive economic fluctuations than we were 20 years ago.

738 citations


Book ChapterDOI
TL;DR: In this paper, the authors provide an overview of dynamic factor models (DFMs), their estimation, and their uses in empirical macroeconomics, including the use of DFMs for analysis of structural shocks.
Abstract: This chapter provides an overview of and user's guide to dynamic factor models (DFMs), their estimation, and their uses in empirical macroeconomics. It also surveys recent developments in methods for identifying and estimating SVARs, an area that has seen important developments over the past 15 years. The chapter begins by introducing DFMs and the associated statistical tools, both parametric (state-space forms) and nonparametric (principal components and related methods). After reviewing two mature applications of DFMs, forecasting and macroeconomic monitoring, the chapter lays out the use of DFMs for analysis of structural shocks, a special case of which is factor-augmented vector autoregressions (FAVARs). A main focus of the chapter is how to extend methods for identifying shocks in structural vector autoregression (SVAR) to structural DFMs. The chapter provides a unification of SVARs, FAVARs, and structural DFMs and shows both in theory and through an empirical application to oil shocks how the same identification strategies can be applied to each type of model.

281 citations


Book ChapterDOI
TL;DR: The authors provide an encyclopedia of the fundamental facts of economic growth upon which our theories are built, gathering them together in one place and updating them with the latest available data, with the purpose of providing an encyclopedia for economic growth.
Abstract: Why are people in the richest countries of the world so much richer today than 100 years ago? And why are some countries so much richer than others? Questions such as these define the field of economic growth. This paper documents the facts that underlie these questions. How much richer are we today than 100 years ago, and how large are the income gaps between countries? The purpose of the paper is to provide an encyclopedia of the fundamental facts of economic growth upon which our theories are built, gathering them together in one place and updating them with the latest available data.

253 citations


Book ChapterDOI
TL;DR: In this paper, the authors investigate how households in different segments of the wealth distribution were affected by income declines, and how they changed their expenditures differentially during the aggregate downturn and find that wealth inequality can significantly amplify the impact of an aggregate shock, and it does so if the distribution features a sufficiently large fraction of households with very little net worth that sharply increase their saving (i.e., they are not hand-to-mouth) as the recession hits.
Abstract: The goal of this chapter is to study how, and by how much, household income, wealth, and preference heterogeneity amplify and propagate a macroeconomic shock. We focus on the US Great Recession of 2007–09 and proceed in two steps. First, using data from the Panel Study of Income Dynamics, we document the patterns of household income, consumption, and wealth inequality before and during the Great Recession. We then investigate how households in different segments of the wealth distribution were affected by income declines, and how they changed their expenditures differentially during the aggregate downturn. Motivated by this evidence, we study several variants of a standard heterogeneous household model with aggregate shocks and an endogenous cross-sectional wealth distribution. Our key finding is that wealth inequality can significantly amplify the impact of an aggregate shock, and it does so if the distribution features a sufficiently large fraction of households with very little net worth that sharply increase their saving (ie, they are not hand-to mouth) as the recession hits. We document that both these features are observed in the PSID. We also investigate the role that social insurance policies, such as unemployment insurance, play in shaping the cross-sectional income and wealth distribution, and through it, the dynamics of business cycles.

203 citations


Book ChapterDOI
TL;DR: An overview of solution and estimation techniques for dynamic stochastic general equilibrium models and the foundations of numerical approximation techniques as well as statistical inference are covered.
Abstract: This chapter provides an overview of solution and estimation techniques for dynamic stochastic general equilibrium models. We cover the foundations of numerical approximation techniques as well as statistical inference and survey the latest developments in the field.

176 citations


Book ChapterDOI
TL;DR: In this paper, the authors review the literature which explains why and under which circumstances governments accumulate more debt than it would be consistent with optimal fiscal policy and discuss numerical rules or institutional designs which might lead to a moderation of these distortions.
Abstract: This chapter critically reviews the literature which explains why and under which circumstances governments accumulate more debt than it would be consistent with optimal fiscal policy. We also discuss numerical rules or institutional designs which might lead to a moderation of these distortions.

