Since the seminal work of Becker, the dynamics of endogenous fertility has been based on the trade-off faced by parents between the quantity and the quality of their children. However, in developing countries, where child labor is an indispensable source of household income, parents actually incur a negative cost by having an extra child, so that the trade-off disappears. The purpose of this paper is to restore the Beckerian quantity–quality trade-off when intergenerational transfers are upstream, in order to keep fertility endogenous. We do that by adding a negative “sibship size effect” on human capital formation to the standard Becker model. With a simple specification, we obtain multiplicity of steady states or, more fundamentally, the possibility of a jump from a state with high fertility and low income to a state with low fertility and high income, triggered by a continuous increase in the productivity of human capital formation.

We study the general equilibrium properties of two growth models with overlapping generations, habit formation, and endogenous fertility. In the neoclassical model, habits modify the economy's growth rate and generate transitional dynamics in fertility; stationary income per capita is associated with either increasing or decreasing population and output, depending on the strength of habits. In the AK specification, growing population and increasing consumption per capita require that the habit coefficient lie within definite boundaries; outside the critical interval, positive growth is associated with either declining consumption due to overcrowding, or extinction paths with declining population. In both frameworks, habits reduce fertility: the trade-off between second-period consumption and spending for bequests prompts agents to decrease fertility in order to make parental altruism less costly. This mechanism suggests that status-dependent preferences may explain part of the decline in fertility rates observed in most developed economies.

This paper modifies a Townsend turnpike model by letting agents stay at a location long enough to trade some consumption loans, but not long enough to support a Pareto-optimal allocation. Monetary equilibria exist that are nonoptimal in the absence of a scheme to pay interest on currency at a particular rate. Paying interest on currency at the optimal rate delivers a Pareto-optimal allocation, but a different one than the allocation for an associated nonmonetary centralized economy. The price level remains determinate under an optimal policy. We study the response of the model to “helicopter drops” of currency, steady increases in the money supply, and restrictions on private intermediation.

Imperfections in the credit market can hamper the flow of factors from less productive to more productive firms and result in a lower aggregate total factor productivity (TFP). Depth of such misallocation will depend on per capita income, the level of imperfections in the credit market, and the distribution of entrepreneurial productivity. Under some parameter configurations, we find that per capita income and TFP may affect each other so that an economic boom may cause higher resource misallocation, lower TFP, and economic recession. At the same time, an economic recession may have a “cleansing effect” on TFP leading to a lower resource misallocation, higher TFP, and economic boom. In other words, economic success may breed the failure and the failure can become a precondition for success so that the boom-bust cycles in resource misallocation, TFP, and per capita income may become endogenous.

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.

This paper explores the impact of gender differences in the desire for sex and the distribution of power in the household on the onset of the demographic transition and the take-off to growth. Depending on the price and efficacy of modern contraceptives, the gender wage gap, and female bargaining power, the economy assumes one of two possible equilibria. At the traditional equilibrium, contraceptives are not used, fertility is high and education and growth are low. At the modern equilibrium, contraceptives are used, fertility is low and further declining with increasing income, and education and growth are high. The theory motivates a “wanted fertility reversal”: At the traditional equilibrium, men prefer more children than women, whereas at the modern equilibrium, men prefer fewer children than women. Female empowerment causes households to provide more education for their children and leads to an earlier uptake of modern contraceptives and an earlier onset of the demographic transition and the take-off to modern growth.

We compare inflation uncertainty in distinguished groups of economies. Results indicate that during the recent financial crisis the global inflation climate has become markedly more uncertain than previously. We document that in comparison to other economies, member states of the European Monetary Union are less exposed to inflation uncertainty. Three European Union members that are not part of the monetary union and five other OECD member economies serve as control groups. With regard to the quantification of inflation uncertainty, results are robust over a set of alternative estimates of the latent inflation risk processes.

