This paper analyzes periods of economic stagnation in a panel of countries. We test whether stagnation can be predicted by institutional characteristics and political shocks and compare the impacts of such variables with those of traditional macroeconomic variables. We examine the determinants of stagnation episodes using dynamic linear and nonlinear models. In addition, we analyze whether the effects of the included variables on the onset of stagnation differ from their effects on the continuation of stagnation. We find that inflation, negative regime changes, real exchange rate undervaluation, financial openness, and trade openness have significant effects on both the onset and the continuation of stagnation. Only for trade openness is there robust evidence of a differential impact. Open economies have a significantly lower probability of falling into stagnation, but once in stagnation they do not recover faster.

This paper proves the existence of competitive equilibrium in a single-sector dynamic economy with heterogeneous agents, elastic labor supply, and complete asset markets. The method of proof relies on some recent results concerning the existence of Lagrange multipliers in infinite-dimensional spaces and their representation as a summable sequence and a direct application of the inward-boundary fixed point theorem.

Through their influence on the cross-sectional distribution of productivity across firms and workers, job creation and destruction likely have an impact on the rate at which aggregate productivity changes over time. However, the nature of this effect is not, a priori, clear. Although a broad consensus has emerged suggesting that job destruction enhances productivity by eliminating inefficient production units, theories disagree with regard to the effect of job creation. If job flows represent the reallocation of labor from low- to high-productivity positions, job creation would boost productivity growth. If, instead, they represent changes in employment along a primarily low-skill dimension, the effect would be negative. This paper estimates the influence of job creation and destruction on total factor productivity (TFP) growth using annual data on four-digit U.S. manufacturing. As expected, the results reveal a positive association between job destruction and changes in TFP. Yet, they also indicate that job creation tends to have a negative effect on productivity growth.

This paper examines an intertemporal optimizing consumer or a representative consumer-firm in a deterministic setting subject to a general (either linear or nonlinear) capital accumulation equation. Duality theory is used to recast the Hamilton–Jacobi equation for dynamic optimization in terms of an instantaneous and an intertemporal profit function. An envelope theorem allows derivation of an explicit solution for the value of the costate variable as a function of the state and other variables. The final model form only requires specification of atemporal functions that are linked into a closed-form solution for the optimal dynamic decision variables through a system of contemporaneous simultaneous equations.

This study examines the influence of foreign direct investment (FDI), overseas development aid (ODA), and remittances on the enrollment of girls and boys in 103 countries over the years 1970–2011. The results suggest that remittances have a contemporaneous robust significant influence on enrollment, with the positive effect being slightly higher for girls than for boys. FDI and ODA have an influence on the enrollment of girls and boys only after a significant time lag. The results also suggest that the impact of remittances on enrollment is increased through income and a well-developed financial sector; FDI through better institutions and a well-developed financial sector; and ODA through better government policy.

This paper studies asymmetric dynamics of real GDP growth by estimating linear and nonlinear quantile persistence over different parts of the conditional distribution for six major developed economies. Several novel quantile-based hypotheses are motivated in this paper and tested for the steepness asymmetry of real GDP growth that hypothesizes that contractions are steeper than expansions. The empirical results show that quantile persistence is generally high at far lower tails, thus requiring much longer half-lives to reverting negative deviations to the mean of real GDP growth and hence leading to gradual economic recoveries. By contrast, less persistence in far upper tails tends to generate sharp and short economic downturns that adjust positive deviations towards the mean of real GDP growth so as to cause abrupt economic recessions. In particular, this asymmetry in quantile persistence strongly supports the steepness asymmetry conjecture, robust to the presence of structural breaks and potential nonlinearities in real GDP growth.

Country risk premia can substantially affect macroeconomic dynamics. We concentrate on one of their most important determinants—a country’s net foreign asset (NFA) position and—in contrast to the existing research—investigate its nonlinear link to risk premia. The importance of this particular nonlinearity is two-fold. First, it allows to identify the NFA level above which the elasticity becomes much (possibly dangerously) higher. Second, such a nonlinear relationship is a standard ingredient of dynamic stochastic general equilibrium (DSGE) models, but its proper calibration/estimation is missing. Our estimation shows that indeed the link is highly nonlinear and helps to identify the NFA position where the nonlinearity kicks in at approximately −70% to −75% of GDP. We also provide a proper calibration of the risk premium—NFA relationship which can be used in DSGE models and demonstrate that its slope matters significantly for economic dynamics in such a model.