142 citations


Book ChapterDOI
TL;DR: The authors argue that family economics should be an integral part of macroeconomics, and that accounting for the family leads to new answers to classic macro questions such as savings, education, and labor supply.
Abstract: Much of macroeconomics is concerned with the allocation of physical capital, human capital, and labor over time and across people. The decisions on savings, education, and labor supply that generate these variables are made within families. Yet the family (and decision-making in families) is typically ignored in macroeconomic models. In this chapter, we argue that family economics should be an integral part of macroeconomics, and that accounting for the family leads to new answers to classic macro questions. Our discussion is organized around three themes. We start by focusing on short and medium run fluctuations, and argue that changes in family structure in recent decades have important repercussions for the determination of aggregate labor supply and savings. Next, we turn to economic growth, and describe how accounting for families is central for understanding differences between rich and poor countries and for the determinants of long-run development. We conclude with an analysis of the role of the family as a driver of political and institutional change.

108 citations


Book ChapterDOI
TL;DR: Natural experiments have been used to verify underlying assumptions of conventional models, quantify specific model parameters, and identify mechanisms that have major effects on macroeconomic quantities but are absent from conventional models as discussed by the authors.
Abstract: A growing literature relies on natural experiments to establish causal effects in macroeconomics. In diverse applications, natural experiments have been used to verify underlying assumptions of conventional models, quantify specific model parameters, and identify mechanisms that have major effects on macroeconomic quantities but are absent from conventional models. We discuss and compare the use of natural experiments across these different applications and summarize what they have taught us about such diverse subjects as the validity of the Permanent Income Hypothesis, the size of the fiscal multiplier, and about the effects of institutions, social structure, and culture on economic growth. We also outline challenges for future work in each of these fields, give guidance for identifying useful natural experiments, and discuss the strengths and weaknesses of the approach.

107 citations


Book ChapterDOI
TL;DR: In this article, the authors develop the theory of price-level determination in a range of models using both ad hoc policy rules and jointly optimal monetary and fiscal policies and discuss empirical issues that arise when trying to identify monetary-fiscal regime.
Abstract: We develop the theory of price-level determination in a range of models using both ad hoc policy rules and jointly optimal monetary and fiscal policies and discuss empirical issues that arise when trying to identify monetary–fiscal regime. The chapter concludes with directions in which theoretical and empirical developments may go.

102 citations


Book ChapterDOI
TL;DR: This paper studied how incomplete information helps accommodate frictions in coordination, leading to novel insights on the joint determination of expectations and macroeconomic outcomes and elaborate on the distinct effects of strategic uncertainty relative to fundamental uncertainty.
Abstract: This chapter studies how incomplete information helps accommodate frictions in coordination, leading to novel insights on the joint determination of expectations and macroeconomic outcomes. We review and synthesize recent work on global games, beauty contests, and their applications. We elaborate on the distinct effects of strategic uncertainty relative to fundamental uncertainty. We demonstrate the potential fragility of workhorse macroeconomic models to relaxations of common knowledge; the possibility of operationalizing the notions of “coordination failure” and “animal spirits” in a manner that unifies unique- and multiple-equilibrium models; and the ability of incomplete information to offer a parsimonious explanation of important empirical regularities. We provide a general treatment of these ideas, as well as specific applications in the context of business cycles, financial crises, and asset pricing.

94 citations


Book ChapterDOI
TL;DR: The authors surveys the literature on housing in macroeconomics and presents a theoretical model of frictional housing markets with heterogeneous agents that nests or provides background for many studies and describes quantitative results obtained during the last 15 years.
Abstract: This chapter surveys the literature on housing in macroeconomics. We first collect facts on house prices and quantities in both the time series and the cross section of households and housing markets. We then present a theoretical model of frictional housing markets with heterogeneous agents that nests or provides background for many studies. Finally, we describe quantitative results obtained during the last 15 years on household behavior, business cycle dynamics, and asset pricing, as well as boom bust episodes.

