The lack of a supranational legal authority that can enforce private contracts across borders makes debt repayment in an international setting contingent on borrowers' willingness to pay rather than ability to pay. This market failure (i.e., inadequate enforcement) causes investment to fall short of its unconstrained level. This paper examines how foreign aid affects a country's willingness to honor private investment agreements. We consider two types of aid: technical assistance and loan subsidies. We show that when enforcement is inadequate, aid has the following effects: (i) it reduces default risk, promotes capital flows, and can, in principle, restore investment to its unconstrained level; (ii) when default risk is high, aid can increase the welfare of both the recipient and the donor country. Thus, foreign aid serves as an enforcement mechanism in an international setting. This provides a nonaltruistic rationale for foreign aid. Finally, we discuss the implications of providing bilateral versus multilateral aid (e.g., by individual countries versus multilateral organizations).

Misallocation of resources across firms leads to lower aggregate productivity. In this paper, we provide new estimates of manufacturing productivity differences across countries and establish by how much they would be reduced if such misallocation were eliminated. Using World Bank survey data for formal manufacturing firms in 52 low- and middle-income countries, we show that manufacturing productivity would increase by an average of 62%, but productivity gaps relative to the United States would remain large. We also find that lower-income countries do not have more to gain from reducing misallocation, as efficiency of resource allocation is uncorrelated with income levels.

We estimate consumption Euler equations using U.K. household-level data, employing a switching regression technique. We find excess sensitivity to income for one group of households but not for a second group. The likelihood of excess sensitivity is greater for the young, those without liquid assets, the degree-educated, ethnic minorities and those with negative home equity, consistent with liquidity constraints and buffer-stock saving. Housing capital gains affect the consumption plans of the excess sensitivity group of households, but not the other group. These results are consistent with a “collateral channel” for housing. Around 20%–40% of U.K. households display excess sensitivity.

An increase in inflation causes people to hold smaller real balances and to speed up their spending. Virtually all monetary models capture the first—inflation tax—effect. Few capture the second—hot potato—effect. Those that do associate negative welfare consequences with the hot potato effect. Because both the inflation tax and the hot potato effect imply that inflation has negative effects on welfare, an optimal monetary policy is characterized by the Friedman rule. In the model presented here, there is a hot potato effect, but—all else held constant—the hot potato effect has positive consequences for welfare. As a result, a departure from the Friedman rule can be socially desirable.

This paper establishes some stylized facts of the long-run relationship between growth and labor shares using historical data for the USA (1898–2010), the United Kingdom (1856–2010), and France (1896–2010). Performing individual country time–frequency analysis, we demonstrate the existence of long-term cycles in labor share of 30–50 years explaining a major part of the variance in the data. Further, the impact of labor share on growth changes sign with the frequency considered from negative at high frequencies to positive at low frequencies. Finally, the positive coefficient associated with the labor share at low frequencies increases over time.

In this paper we investigate the relationship between money growth uncertainty and the level of economic activity in the United States. We pay explicit attention to the Divisia monetary aggregates. In doing so, we use the new vintage of the data [called MSI (monetary services indices) by the St. Louis Fed], together with the simple sum monetary aggregates, over the period from 1967:1 to 2011:3. In the context of a bivariate VARMA, GARCH-in-mean, asymmetric BEKK model, we show that increased Divisia money growth volatility (irrespective of the level of aggregation and the method of calculation) is associated with a lower average growth rate of real economic activity. However, there are no effects of simple-sum money growth volatility on real economic activity, except with the Sum M1 and perhaps Sum M2M aggregates. We conclude that monetary policies that focus on the Divisia monetary aggregates and target their growth rates will contribute to higher overall economic growth.

We investigate the dynamics of a cobweb model with heterogeneous beliefs, generalizing the example of Brock and Hommes (1997). We examine situations where the agents form expectations by using either rational expectations, or a type of adaptive expectations with limited memory defined from the last two prices. We specify conditions that generate cycles. These conditions depend on a set of factors that includes the intensity of switching between beliefs and the adaption parameter. We show that both Flip bifurcation and Neimark–Sacker bifurcation can occur as primary bifurcation when the steady state is unstable.

