This study investigates the labor market under increased automation of middle-skilled jobs wherein worker suitability for these jobs is considered. We examine two effects of increased automation on workers. The first effect is the possibility of replacement of middle-skilled workers by machines. The second effect is the diversity in job mismatch probabilities of workers. If machines perform a worker’s suitable jobs more (or less) than the worker’s unsuitable jobs, then the worker’s job mismatch probability rises (or declines). Because workers who have larger job mismatch probabilities remain job seekers, it is more difficult for a firm to find a suitable worker. Due to these two effects, underemployment rises.

This paper shows how fiscal policy affects unemployment in a New Keynesian model with search and matching frictions and distortionary taxation. The model is estimated using US data that includes labor market flows and distinct fiscal instruments. Several findings stand out. First, unemployment multipliers for spending and consumption tax cuts are substantial, even though output multipliers turn out to be less than one. Second, multipliers for labor tax cuts are small. Third, fiscal rules enhance the positive effects of discretionary fiscal policy. However, these expansionary effects on the multipliers are modest compared to earlier studies.

This paper offers a framework for measuring global growth and inflation, built on standard index number theory, national accounts principles, and the concepts and methods for international macro-economic comparisons. Our approach provides a sound basis for purchasing power parity (PPP)- and exchange rate (XR)-based global growth and inflation measures. The Sato–Vartia index number system advocated here offers very similar results to a Fisher system but has the added advantage of allowing a complete decomposition with PPP or XR effects. For illustrative purposes, we present estimates of global growth and inflation for 141 countries over the years 2005 and 2011. The contribution of movements in XRs and PPPs to global inflation are presented. The aggregation properties of the method are also discussed.

This paper studies the evolution of China’s exchange rate policy using real options theory. With intervention costs and ongoing uncertainty, intervention involves the exercise of an option. Increased uncertainty increases the value of this option. This “wait and see” effect leads the Central Bank to widen its intervention band. However, increased volatility also produces larger fluctuations in welfare, which creates a “fear of floating.” This induces the Central Bank to set a tighter band. To study this trade-off, our paper incorporates stochastic volatility into a new Keynesian target zone model and then calibrates it to data from China. We find that increased uncertainty leads to a tighter intervention band, both in the data and in the model. Hence, in China, “fear of floating” appears to dominate the “wait and see” effect.

Many recent digital innovations (like video games) augment the value of leisure time, which is not captured by Gross Domestic Product. Therefore, the productivity impact of such innovations may be understated. I develop the theoretical foundations for measuring the value of leisure when it is produced using the household’s leisure time and recreational durable goods. I apply this framework to estimate the value of US leisure from 1948 to 2016. While the value of leisure is large, it has become less important over time. I find that productivity growth of leisure time has slowed in the digital era. Household stocks of digital goods are small, so have relatively little impact on leisure value. I conclude that mismeasurement due to household digital goods is not a first-order cause of the recent productivity slowdown.

The rate of innovation in Information Technology (IT) has slowed down over time. The slowdown is evident both in the data on quality-adjusted prices of computers, and performance of microprocessors used in computers. The model in this paper shows that an IT–labor elasticity of substitution that is greater than 1 can explain the slowdown. With an elasticity of substitution greater than 1, however, slowing innovation can result in sustained labor productivity and output growth. Sustained growth is possible because an IT–labor elasticity of substitution greater than 1 results in a continuously increasing share of IT in production costs, which counteracts the effect of slowing innovation on labor productivity and output growth. In this environment of slowing innovation, increasing IT share and sustained growth, employment can increase or decrease, depending on the values of the IT–labor elasticity of substitution and the price elasticity of demand for IT-enabled consumption goods.

This paper applies the common stochastic trends representation approach to the time series of total factor productivity (TFP) and the relative price of investment (RPI) to investigate the modeling of neutral technology (NT) and investment-specific technology (IST) and its econometric ramifications on the analysis of general equilibrium model. The permanent and transitory movements in both series are estimated efficiently via Markov chain Monte Carlo methods using band matrix algorithms. The results indicate that TFP and the RPI are, each, well represented by a differenced first-order autoregressive process. In addition, their time series share a common trend component that we interpret as reflecting changes in general purpose technology. These results are consistent with studies that suggest that (1) the traditional view of assuming that NT and IST follow independent processes is not supported by the features of the time series and (2) improper specification of secular trends may distort estimation and inference. Notably, the findings provide some guidance to minimize the effect of idiosyncratic and common trend misspecifications on the analysis of impulse dynamics and propagation mechanisms in macroeconomic models.