Book ChapterDOI
TL;DR: A survey of the literature for studying regime changes and summarizing available methods can be found in this paper, where the authors provide a detailed overview of econometric analysis of time series that are subject to changes in regime.
Abstract: Many economic time series exhibit dramatic breaks associated with events such as economic recessions, financial panics, and currency crises. Such changes in regime may arise from tipping points or other nonlinear dynamics and are core to some of the most important questions in macroeconomics. This chapter surveys the literature for studying regime changes and summarizes available methods. Section 1 introduces some of the basic tools for analyzing such phenomena, using for illustration the move of an economy into and out of recession. Section 2 focuses on empirical methods, providing a detailed overview of econometric analysis of time series that are subject to changes in regime. Section 3 discusses theoretical treatment of macroeconomic models with changes in regime and reviews applications in a number of areas of macroeconomics. Some brief concluding recommendations for applied researchers are offered in Section 4 .

Book ChapterDOI
TL;DR: This article explored the long-run evolution from classic banking panics toward modern banking crises where financial guarantees are associated with crisis resolution, and found economically significant output losses from various types of crises using a consistent methodology across time and datasets.
Abstract: Interconnections between banking crises and fiscal crises have a long history. We document the long-run evolution from classic banking panics toward modern banking crises where financial guarantees are associated with crisis resolution. Recent crises feature a feedback loop between bank guarantees and bank holdings of local sovereign debt thereby linking financial to fiscal crises. Earlier examples include the crises in Chile (early 1980s), Japan (1990), Sweden and Finland (1991), and the Asian crisis (1997). We discuss the evolution in economic theorizing on crises since the 1950s, and then provide an overview of the long-run evolution of connections between different types of crises. Next we explore the empirics of financial crises. We discuss the methodological issue of crisis measurement encompassing the definition, dating, and incidence of financial crises. Leading datasets differ markedly in terms of their historical frequency of crises leading to classification uncertainty. There is a range of estimates of output losses from financial crises in the literature, and these are also dependent upon definitions. We find economically significant output losses from various types of crises using a consistent methodology across time and datasets. Predicting crises also remains a challenge. We survey the Early Warnings Indicators literature finding that a broad range of variables are potential predictors. Credit booms have been emphasized recently, but other factors still matter. Finally, we identify a new policy trilemma. Countries can have two of the following three choices: a large financial sector, fiscal bailouts devoted to financial crises, and discretionary fiscal policy aimed at raising demand during the recessions induced by financial crises.

Book ChapterDOI
TL;DR: In this paper, the authors examine the spread of sovereign debt in 20 emerging market economies since 1993 and document the extent to which fluctuations in spreads are driven by country-specific fundamentals, common latent factors and observed global factors.
Abstract: This chapter is on quantitative models of sovereign debt crises in emerging economies. We interpret debt crises broadly to cover all of the major problems a country can experience while trying to issue new debt, including default, sharp increases in the spread and failed auctions. We examine the spreads on sovereign debt of 20 emerging market economies since 1993 and document the extent to which fluctuations in spreads are driven by country-specific fundamentals, common latent factors and observed global factors. Our findings motivate quantitative models of debt and default with the following features: (i) trend stationary or stochastic growth, (ii) risk averse competitive lenders, (iii) a strategic repayment/borrowing decision, (iv) multiperiod debt, (v) a default penalty that includes both a reputation loss and a physical output loss, and (vi) rollover defaults. For the quantitative evaluation of the model, we focus on Mexico and carefully discuss the successes and weaknesses of various versions of the model. We close with some thoughts on useful directions for future research.