We study the transmission mechanism of a Green QE, defined as a policy that tilts the central bank’s balance sheet toward green bonds, that is bonds issued by non-polluting firms. We merge a DSGE framework with an environmental model, in which CO2 emissions increase the stock of atmospheric carbon, which in turn decreases total factor productivity. Imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. However, even under this assumption, the effect of Green QE in reducing emissions is negligible and in some cases close to nil.

This paper analyzes the effects of corporate tax liability on firm-level total factor productivity (TFP) as the key driver of economic performance. This is a new dimension in the UK productivity puzzle that has not attracted attention so far. We use 6559 manufacturing firms over 2004–2011 to investigate whether higher levels of corporate tax affect the productivity catch-up process by reducing after-tax earnings that could alternatively be used for productivity-enhancing investment, particularly focusing on R&D- and export-intensive firms. Our key results are summarized as follows: first, higher levels of corporate taxation impact adversely on TFP and this finding is robust to different tax measures and insensitive to endogeneity bias; second, as R&D- and export-intensive firms tend to have relatively higher TFP growth, higher levels of tax liability as a share of earnings before interest and taxes decelerate TFP growth of these firms.

This paper analyzes the role of money and monetary policy as well as the forecasting performance of New Keynesian dynamic stochastic general equilibrium models with and without separability between consumption and money. The study is conducted over three crisis periods in the Eurozone, namely, the ERM crisis, the dot-com crisis, and the global financial crisis (GFC). The results of successive Bayesian estimations demonstrate that during these crises, the nonseparable model generally provides better out-of-sample output forecasts than the baseline model. We also demonstrate that money shocks have some impact on output variations during crises, especially in the case of the GFC. Furthermore, the response of output to a money shock is more persistent during the GFC than during the other crises. The impact of monetary policy also changes during crises. Insofar as the GFC is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter.

We examine whether the importance of lagged inflation in the New Keynesian Phillips Curve (NKPC) may be a result of specification biases. NKPCs are estimated for four countries: France, Germany, Italy, and the United Kingdom. Using time-varying coefficient (TVC) estimation, a procedure that can deal with possible specification biases, we find support for the NKPC model that excludes lagged inflation. Our results indicate a Phillips-curve relationship for the countries considered that does not contain an inertial element.

This paper develops a computable overlapping generations (OLG) model for gender and growth policy analysis that brings to the fore the role of access to public infrastructure. The model accounts for human and physical capital accumulation, intra- and intergenerational health persistence, fertility choices, and women's time allocation between market work, child rearing, and home production. Bargaining between spouses and gender bias, in the form of discrimination in the work place and mothers' time allocation between daughters and sons, are also accounted for. The model is calibrated for a low-income country and various experiments are conducted, including improved access to infrastructure, an increase in subsidies to child care, a reduction in gender bias, and a composite gender-based reform program to assess the role of policy complementarities. The results illustrate the importance of accounting for changes in women's time allocation in assessing the impact of public policy on economic growth.

This paper shows that growth and income distribution dynamics are closely linked through occupation, financial intermediation, and education. We use micro data from Thailand for 1976–1996. The compositional changes across these characteristics account for half of the Thai inequality increase and 40% of the Thai growth and poverty reduction. Financial deepening and educational expansion contributed to increasing inequality, whereas occupational transformation contributed to poverty alleviation. The changes in income gaps across the income–status groups, that is, divergence and then convergence, give rise to inverted-U inequality dynamics. These two growth-related components of inequality dynamics, composition and income-gap dynamics, explain virtually all the change in overall inequality, except its initial rise. Thus, inequality dynamics can be viewed as an integral part of the wider process of growth, as Kuznets speculated.