This paper examines optimal policy in a macroeconomic model with collateral constraints. Binding collateral constraints yield inefficient competitive equilibrium allocations because they distort the optimal utilization of real resources. I identify the set of policy instruments that can be used by a Ramsey planner to achieve the first-best and the second-best (i.e., constrained planner's) allocations. A system of distortionary taxes on capital and labor income, along with direct lump-sum transfers among borrowers and lenders replicates the first-best outcome. The tax rates correct for the marginal distortions, whereas the direct lump-sum transfers perform income redistributions among the agents. In absence of direct lump-sum transfers, the distortionary taxes have an additional role, i.e., to perform implicit income transfers, and only second-best outcomes are attainable. I also derive the optimal policy in response to real and financial shocks, and show how the policy recommendations differ depending on the set of policy instruments available.

This study introduces automation into a Schumpeterian growth model to explore the effects of R&D and automation subsidies. R&D subsidy increases innovation and growth but decreases the share of automated industries and the degree of capital intensity in the aggregate production function. Automation subsidy has the opposite effects on these macroeconomic variables. Calibrating the model to US data, we find that raising R&D subsidy increases the welfare of high-skill workers but decreases the welfare of low-skill workers and capital owners, whereas increasing automation subsidy increases the welfare of high-skill workers and capital owners but decreases the welfare of low-skill workers. Therefore, whether the government should subsidize innovation or automation depends on how it evaluates the welfare gains and losses of different agents in the economy.

This paper considers a model of linear capital taxation for an economy where capital and labor income are subject to idiosyncratic uninsurable risk. To keep the model tractable, we assume that investment decisions are made before uncertainty is realized, so that the realization of the capital and labor income shocks only affects current consumption. In this setting, we are able to jointly analyze capital and labor income risk and derive analytical results regarding the optimal taxation of capital. We find that the optimal capital tax is positive in the long run if there is only capital income risk. The reason for this is that the capital tax provides insurance against capital income risk. Furthermore, for high levels of risk, increasing the capital tax may actually induce capital accumulation. On the other hand, if there is only labor income risk, the optimal capital tax is zero. The sign of the optimal tax can only be negative if the two types of risk are negatively correlated and labor income risk is large enough.

The credibility criterion commonly used in the strategic macroeconomic policy literature, subgame perfection or its variants, ignores a critical problem concerning intertemporal consistency of policy announcements. To capture this additional credibility constraint, this note applies two distinct notions of Renegotiation-Proof, originally proposed in the context of two-person repeated games. Macroeconomic policy games, where the benevolent government interacts with atomistic private agents, offers a new testing ground for these criteria to be evaluated. This note discusses the relative strengths and weaknesses of these criteria.

Based on a multisector general equilibrium framework, we show that the sectoral elasticity of substitution plays the key role in the evolution of asymmetric tails of macroeconomic fluctuations and the establishment of robustness against productivity shocks. A non-unitary elasticity of substitution renders a nonlinear Domar aggregation, where normal sectoral productivity shocks translate into non-normal aggregated shocks with variable expected output growth. We empirically estimate 100 sectoral elasticities of substitution, using the time-series linked input-output tables for Japan and find that the production economy is elastic overall, relative to a Cobb-Douglas economy with unitary elasticity. In addition to the previous assessment of an inelastic production economy for the USA, the contrasting tail asymmetry of the distribution of aggregated shocks between the USA and Japan is explained. Moreover, the robustness of an economy is assessed by expected output growth, the level of which is led by the sectoral elasticities of substitution under zero-mean productivity shocks.

Occurrences of an old phenomenon, the expropriation of foreign-owned property, peaked in the 1970s when virtually every significant oil-producing developing country nationalized its oil. Nationalization was again on the rise in the 2000s. Using novel data, this paper quantitatively evaluates the effects of nationalization. First, the paper finds significant productivity losses associated with nationalization in a sample of oil-producing countries. Venezuela in particular experienced a striking decline in productivity. Second, the paper presents a new channel through which nationalization affects productivity: a long-term pre-announcement can shift the composition of the workforce with a huge decline in highly skilled foreign workers and result in higher extraction and lower exploration. Guided by a quantitative dynamic partial equilibrium framework disciplined by features of the Venezuelan data, this paper then evaluates the effects of nationalization. A comparison of the simulated and time series data shows that the model can explain about 80% of the productivity pattern over 1961–1980 in the Venezuelan oil industry. Counterfactual experiments suggest that the shift in the composition of the workforce is important in accounting for the productivity pattern. Furthermore, if nationalization had been sudden, long-run losses would have been lower.