We introduce skill decay during unemployment into a New Keynesian model with hiring frictions and real-wage rigidity. Plausible values of quarterly skill decay and real-wage rigidity turn the long-run marginal cost–unemployment relationship positive in a “European” labor market with little hiring but not in a fluid “American” one. If the marginal cost–unemployment relationship is positive, determinacy requires a passive response to inflation in the central bank's interest feedback rule if the rule features only inflation. Targeting steady-state output or unemployment helps to restore determinacy.

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.

The market economy is modeled as a decentralized joint production system. Markets in such an economy require the use of money or credit instruments to facilitate exchange. As a result, market economies are at risk for monetary instability induced by real-side production coordination failure. In particular, economies decentralized via centralized wholesaling markets are subject to precipitous collapses. The most stable monetary system is trade in specie. However, there very likely is a scarcity of specie, which generates inefficiency and discourages production. There is, then, a need for an elastic currency. Bank-issued bills of exchange are a perfectly elastic medium and eliminate the scarcity of specie and its attendant inefficiency, but are a less stable monetary system than is trade in specie. In the trade-off between elasticity and stability, fiduciary currency (or fiduciary deposits) lies between specie and bank-issued bills of exchange.

This study constructs a dynamic model of the coexistence of public and private schools to study the impact of voucher programs when there are nonlinear peer group effects. The government provides public schools as well as tuition vouchers for households attending private schools. School quality depends on expenditure per student and peer quality within the school. When peer quality is nonlinear, more agents will choose public schools if peer quality is more substitutable, whereas more agents will attend private schools if peer quality is more complementary. We find that vouchers will typically create a “cream skimming” effect and the impact of voucher programs on economic performance is sensitive to the way in which peer interactions affect school quality.

We first explore empirical evidence of parameter and shock uncertainties in a state-space model with Markov switching. The evidence indicates that uncertainties in the U.S. economy have been too great to accurately define monetary policy rules. We then explore monetary policy rules under uncertainty with two approaches: the RLS learning algorithm and robust control. The former allows the parameters to be learned for a given model. Yet, as our results of the RLS learning in a framework of optimal control indicate, the state variables do not necessarily converge even in a nonstochastic model. The latter, by permitting uncertainty with respect to model misspecification, allows for a broader framework. Our study on robust control shows that robust optimal monetary policy rules reveal a stronger response to fluctuations in inflation and output than when no uncertainty exists, implying that uncertainty does not necessarily require caution.

Agents can learn from financial markets to predict macroeconomic outcomes, and learning dynamics can feed back into both the macroeconomy and financial markets. This paper builds on the adaptive learning (AL) model of [Slobodyan, S. and R. Wouters (2012a) American Economic Journal: Macroeconomics 4, 65–101.] by introducing the term structure of interest rates. This extension enables term structure information to fully characterize agents’ expectations in real time. This feature addresses an imperfect information issue neglected in the related AL literature. The term structure of interest rates results in a strong channel of persistence driven by multi-period forecasting. Including the term structure in the AL model results in a model fit similar to that obtained in the rational expectation (RE) version of the model, but it greatly reduces the importance of other endogenous sources of aggregate persistence such as price and wage stickiness and the elasticity of the cost of adjusting capital. The model estimated also shows that term premium innovations are a major source of persistent fluctuations in nominal variables under AL. This stands in sharp contrast to the lack of transmission of term premium shocks to the macroeconomy under REs.

This study investigates the time-varying effects of international uncertainty shocks. I use a global vector autoregressive model with drifting coefficients and factor stochastic volatility in the errors to model the G7 economies jointly. The measure of uncertainty is constructed by estimating a time-varying scalar driving the innovation variances of the latent factors, which is also included in the conditional mean of the process. To achieve regularization, I use Bayesian techniques for estimation, and rely on hierarchical global–local priors to shrink the high-dimensional multivariate system towards sparsity. I compare the obtained econometric measure of uncertainty to alternative indices and discuss commonalities and differences. Moreover, I find that international uncertainty may differ substantially compared to identically constructed domestic measures. Structural inference points towards pronounced real and financial effects of uncertainty shocks in all considered economies. These effects are subject to heterogeneities over time and the cross-section, providing empirical evidence in favor of using the flexible econometric framework introduced in this study.

