Using results from the literature on H∞ control, this paper incorporates model uncertainty into a frequency-domain approach to stabilization policy. The derived policies guarantee a minimum performance level even in the worst of (a bounded set of) circumstances. Robust H∞ policies are shown to be more “activist” than H2 policies in the sense that their impulse responses are larger. Robust policies also tend to be more autocorrelated. Consequently, the premium associated with being able to commit is greater under model uncertainty. Without commitment, the policymaker is not able to (credibly) smooth his response to the degree that he would like. A contribution of this paper is its analysis of robust control in a model featuring a forward-looking state transition equation, which arises from the fact that the private sector bases its decisions on expectations of future government policy. Existing applications of H∞ control in economics follow the engineering literature, and only consider backward-looking state transition equations.

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.

There are suggestions that increased uncertainty makes fiscal policy temporarily less effective. In this paper, I examine the relationship between business uncertainty and fiscal policy effectiveness in Germany. I use measures of business uncertainty that are derived from the firm-level data of the Ifo Business Climate Survey and interact them with the parameters of a structural vector autoregression to produce state-dependent spending multipliers. The impact of increased uncertainty on the spending multiplier is generally small and often statistically not significant in the short run. By contrast, I obtain a significant positive impact on the long-run multiplier. These baseline results are supported by a variety of robustness checks and specifications.

This paper studies the determinacy of equilibrium in a new Keynesian model with deep habits under different interest rate rules. The main finding is that an interest rate rule satisfying the Taylor principle is no longer a sufficient condition to guarantee determinacy. Including interest rate smoothing and a response to output deviations from steady state significantly enlarges the regions of determinacy. However, under all the simple interest rate rules considered, determinacy is not guaranteed for a very high degree of deep habits. Deep habits give rise to countercyclical markups, which is in line with empirical evidence and makes them an appealing feature in the study of demand shocks. The countercyclicality of markups also leads to multiple equilibria because of self-fulfilling expectations for a high degree of deep habit formation.

In this paper I show that the intensity at which intermediate goods are used in the production process affects aggregate total factor productivity (TFP). To do this, I construct an input–output model economy in which firms produce gross output by means of a production function in capital, labor, and intermediate goods. This production function is subject, together with the standard neutral technical change, to intermediates-biased technical change. Positive (negative) intermediates-biased technical change implies a decline (increase) in the elasticity of gross output with respect to intermediate goods. In equilibrium, this elasticity appears as an explicit part of TFP in the value added aggregate production function. In particular, when the elasticity of gross output with respect to intermediates increases, aggregate TFP declines. I use the model to quantify the impact of intermediates-biased technical change for measured TFP growth in Italy. The exercise shows that intermediates-biased technical change can account for the productivity slowdown observed in Italy from 1994 to 2004.

The paper analyzes a multicountry extension of the Barro model of productive public expenditure. In the presence of positive infrastructural externalities between countries, the provision of infrastructure will be inefficiently low if countries do not coordinate. This provides a role for a supranational body, such as the European Union, to coordinate the policies of the individual governments. It is shown how intervention by a supranational body can raise welfare by internalizing the infrastructural externality. Infrastructural externalities increase the importance of tax policy in the growth process and distribute the benefits of taxation across countries.

The relationship between the price of oil and the level of economic activity is a fundamental empirical issue in macroeconomics. Hamilton (1983) showed that oil prices had significant predictive content for real economic activity in the United States prior to 1972, whereas Hooker (1996) argued that the estimated linear relations between oil prices and economic activity appear much weaker after 1973. In the debate that followed, several authors suggested that the apparent weakening of the relationship between oil prices and economic activity is illusory, arguing that the true relationship between oil prices and real economic activity is asymmetric, with the correlation between oil price decreases and output significantly different from the correlation between oil price increases and output—see, for example, Mork (1989) and Hamilton (2003).

The paper compares the effects of market-based (M-B) and command-and-control (C&C) climate policies on the direction of technical change and the prevention of environmental disasters. Drawing on a model of endogenous growth and directed technical change, we show that M-B policies (carbon taxes and subsidies toward clean sectors) suffer from path dependence and exhibit bounded window of opportunities: delays in their implementation make them ineffective both in redirecting technical change, (i.e. triggering a transition toward clean energy) and in avoiding environmental catastrophes. On the contrary, we find that C&C interventions are favored by path dependence and guarantee policy effectiveness irrespectively of the timing of their introduction. As the hypothesis of path dependence in technological change has received vast empirical support and it is a key feature of many models of growth, we argue that C&C policies should be seen as a valuable and non-equivalent alternative to M-B interventions.

In this work, we find that the zero capital income tax result might not hold, even at the steady state, when the government discount rate differs from the individual one. As intuitive Pigouvian considerations would suggest, capital income should be taxed (subsidized) when the government is less (more) impatient than individuals are. However, a counterintuitive asymmetry emerges as for the steady state since, in the long run, capital income cannot be taxed because of the explosive distortionary effect of positive taxes. The asymmetry is ruled out with a logarithmic utility function because, in this case, the anticipated policy path does not affect current individual choices and thus the cumulative distortionary effect of taxes disappears.

This paper introduces adaptive learning into the third-generation currency crisis model of Aghion, Bacchetta, and Banerjee (2001, Currency crises and monetary policy in an economy with credit constraints, European Economic Review 45, 1121–1150). Adaptive learning might reflect, for example, uncertainty about the economy's exposure to adverse balance sheet effects. Even when equilibrium is unique, we show that the learning algorithm's escape dynamics can produce the same kind of Markov-switching exchange rate behavior that is typically attributed to sunspots or herds. An advantage of our learning model is that currency crises become endogenous, in the sense that their stochastic properties can be related to assumptions about learning and other structural features of the economy.