Introducing susceptible-infected-recovered epidemiology dynamics with vaccines into an endogenous growth model, we investigate the impact of government infectious disease policy on macroeconomic performance. We find that any expenditure that improves health, whether to reduce the contact rate or increase the recovery rate or the vaccination rate, and regardless of whether it comes directly from the households or the government, has a positive impact on economic growth, but does not necessarily improve the welfare. The reason people’s health has improved but their welfare has fallen is because government expenditures must be covered by taxes, which will reduce their disposable income and consumption.

We characterize the necessary and sufficient conditions for optimality in discrete-time, infinite-horizon optimization problems with a state space of finite or infinite dimension. It is well known that the challenging task in this problem is to prove the necessity of the transversality condition. To do this, we follow a duality approach in an abstract linear space. Our proof resembles that of Kamihigashi (2003), but does not explicitly use results from real analysis. As an application, we formalize Sims's argument that the no-Ponzi constraint on the government budget follows from the necessity of the tranversality condition for optimal consumption.

In this paper, we investigate real-time behavior of constant-gain stochastic gradient (SG) learning, using the Phelps model of monetary policy as a testing ground. We find that whereas the self-confirming equilibrium is stable under the mean dynamics in a very large region, real-time learning diverges for all but the very smallest gain values. We employ a stochastic Lyapunov function approach to demonstrate that the SG mean dynamics is easily destabilized by the noise associated with real-time learning, because its Jacobian contains stable but very small eigenvalues. We also express caution on usage of perpetual learning algorithms with such small eigenvalues, as the real-time dynamics might diverge from the equilibrium that is stable under the mean dynamics.

This paper uses a Bayesian approach to estimate a standard international real business cycle model augmented with preferences with zero wealth effect, variable capacity utilization, and investment adjustment costs. First, I find that the bulk of fluctuations in country-specific outputs, consumption, investments, and international relative prices can be attributed to country-specific neutral technology, investment-specific technology, and preference shocks. Second, my estimated model with economically meaningful shocks simultaneously accounts for the negative correlation between the real exchange rate and relative consumption and the negative correlation between the terms of trade and relative output. Last, through a marginal likelihood comparison exercise, I find that the success of the model depends on preferences with zero wealth effects; other frictions and alternative asset market structures play a less important role.

Benhabib and Farmer show that in a laissez-faire one-sector real business cycle model under aggregate increasing returns, under sufficiently high degrees of productive externality, the demand-side effect in the labor market triggered by agents' expectations about the economy's future outweighs the supply-side effect, making agents' expectations become self-fulfilling. This paper analytically demonstrates that the conduct of monetary policy under nominal gross domestic product (GDP) targeting reinforces the supply-side effect in the labor market, thereby making belief-driven aggregate fluctuations more difficult to occur. This reinforcement effect on labor supply is absent under nominal consumption targeting and inflation targeting. Hence, under these two monetary regimes, the necessary and sufficient conditions for the economy to display equilibrium indeterminacy and sunspot fluctuations are identical to those in Benhabib and Farmer's laissez-faire economy. The results are robust to an endogenous growth extension of the model, implying that targeting the nominal GDP growth rate is more desirable than targeting the nominal consumption growth rate or the inflation rate in terms of macroeconomic stability.

This paper investigates the quantitative importance of different savings motives on the distributions of wealth and consumption and aggregate capital accumulation by solving an overlapping generations model with intragenerational heterogeneity. Agents differ in age, ability, earnings shocks, and inherited bequests. In the baseline economy, there are uninsurable idiosyncratic risks associated with uncertain lifetime and earnings shocks. The model is calibrated to the U.S. economy and solved numerically. Then the allocations of the baseline economy are compared with those of an economy with complete annuity markets, one without earnings uncertainty, and one without altruism.

Under adaptive learning, recursive algorithms are proposed to represent how agents update their beliefs over time. For applied purposes, these algorithms require initial estimates of agents perceived law of motion. Obtaining appropriate initial estimates can become prohibitive within the usual data availability restrictions of macroeconomics. To circumvent this issue, we propose a new smoothing-based initialization routine that optimizes the use of a training sample of data to obtain initials consistent with the statistical properties of the learning algorithm. Our method is generically formulated to cover different specifications of the learning mechanism, such as the least-squares and the stochastic gradient algorithms. Using simulations, we show that our method is able to speed up the convergence of initial estimates in exchange for a higher computational cost.