In overlapping-generations economies with life-cycle saving and exogenous growth, the laissez-faire equilibrium balanced growth path fails in general to achieve optimality, but is dynamically efficient if the marginal product of physical capital is greater than the growth rate of the economy. In this paper, we accommodate the concept of dynamic (in)efficiency in an overlapping-generations economy with endogenous growth due to human capital accumulation. We show that the condition that the marginal product of physical capital is larger than the growth rate of the economy is necessary but no longer sufficient for the dynamic efficiency of the laissez-faire equilibrium balanced growth path.

We incorporate emission into a general equilibrium model with rich dispersion in productivity among monopolistically competitive plants. Emission is modeled as a by-product of goods production. An abatement technology is available to the plants for reducing emission. We compare an emission tax with an emission intensity standard. The tax is shown to dominate the standard in welfare for all values of market power if either productivity is sufficiently dispersed or the abatement technology is not effective. On the other hand, if productivity dispersion is small and the abatement technology is effective, there exists sufficiently strong market power so that the standard will dominate the tax in welfare. Even in the case where the standard unambiguously induces a higher output of dirty goods than the tax, the general equilibrium framework is necessary for ranking the two policies in welfare.

This paper analyzes the existence of Hopf bifurcation and establishes the conditions under which the equilibrium path converges toward periodic solutions in a one-sector optimal growth model with delay. We establish the limits and the possibilities of nonlinear dynamics (i.e., cycles) vis-à-vis delays. In particular, we formulate a new method to further comprehend the root distribution of the characteristic equation of a standard optimal growth model with delayed investment structure. We show that nonmonotonic dynamics (limit cycles, persistent oscillations) occurs when the delayed investment causes permanent adjustment failures among the economic variables in the economy.

We provide a theory-based inquiry into the contours of China's international balance sheets after the renminbi becomes convertible under the capital account. We construct a two-country general equilibrium model with trading in equities and bonds and calibrate the model with U.S. and Chinese data. We interpret Chinese capital account liberalization as a removal of restrictions that prohibit agents trading Chinese bonds and U.S. equities. We explore how international risk-sharing can be achieved through portfolio diversification in each of these asset market configurations. We also look at how these holdings would change as China gradually rebalanced its production with a larger share of labor income, and as the productivity gap between China and the United States narrowed. We find that both U.S. and Chinese residents would have incentives to increase their holdings in each other's equities and to issue debt in each other's currency.

This paper investigates how the different food aid programs affect economic development via their effect on the parental trade-off between the number of children and the investment in each child's human capital. This is done in an OLG framework where parents decide on the number of children and the nutrition and secondary schooling of each child. Primary schooling is mandatory. Providing school meals locks countries with no children attending secondary schooling into poverty by reducing the private (nutrition) cost per child. In countries where parents find it optimal to enroll children in secondary schooling, food aid increases the marginal benefit of schooling. Consequently, school feeding programs are conducive to economic development in these countries. If food aid is in the form of a food price subsidy, we show that child nutrition and thus children's human capital increase unambiguously. Although fertility and schooling are not directly affected, a sufficiently high subsidy rate will induce parents to begin to enroll children into secondary schooling by the assumed complementarity between nutrition and schooling in the human capital production function. If the food aid program provides a fixed amount of food per child, this decreases the marginal benefit of parental nutritional investments; therefore, it leads to higher fertility and to lower total provision of nutrition per child.

The literature has proposed two potential channels through which monetary policy played a role in the Great Inflation in the United States. One approach posits that the Federal Reserve held misperceptions of the economy. An alternative explanation contends that policy makers shifted preferences from an output gap stabilization goal toward inflation stabilization after 1979. This paper develops a medium-scale macroeconomic model that incorporates real-time learning by policy makers as well as a (potential) shift in policy makers' preferences. The empirical results show that combining both views—distorted policy makers' beliefs about the persistence of inflation and the inflation-output gap trade-off, accompanied by a stronger preference for inflation stabilization after 1979—illuminates the role played by monetary policy in propagating and ending the Great Inflation.