Book ChapterDOI
TL;DR: In this paper, the authors characterize a model that can be seen as a natural extension of the existing literature, but in which the analysis is focused on wholesale funding markets, and also draw out the implications of possible instability in the wholesale banking sector for lender-of-last resort policy as well as for macroprudential policy.
Abstract: There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households. In fact, the recent financial crisis that triggered the Great Recession featured a disruption of wholesale funding markets, where banks lend to one another. Accordingly, to understand the financial crisis as well as to draw policy implications, it is essential to capture the role of wholesale banking. The objective of this chapter is to characterize a model that can be seen as a natural extension of the existing literature, but in which the analysis is focused on wholesale funding markets. The model accounts for both the buildup and collapse of wholesale banking and also sketches out the transmission of the crises to the real sector. We also draw out the implications of possible instability in the wholesale banking sector for lender-of-last resort policy as well as for macroprudential policy.

Book ChapterDOI
TL;DR: In this article, the authors compare the business cycle accounting method proposed by Chari et al. (2006) and apply it to compare the Great Recession across OECD countries as well as to the recessions of the 1980s in these countries.
Abstract: We elaborate on the business cycle accounting method proposed by Chari et al. (2006) , clear up some misconceptions about the method, and then apply it to compare the Great Recession across OECD countries as well as to the recessions of the 1980s in these countries. We have four main findings. First, with the notable exception of the United States, Spain, Ireland, and Iceland, the Great Recession was driven primarily by the efficiency wedge. Second, in the Great Recession, the labor wedge plays a dominant role only in the United States, and the investment wedge plays a dominant role in Spain, Ireland, and Iceland. Third, in the recessions of the 1980s, the labor wedge played a dominant role only in France, the United Kingdom, and Belgium. Finally, overall in the Great Recession, the efficiency wedge played a more important role and the investment wedge played a less important role than they did in the recessions of the 1980s.

Book ChapterDOI
TL;DR: This paper showed that the decline in numerous measures of consumption during the Great Recession was much larger in zip codes that experienced a sharp decline in housing net worth, while these same zip codes saw high house price growth, a substantial expansion of debt by homeowners, and high consumption growth.
Abstract: This chapter reviews empirical estimates of differential income and consumption growth across individuals during recessions. Most existing studies examine the variation in income and consumption growth across individuals by sorting on ex ante or contemporaneous income or consumption levels. We build on this literature by showing that differential shocks to household net worth coming from elevated household debt and the collapse in house prices play an underappreciated role. Using zip codes in the United States as the unit of analysis, we show that the decline in numerous measures of consumption during the Great Recession was much larger in zip codes that experienced a sharp decline in housing net worth. In the years prior to the recession, these same zip codes saw high house price growth, a substantial expansion of debt by homeowners, and high consumption growth. We discuss what models seem most consistent with this striking pattern in the data, and we highlight the increasing body of macroeconomic evidence on the link between household debt and business cycles. Our main conclusion is that housing and household debt should play a larger role in models exploring the importance of household heterogeneity on macroeconomic outcomes and policies.

Book ChapterDOI
TL;DR: In this article, a manual for setup and solving a continuous time model that allows to analyze endogenous (1) level and risk dynamics is presented, including (2) tail risk and crisis probability as well as (3) the Volatility Paradox.
Abstract: This chapter puts forward a manual for how to setup and solve a continuous time model that allows to analyze endogenous (1) level and risk dynamics. The latter includes (2) tail risk and crisis probability as well as (3) the Volatility Paradox. Concepts such as (4) illiquidity and liquidity mismatch, (5) endogenous leverage, (6) the Paradox of Prudence, (7) undercapitalized sectors (8) time-varying risk premia, and (9) the external funding premium are part of the analysis. Financial frictions also give rise to an endogenous (10) value of money.

Book ChapterDOI
TL;DR: In this paper, a modification of the Diamond and Dybvig (1983) model was studied, where the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank's ability to survive a run.
Abstract: We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank's ability to survive a run. The incomplete information means that the bank is not automatically incentivized to always hold enough liquid assets to survive runs. Regulation similar to the liquidity coverage ratio and the net stable funding ratio (that are soon be implemented) can change the bank's incentives so that runs are less likely. Optimal regulation would not mimic these rules.