The paper investigates whether US regions respond differently to shocks in the crude oil market. We disentangle oil market shocks into distinct demand and supply shocks and examine the response of regional personal income to these shocks. Results indicate that for most regions, oil supply shocks decrease real personal income. Except for the Rocky Mountains and the Southwest, global aggregate demand shocks are recessionary, typically about a year and a half after the shock. When we split our data into oil-producing and non-oil-producing regions, we find that global aggregate demand shocks have no effect on oil-producing regions but cause a decrease in income in non-oil-producing regions. Our analysis further indicates that oil-specific demand shocks have positive and persistent impacts on oil-producing regions but are recessionary in non-oil-producing regions. We also document significant asymmetries in the regional responses to small versus large oil shocks. In addition, the paper shows that regional differences in industrial composition explain some of the variation in the responses of real regional personal income to oil shocks.

We propose an endogenous growth model incorporating social capital. Social capital serves only as an input in the production of human capital and it involves a cost in terms of the final good. In contrast to alternative specifications, this model ensures that social capital enhances productivity gains by playing the role of a timing belt that drives the transmission and propagation of all productivity shocks. We find that, depending on the measure of social capital, the elasticity of human capital with respect to social capital varies from 6% to 10%. Finally, we investigate the short-term dynamics and imbalance effect properties of the model, depending on the value of this elasticity. In particular, we show that when the substitutability of social capital for human capital increases, the economy is better equipped to surmount initial imbalances, as individuals may allocate more working time to the final good sector without impeding economic growth.

This paper studies the distortionary impact of progressive dividend taxation on investment decisions under the premises of the “new” view. According to the new view, proportional dividend taxation does not distort firms' investment decisions. We find that progressive dividend taxation distorts investment decisions due to endogenous variations in the marginal tax rate caused by stochastic taxable income over the business cycle. The magnitude of this distortion critically depends upon the marginal tax rate and the progressivity of the tax system.

To what extent did deviations from the Taylor rule between 2002 and 2006 help to promote price stability and maximum sustainable employment? To address that question, I estimate a New Keynesian model with unemployment and perform a counterfactual experiment where monetary policy strictly follows a Taylor rule over the period 2002:Q1–2006:Q4. I find that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8% would have been as high as 80%, whereas the probability of an inflation rate above 1% would have been close to zero.

In this paper, we build on Ryan and Wales (1998) and Moschini (1999) and impose curvature conditions locally on the generalized Leontief model, introduced by Diewert (1974). In doing so, we exploit the Hessian matrix of second order derivatives of the reciprocal indirect utility function, unlike Ryan and Wales (1998) and Moschini (1999), who exploit the Slutsky matrix.

A recent finding of the SVAR literature is that the response of hours worked to a (positive) technology shock depends on the assumed order of integration of the hours. In this work we relax this assumption, allowing fractional integration in hours and productivity. We find that the sign and magnitude of the estimated responses depend crucially on the identification assumptions employed. Although the responses of hours recovered with short-run (SR) restrictions are positive in all data sets, long-run (LR) identification results in negative, although sometimes not significant responses. We check the validity of these assumptions with the Sims procedure, concluding that both LR and SR are appropriate to recover responses in a fractionally integrated VAR. However, the application of the LR scheme always results in an increase in sampling uncertainty. Results also show that even the negative responses found in the data could still be compatible with real business cycle models.

This paper quantifies the welfare gains from Social Security when individuals face uninsurable longevity risk. While past researchers have studied this basic question, we do so from a unique perspective. In contrast to traditional macroeconomic models that abstract from specific linkages between parents and children, in our model, children are born to specific parents whose longevity is uncertain. And because parental asset holdings evolve over the life of the parent, children face uninsurable bequest income risk in addition to their own longevity risk. We find that Social Security improves ex ante expected utility by 3.4% of lifetime consumption (for the second generation). Because our baseline analysis assumes full information and optimal hedging of longevity risk, we treat these welfare gains as a conservative estimate, and we show that the gains are significantly larger when individuals fail to hedge their longevity risk.

Karl Shell is without a doubt one of the central players in the development of economic theory and macroeconomics in the latter part of the twentieth century. He has made important contributions on topics ranging from growth theory, to overlapping generations, to extrinsic uncertainty, to monetary economics, to market games, and to technological innovation. His collaborations with Dave Cass are legend, and include the seminal formulation of the concept of sunspot equilibria. His “Notes on the Economics of Infinity,” and his papers with Yves Balasko are overlapping-generations classics. Shell's many coauthors read like a Who's Who in economics, and include (in no particular order) Joe Stiglitz, Franklin Fisher, Miguel Sidrauski, Ned Phelps, Duncan Foley, Walt Heller, Albert Ando, Jim Peck, Rod Garratt, Aditya Goenka, Christian Ghiglino, and Todd Keister. This is also a club to which we are also proud to belong.