For the United States, the supply and wages of skilled labor relative to those of unskilled labor have grown over the postwar period. The literature has tended to explain this through “skill-biased technical change” (SBTC). Empirical work has concentrated around two variants: (1) capital-skill complementarity, (2) skill-augmenting technical change. Our purpose is to nest and discriminate between these two explanations. We do so in the framework of multilevel Constant Elasticity of Substitution (CES) production function, where factors are disaggregated into skilled and unskilled labor, and capital into structures and equipment capital. Using a five-equation system approach and several nesting alternatives, we retrieve estimates of the substitution elasticities and technical changes. Our estimations can produce results in line with capital-skill-complementarity hypothesis. However, those results are outperformed where the only source of the widening skill premium has been skill-augmenting technical change. We also show that the different explanations for SBTC have different implications for projected developments of the premium.

This paper analyzes the effects of an unanticipated increase in immigration in a macroeconomic model with search and matching frictions. It shows how an immigration shock can lead to a temporary increase in unemployment under a variety of conditions and that this is qualitatively consistent with the responses from a VAR estimated on postwar US data.

This paper studies the effects of monetary policy in an inventory-theoretic model of money demand. In this model, agents keep inventories of money, despite the fact that money is dominated in rate of return by interest-bearing assets, because they must pay a fixed cost to transfer funds between the asset market and the goods market. In contrast to exogenous segmentation models in the literature, the timing of money transfers is endogenous. As a result, the model endogenizes the degree of market segmentation as well as the magnitudes of liquidity effects, price sluggishness, and the variability of velocity. I first show that the endogenous segmentation model can generate the positive long-run relationship between money growth and velocity observed in the data, which the exogenous segmentation model fails to capture. I also show that the short-run effects of money shocks on prices, inflation, and nominal interest rates are not robust.

This paper offers possible explanations for three generally observed facts about fiscal policy and development: (F1) the relative size of government increases as an economy develops, (F2) the rise in government and taxation are associated with rising or constant economic growth rates, and (F3) today's developing countries have larger government sectors than today's developed countries had at similar stages of development. The explanations for these facts are based on the structural transformation from traditional to modern production, rising public infrastructure investment, and less democratic governments in many of today's developing economies.

This paper evaluates the effectiveness of short-time work (STW) extensions—e.g., relaxing eligibility criteria or implementing new schemes—in OECD countries during the Great Recession. First, we find that the dampening effect of STW on the unemployment rate diminishes at higher take-up rates. Second, only countries with pre-existing STW schemes were able to fully exploit the benefits of STW. Third, the effects of STW were strongest when GDP growth was deeply negative at the beginning of the recession. In summary, our results indicate that STW is most effective when used as a fast-responding automatic stabilizer.

We investigate local strong rationality (LSR) in a one-step-forward-looking univariate model with memory one. Eductive arguments are used to determine when common knowledge (CK) that the solution is near some perfect-foresight path is sufficient to trigger complete coordination on that path (i.e., the path is LSR). Coordination of expectations is shown to depend on three factors: the nature of the CK initial beliefs, the degree of structural heterogeneity, and the information structure. Our sufficient conditions for LSR precisely reflect these features and provide basic consistent justifications for the choice of the saddle-path solution.

This paper aims to estimate the government investment fiscal multipliers in select European countries for the period 1970–2016. To do this, we combine Structural Vector Autoregression (SVAR) modeling with the Local Projections (LP) approach. We estimate models by also controlling for fiscal foresight, excluding the postcrisis period and distinguishing between Northern and Southern countries. Our findings suggest that an increase in government investment generates a “Keynesian effect” by engendering positive and permanent effects on the GDP level, even when government expenditure expectations are considered. Fiscal multipliers are close to 1 on impact and increase in the years after the implementation of a discretionary fiscal policy.

This paper examines how population aging affects the output effect of a government spending shock by using a panel data of OECD countries. The government spending shock is identified as a forecast error of government spending, and its output effect is estimated by using the local projection method. We find that population aging affects the output effect of the government spending shock. While in non-aging economies, government spending shock increases output significantly in both short- and medium-terms, in aging economies, output responses are not statistically significant.

An overlooked topic is the treatment of worker claims when firms are shutting down. In fact, when firms close, worker claims such as severance pay often go unfulfilled. To evaluate the quantitative importance of this observation, this paper develops a general equilibrium model with close attention to the exit margin, and examines how macroeconomic outcomes vary with the treatment of firing costs on exit. In the model, the impact of firing costs on employment weakens by a third when closing plants do not have to pay them, even though closure accounts for considerably less than one-third of total job destruction. Thus, the distribution of firm characteristics is a new channel for labor market rigidities to affect aggregates. The model also accounts for cross-country differences in the relationship between the structure of job flows and firm turnover.

This paper studies the role played by differences in risk aversion in affecting the long-run distribution of wealth across agents in the context of an endowment economy. The economy is populated by two types of Epstein-Zin agents who differ only in their attitudes toward risk. By choosing riskier portfolio strategies, less-risk-averse agents enjoy returns on their investments characterized by a higher mean and a higher variance than the ones enjoyed by more-risk-averse agents. The former effect tends to make less-risk-averse agents wealthier over time, whereas the latter tends to make them poorer. The paper shows that, contrary to the results obtained using standard expected utility preferences, for some parameter values the long-run distribution of wealth is dominated by more-risk-averse agents.