We investigate the importance of trend inflation and the real-activity gap in explaining inflation in G7 countries since 1960. Our analysis is based on a bivariate unobserved components model of inflation and unemployment in which inflation is decomposed into a stochastic trend and a transitory component. As in recent implementations of the New Keynesian Phillips Curve, it is the transitory component of inflation, or “inflation gap,” that is driven by the real-activity gap, which we measure as the deviation of unemployment from its natural rate. We find that both trend inflation and the inflation gap have been consistent and substantial determinants of inflation at business cycle horizons for all G7 countries since 1960. Also, the real-activity gap explains a large fraction of the variation in the inflation gap for each country. These results provide empirical support for the New Keynesian Phillips Curve augmented with trend inflation.

In this paper, unemployment, growth, and income inequality are interdependent and endogenously determined in a unified model of a trade union. Analytically, we show that the effective labor force exhibits an intensive margin response, in the sense that in response to higher unionization the number of employed workers decreases, but each individual employed worker provides more working hours. This intensive margin response leads to the possibility of the coexistence of high unemployment and high growth. Moreover, unionization gives rise to an ambiguous effect on income inequality, whereas it has an unambiguously positive effect on the labor income share and growth rate. Our numerical study shows that the elasticity of substitution between labor and capital plays an important role in governing the steady-state consequences and affecting the impact of (de-) unionization. These results provide not only a plausible explanation of the empirical evidence, but also a reconciliation for the disparity in the empirical findings.

This work shows the asymmetric effect of the reduction in transportation costs across different sectors in the process of the Great Divergence. Specifically, the analysis indicates that reductions in transportation costs of industrial goods enhance convergence of the growth rates of trading economies. In contrast, reductions in transportation costs of nonindustrial goods contribute to a further divergence across countries.

This paper considers the effects of patent length and price regulation in an R&D growth model with variety expansion. Innovation requires lower bounds on patent length and price. Increasing patent duration promotes growth; increasing the cap on the price of patented products promotes growth below the monopoly-pricing level. Each policy instrument can raise welfare unless excessively used, and their welfare ranking depends on parameterizations. It is desirable, on welfare grounds, to limit patent protection along both dimensions, namely by limiting patent length and capping the price of patented products. Such limits raise welfare despite reducing the growth rate.

We propose a simple short-run Post-Keynesian model in which the key aspects of shadow banking, namely securitization and the production of structured finance instruments, are explicitly formalized. To the best of our knowledge, this is the first attempt to broaden purely real-side Post-Keynesian models and their traditional focus on shareholder-value orientation, the financialization of non-financial firms, and the profit-led vs. wage-led dichotomy. We rather put emphasis on the role of financial institutions and rentier-friendly environment in determining the predominance of specific growth and distribution regimes. First, we illustrate the macroeconomic rationale of shadow banking practices. We show how, before the 2007–08 crisis, securitization and shadow banking allowed for an increase in profitability for the whole financial sector, while apparently keeping leverage under control. Second, we define a variety of shadow-banking-led regimes in terms of economic activity, productive capital accumulation, and income distribution.

The transcript of a panel discussion marking the 50th anniversary of John Muth's “Rational Expectations and the Theory of Price Movements” (Econometrica 1961). The panel consisted of Michael Lovell, Robert Lucas, Dale Mortensen, Robert Shiller, and Neil Wallace. The discussion was moderated by Kevin Hoover and Warren Young. The panel touched on a wide variety of issues related to the rational-expectations hypothesis, including its history, starting with Muth's work at Carnegie Tech; its methodological role; applications to policy; its relationship to behavioral economics; its role in the recent financial crisis; and its likely future.

The panel discussion was held in a session sponsored by the History of Economics Society at the Allied Social Sciences Association (ASSA) meetings in the Capitol 1 Room of the Hyatt Regency Hotel in Denver, Colorado.

We review several control problems, all related to robust control in some way, that lead to a minimax linear quadratic problem. We stress the fact that although an augmented performance index appears, containing an L2 norm of a disturbance signal, only the nonaugmented quadratic performance index is of interest per se in each case.