Shell's research is first rate and highly innovative, but his full contribution to economic theory must also be judged by his long service as the editor of one of the profession's premier journals, the Journal of Economic Theory. As the founding editor of JET, Shell took a small upstart journal, originally envisioned as a niche outlet for papers on mathematical economics, and turned it into one of the best in the profession. JET has published papers that have had major impacts on the development of economic theory in all its various flavors.

Because of Shell's long stewardship of JET, the story of his professional life—which we hope we have captured in this interview—is also a history of the evolution of economic theory over the past quarter century. We spoke with Karl in his office at Cornell University and over lunch at the faculty club in the Statler, and the interview tapes we made were very much a three-way conversation between Karl and the two of us. In editing the transcripts of these tapes for publication, we wished to keep the focus of the conversation on Shell, and have therefore adopted the same anonymous “MD” moniker we used in our interview of Dave Cass to mask the identity of the questioner. We hope you enjoy the conversation as much as we did.

In aggregation theory, index numbers are judged relative to their ability to track the exact aggregator functions nested within the economy's structure. We compare two statistical index numbers—the Divisia monetary aggregate and the simple-sum monetary aggregate—with the exact rational expectations monetary aggregate, using actual data. Because we are not using simulated data, we estimate the parameters of the Euler equations, and thereby of the nested monetary aggregator function, using the generalized method of moments. We explore the tracking errors of the two index numbers relative to the estimated exact aggregate. We investigate the circumstances under which risk aversion increases tracking error. We also use polyspectral methods to test for the existence of remaining nonlinear structure in the residual tracking errors.

This paper studies a growth model with public and private education alternatives. The impact of education vouchers on economic growth and the evolution of income inequality are considered. Results indicate that introducing education vouchers can increase economic growth. Households switching from public to private education experience higher incomes. This raises the tax base, in turn raising public education expenditures and growth of the whole economy. Vouchers are found to generally increase income inequality. Welfare comparisons show that voucher schemes may in some cases gain majority support, depending on assumptions and parameters. The results add a new dimension on which vouchers can be evaluated in the continuing policy debate.

We investigate sources of economic fluctuations in Chile during 1998–2007 within the framework of a standard neoclassical growth model with time-varying frictions (wedges). We analyze the relative importance of efficiency, labor, investment, and government/trade wedges for business cycles in Chile. The purpose of this exercise is twofold: (i) focusing the policy discussion on the most important wedges in the economy and (ii) identifying which broad class of models would present fruitful avenues for further research. We find that different wedges have played different roles during our studied period, but that the efficiency, labor, and investment wedges have had the greatest impact. We also compare our results with existing studies on emerging and developed economies.

This paper examines the government spending multiplier when economic agents combine adaptive learning and knowledge about future fiscal policy to form their expectations. The analysis shows that the effects of a government spending shock substantially change when the rational expectations hypothesis is replaced by this learning mechanism. In contrast to the dynamics under rational expectations, a government spending shock in a small-scale new Keynesian DSGE model with learning crowds in private consumption and is associated with a positive comovement between real wages and hours worked. In the baseline calibration, the output multiplier under learning is above one and about twice as large as under rational expectations.

In this paper, we apply two novel methodological approaches, Tucker three-way principal component analysis and locally weighted principal component analysis, to construct financial conditions index for Eurozone countries. The aim is to point out how real and financial macroeconomic variables affect the credit channel and which variables are more relevant in each occasion, highlighting structural differences within the Eurozone. The results suggest that the Eurozone is involved into a low easing pattern, which is difficult to reverse and affects considerably the financial conditions, surrounding the hypothesis that this pattern has been worsened by structural differences between the European Monetary Union (EMU) countries. Empirical evidence shows that European Central Bank (ECB) policy has managed to cool financial tensions and has made financial conditions homogeneous, but it has not been able to restore them at a precrisis level.