Book ChapterDOI
TL;DR: In this paper, the authors study the interaction between cycles in credit markets and cycles in housing markets and explore these two channels in a mechanical way, showing that an increase in credit availability can generate first a boom and then a bust in mortgage markets because of multiple equilibria due to adverse selection.
Abstract: Prompted by the recent US experience, in this chapter, we study the interaction between cycles in credit markets and cycles in housing markets. There is a large growing literature exploring two different approaches: on the one hand, a boom–bust in house prices can generate a boom–bust in credit market and, on the other hand, a boom–bust in credit markets can generate a boom–bust in house prices. We start by presenting a stark mechanical model to formalize the interaction between housing prices and credit markets and explore these two channels in a mechanical way. Next, we present two simple models that highlight the two approaches. First, we propose a catastrophe model, where an increase in credit availability can generate first a boom and then a bust in mortgage markets because of multiple equilibria due to adverse selection: as lending expands, the composition of borrowers worsens and at some point this can generate a crash in credit market. Second, we propose a sentiment model, where house prices increase above fundamentals because investors buy assets under the irrational belief that there is always going to be an ever more foolish buyer, willing to buy at a higher price. In the course of the chapter, we relate our simple models to the large existing literature on these topics. At the end, we also point to some empirical papers that propose related facts.

Book ChapterDOI
TL;DR: In this paper, the authors provide explicit solutions for government spending multipliers during a liquidity trap and within a fixed exchange regime using standard closed and open-economy New Keynesian models.
Abstract: We provide explicit solutions for government spending multipliers during a liquidity trap and within a fixed exchange regime using standard closed and open-economy New Keynesian models. We confirm the potential for large multipliers during liquidity traps. For a currency union, we show that self-financed multipliers are small, always below unity, unless the accompanying tax adjustments involve substantial static redistribution from low to high marginal propensity to consume agents, or dynamic redistribution from future to present non-Ricardian agents. But outside-financed multipliers which require no domestic tax adjustment can be large, especially when the average marginal propensity to consume on domestic goods is high or when government spending shocks are very persistent. Our solutions are relevant for local and national multipliers, providing insight into the economic mechanisms at work as well as the testable implications of these models.

Book ChapterDOI
TL;DR: In this article, the authors study and extend the available evidence on the cyclicality of wages and pay particular attention to the response of wages to identified monetary policy shocks, concluding that price rigidity likely plays a substantially more important role than wage rigidity in governing economic fluctuations.
Abstract: Modern monetary business-cycle models rely heavily on price and wage rigidity. While there is substantial evidence that prices do not adjust frequently, there is much less evidence on whether wage rigidity is an important feature of real world labor markets. While real average hourly earnings are not particularly cyclical, and do not react significantly to monetary policy shocks, systematic changes in the composition of employed workers and implicit contracts within employment arrangements make it difficult to draw strong conclusions about the importance of wage rigidity. We augment a workhorse monetary DSGE model by allowing for endogenous changes in the composition of workers and also by explicitly allowing for a difference between allocative wages and remitted wages. Using both individual-level and aggregate data, we study and extend the available evidence on the cyclicality of wages and we pay particular attention to the response of wages to identified monetary policy shocks. Our analysis suggests several broad conclusions: (i) in the data, composition bias plays a modest but noticeable role in cyclical compensation patterns; (ii) empirically, both the wages for newly hired workers and the “user cost of labor” respond strongly to identified monetary policy innovations; and (iii) a model with implicit contracts between workers and firms and a flexible allocative wage replicates these patterns well. We conclude that price rigidity likely plays a substantially more important role than wage rigidity in governing economic fluctuations.