In this paper we estimate a New-Keynesian dynamic stochastic general equilibrium (NK DSGE) model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko develop a DSGE model, in which firms follow four different types of price setting schemes: sticky prices, sticky information, rule-of-thumb, or flexible prices. We enrich Coibion and Gorodnichenko framework by incorporating heterogeneity in nominal wage setting behavior among households. We solve this DSGE model and estimate it using Bayesian techniques for the US economy from 1955 to 2008. The estimation results show the relevance of heterogeneity in wage setting among households. More importantly, we identify qualitative and quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and wage inflation, which a standard NK model with only Calvo-type wage rigidity fails to achieve. We also show that modeling wage-rigidity heterogeneity—as opposed to standard Calvo wages—amplifies the macroeconomic output fluctuations resulting from a technology shock while it mitigates the output fluctuations following a monetary tightening.

In recent years, there has been an explosive increase in the demand for health products and services by people all around the globe, and particularly in advanced economies. Aiming to enhance longevity and also to improve quality of life, individual consumption of pharmaceutical products and services has risen exponentially since the early 1980s. This paper develops a model in which agents invest part of their resources in medical products and time in physical exercise to enhance their health status. In the first part of the paper, we study the steady state and transitional dynamics of the model with special emphasis on the effects of health decisions on aggregate outcomes. In the second part, we explore how public health policies may alter private economic decisions that promote healthier and more productive lives.

This paper analyzes the role and importance of “inside” money, made out of commercial banks' liabilities, for a New Keynesian model of the type commonly used for monetary policy analysis. The active role of inside money stems from its unique role in allowing payment for at least some consumption goods; shocks to the production of inside money may therefore have real effects. A calibrated version of the model is shown to generate small, but nonnegligible effects of inside money shocks on output and inflation. Moreover, the presence of inside money in the model leads to a slight attenuation of the effect of technology and monetary policy shocks. Finally, it is found that it is optimal for monetary policy to react to inside money shocks, but reacting to inflation alone does not result in a significant loss of household welfare.

This paper proposes a financial accelerator framework to study the effects of heterogeneous and bounded rational expectations on macroeconomic dynamics. The paper examines the fluctuations effects departing from the rational expectations hypothesis in order to understand if there are significant implications on macroeconomic volatility and policy prescriptions. The findings suggest that macroeconomic stability and inflation dynamics depend on the chosen set of forecasting rules, as well as on the monetary policy adopted. The model shows that no monetary policy is able to quickly stabilize the system, as some fluctuations persist. Central banks face a trade-off between macro-volatility and speed of convergence to the steady state. This result offers some ground for fiscal policies aiming to prompt system stability. In addition, the analysis reveals a counterintuitive result confirming the “less-is-more” effect: increasing the decision-making and computational abilities of the agents may not lead the system to converge to the preferable steady state.

We study a model in which parents care about the economic and social status of their offspring. The chances of an individual achieving social status depends on innate traits, that is, IQ, ability, social and cultural environment, and other price-insensitive endowments, passed on by their parents, on human capital investments and on chance events. Parents can, through human capital investments, increase the offspring’s probability of climbing the social ladder, although they cannot borrow against the children’s perspective earning. Consequently, income and trait heterogeneity are the determinants of unequal opportunities and of intergenerational mobility.

Linear dynamical systems are widely used in many different fields from engineering to economics. One simple but important class of such systems is called the single-input transfer function model. Suppose that all variables of the system are sampled for a period using a fixed sample rate. The central issue of this paper is the determination of the smallest sampling rate that will yield a sample that will allow the investigator to identify the discrete-time representation of the system. A critical sampling rate exists that will identify the model. This rate, called the Nyquist rate, is twice the highest frequency component of the system. Sampling at a lower rate will result in an identification problem that is serious. The standard assumptions made about the model and the unobserved innovation errors in the model protect the investigators from the identification problem and resulting biases of undersampling. The critical assumption that is needed to identify an undersampled system is that at least one of the exogenous time series be white noise.