In this paper, we investigate the importance of aggregate fluctuations for the assessment of the optimal level of public debt in an incomplete-markets economy. We start by building a steady state model in which households are only subject to uninsurable idiosyncratic risk and evaluate the optimal level of public debt. We then augment the model to allow for aggregate risk and measure the impact on the optimal level. We show that the cyclical behavior of the economy has a quantitative impact on this level that can be decomposed into the effects of the aggregate productivity shock and the cyclicality of unemployment. Moreover, we find that matching wealth distribution statistics substantially changes the optimal level of public debt.

To explain the high and persistent unemployment rate in the United States during and after the Great Recession, this effort develops and estimates a dynamic stochastic general equilibrium model with search and matching frictions and shocks to unemployment benefits and matching efficiency. It finds that unemployment benefits play an important role in the cyclical movement of unemployment through their effects on labor demand, a channel overlooked in previous studies. From the second half of 2008 to 2011, extended unemployment benefits may have increased the overall unemployment rate by one percentage point. In contrast, matching efficiency changes had less effect on the cyclical movement of unemployment for the same period, but significantly slowed down the recovery after 2012.

I develop and calibrate an equilibrium search model with endogenous savings and search intensity. The wage is endogenized using Nash bargaining and the number of vacancies is tied down by a free entry condition. This allows me to conduct a counterfactual analysis of the optimal unemployment insurance (UI) level. The provision of UI is motivated by the worker's inability to perfectly insure against income shocks, but at the same time UI introduces distortions into workers' search intensity decisions and firm vacancy creation. I find that equilibrium effects are important. When the UI level is raised 25%, they constitute around one-third of the increase in total unemployment. However, even with limited savings by workers, optimal UI is close to zero. It is further shown that ignoring the possibility of self-insurance greatly affects the optimal UI level.

We try to understand the nature of Japan's sovereign credit risk by examining the interaction between Japan's sovereign credit default swap (CDS) spreads and its financial indicators of macroeconomic fundamentals. We consider potential contagion from the global financial market and allow for reverse causality between CDS spreads and macroeconomic fundamentals. We find strong evidence of contagion from global stock markets to Japan's credit market when Lehman Brothers collapsed, whereas the European sovereign debt crisis only had temporary effects. We also show that several credit events, such as the 2011 Tohoku earthquake and rating cuts by rating agencies, significantly raised volatility in Japan's sovereign CDS market.

The rationality test is based on regressing the actual series of variable in period t on its forecast formed in period t − 1. The nonrejection of the rationality hypothesis requires expectations' unbiasedness and efficiency. We show that in a model with t − 1 dating, where expectations strongly and positively affect the economy, the rationality test suffers from low power. It provides a high probability of nonrejection of the rationality hypothesis against numerous alternatives for expectations formation. This result is attained because the realization of the economy is driven by the public's expectations, irrespective of how well they are formed, via the structural relationship between them. The parameters in this test are predetermined by the parameters of the structural model, supporting expectations' unbiasedness under reasonable assumptions. Thus, successfully passing the rationality test could be misleading in terms of interpretation of the quality of the expectations and could lead to questionable accuracy of many applications.

I compare nominal gross domestic product (GDP) level targeting with strict price level targeting in a small New Keynesian model, with the central bank operating under optimal discretion and facing a zero lower bound on nominal interest rates. I show that, if the economy is only buffeted by purely temporary shocks to inflation, nominal GDP level targeting may be preferable because it requires the burden of the shocks to be shared by prices and output. However, in the presence of persistent supply and demand shocks, strict price level targeting may be superior because it induces greater policy inertia and improves the tradeoffs faced by the central bank. During lower bound episodes, somewhat paradoxically, nominal GDP level targeting leads to larger falls in nominal GDP.

We show that, in the large-firm search model, employment may decrease even when the level of the introduced minimum wage lies below the equilibrium wage of the laissez-faire economy. Wages also decrease in the presence of the minimum wage. The argument is based on multiple equilibria and the idea that, in a large-firm context, the representative firm may choose to overemploy workers in order to renegotiate lower wages.