Book ChapterDOI
TL;DR: In this article, the authors discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath, and propose three extensions of the DSGE model.
Abstract: In this chapter, we discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath. It shows that a benchmark DSGE model that shares many features with models currently used by central banks and large international institutions has difficulty explaining both the depth and the slow recovery of the Great Recession. In order to better account for these observations, the chapter analyses three extensions of the benchmark model. First, we estimate the model allowing explicitly for the zero lower bound constraint on nominal interest rates. Second, we introduce time variation in the volatility of the exogenous disturbances to account for the non-Gaussian nature of some of the shocks. Third and finally, we extend the model with a financial accelerator and allow for time variation in the endogenous propagation of financial shocks. All three extensions require that we go beyond the linear Gaussian assumptions that are standard in most policy models. We conclude that these extensions go some way in accounting for features of the Great Recession and its aftermath, but they do not suffice to address some of the major policy challenges associated with the use of nonstandard monetary policy and macroprudential policies.

Book ChapterDOI
TL;DR: In this article, the authors investigated the processes that account for persistent slumps in modern economies, where sharp increases in unemployment from major adverse shocks result in long periods of abnormal unemployment and low output.
Abstract: In modern economies, sharp increases in unemployment from major adverse shocks result in long periods of abnormal unemployment and low output. This chapter investigates the processes that account for these persistent slumps. The data are from the economy of the United States, and the discussion emphasizes the nancial crisis of 2008 and the ensuing slump. The framework starts by discerning driving forces set in motion by the initial shock. These are agency frictions in capital markets resulting in tighter lending standards, higher discounts applied by decision makers (possibly related to a loss of condence), withdrawal of potential workers from the labor market, and

Book ChapterDOI
TL;DR: In this article, the authors examine and reassess the staggered wage and price setting model used for macroeconomic analysis and conclude that it is still the most common method of incorporating nominal rigidities into empirical macroeconomic models used for policy analysis.
Abstract: After many years, many critiques, and many variations, the staggered wage and price setting model is still the most common method of incorporating nominal rigidities into empirical macroeconomic models used for policy analysis. The aim of this chapter is to examine and reassess the staggered wage and price setting model. The chapter updates and expands on my chapter in the 1999 Handbook of Macroeconomics which reviewed key papers that had already spawned a vast literature. It is meant to be both a survey and user-friendly exposition organized around a simple “canonical” model. It provides a guide to the recent explosion of microeconomic empirical research on wage and price setting, examines central controversies, and reassesses from a longer perspective the advantages and disadvantages of the model as it has been applied in practice. An important question for future research is whether staggered price and wage setting will continue to be the model of choice or whether it needs to be replaced by a new paradigm.

Book ChapterDOI
TL;DR: In this paper, a review of the literature on model comparison and comparative analysis is presented, which enables individual researchers to conduct systematic model comparisons and policy evaluations easily and at low cost.
Abstract: The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers to explore new modeling approaches. There are many new models that deliver improved estimates of the transmission of macroeconomic policies and aim to better integrate the financial sector in business cycle analysis. Policy making institutions need to compare available models of policy transmission and evaluate the impact and interaction of policy instruments in order to design effective policy strategies. This chapter reviews the literature on model comparison and presents a new approach for comparative analysis. Its computational implementation enables individual researchers to conduct systematic model comparisons and policy evaluations easily and at low cost. This approach also contributes to improving reproducibility of computational research in macroeconomic modeling. Several applications serve to illustrate the usefulness of model comparison and the new tools in the area of monetary and fiscal policy. They include an analysis of the impact of parameter shifts on the effects of fiscal policy, a comparison of monetary policy transmission across model generations and a cross-country comparison of the impact of changes in central bank rates in the United States and the euro area. Furthermore, the chapter includes a large-scale comparison of the dynamics and policy implications of different macro-financial models. The models considered account for financial accelerator effects in investment financing, credit and house price booms and a role for bank capital. A final exercise illustrates how these models can be used to assess the benefits of leaning against credit growth in monetary policy.

Book ChapterDOI
TL;DR: In this paper, the authors discuss climate change and resource scarcity from the perspective of macroeconomic modeling and quantitative evaluation and provide a description of how to build tractable and yet realistic modules of the climate and the carbon cycle.
Abstract: We discuss climate change and resource scarcity from the perspective of macroeconomic modeling and quantitative evaluation. Our focus is on climate change: we build a very simple “integrated assessment model,” ie, a model that integrates the global economy and the climate in a unified framework. Such a model has three key modules: the climate, the carbon cycle, and the economy. We provide a description of how to build tractable and yet realistic modules of the climate and the carbon cycle. The baseline economic model, then, is static but has a macroeconomic structure, ie, it has the standard features of modern macroeconomic analysis. Thus, it is quantitatively specified and can be calibrated to obtain an approximate social cost of carbon. The static model is then used to illustrate a number of points that have been made in the broad literature on climate change. Our chapter begins, however, with a short discussion of resource scarcity—also from the perspective of standard macroeconomic modeling—offering a dynamic framework of analysis and stating the key challenges. Our last section combines resource scarcity and the integrated assessment setup within a fully dynamic general equilibrium model with uncertainty. That model delivers positive and normative quantitative implications and can be viewed as a platform for macroeconomic analysis of climate change and sustainability issues more broadly.

Book ChapterDOI
TL;DR: This article developed a toolkit of neoclassical macroeconomic models, and applied these models to the US economy from 1929 to 2014, and showed that the long-run component is typically much larger than the business cycle component.
Abstract: This chapter develops a toolkit of neoclassical macroeconomic models, and applies these models to the US economy from 1929 to 2014. We first filter macroeconomic time series into business cycle and long-run components, and show that the long-run component is typically much larger than the business cycle component. We argue that this empirical feature is naturally addressed within neoclassical models with long-run changes in technologies and government policies. We construct two classes of models that we compare to raw data, and also to the filtered data: simple neoclassical models , which feature standard preferences and technologies, rational expectations, and a unique, Pareto optimal equilibrium, and extended neoclassical models , which build in government policies and market imperfections. We focus on models with multiple sources of technological change, and models with distortions arising from regulatory, labor, and fiscal policies. The models account for much of the relatively stable postwar US economy, and also for the Great Depression and World War II. The models presented in this chapter can be extended and applied more broadly to other settings. We close by identifying several avenues for future research in neoclassical macroeconomics.

Book ChapterDOI
TL;DR: In this article, the authors study dynamic incentive models in which risk sharing is endogenously limited by the presence of informational or enforcement frictions, and comprehensively overview one of the most important tools for the analysis such problems.
Abstract: In this chapter we study dynamic incentive models in which risk sharing is endogenously limited by the presence of informational or enforcement frictions. We comprehensively overview one of the most important tools for the analysis such problems—the theory of recursive contracts. Recursive formulations allow us to reduce often complex models to a sequence of essentially static problems that are easier to analyze both analytically and computationally. We first provide a self-contained treatment of the basic theory: the Revelation Principle, formulating and simplifying the incentive constraints, using promised utilities as state variables, and analyzing models with persistent shocks using the first-order approach. We then discuss more advanced topics: duality theory and Lagrange multiplier techniques, models with lack of commitment, and martingale methods in continuous time. Finally, we show how a variety of applications in public economics, corporate finance, development and international economics featuring incomplete risk sharing can be analyzed using the tools of the theory of recursive contracts.

Book ChapterDOI
TL;DR: In this paper, the authors explore the macroeconomics of time allocation, focusing on several core nonmarket activities, including home production, child care, and leisure, and conclude with a discussion of why these patterns are important to macroeconomic economics and spell out directions for future research.
Abstract: In this chapter we explore the macroeconomics of time allocation. We begin with an overview of the trends in market hours in the United States, both in the aggregate and for key subsamples. After introducing a Beckerian theoretical framework, the chapter then discusses key empirical patterns of time allocation, both in the time series (including business cycle properties) and over the life cycle. We focus on several core nonmarket activities, including home production, child care, and leisure. The chapter concludes with a discussion of why these patterns are important to macroeconomics and spells out directions for future research.