Dynamic spatial theory has been a fruitful approach to understanding economic phenomena involving time and space. However, several central questions still remain unresolved in this field. The identification of the social optimal allocation of economic activity across time and space is particularly problematic, not been ensured yet in economic growth. Developing a monotone method, we study the optimal solution of the spatial Ramsey model. Under fairly general assumptions, we prove the existence of unique social optimum. Considering a numerical implementation of our algorithm, we study the role played by capital mobility in the neoclassical growth environment. With capital irreversibility and economic openness, space allows for transitional dynamics. Moreover, in this context, capital mobility is beneficial as well in terms of social welfare and inequality. We also consider an application of our method to an extension of the spatial Ramsey model for optimal land-use planning.

Externalities are a fundamental aspect of any modern interdependent economy. The fact that agents interact with one another makes it inevitable that their decisions will influence one another directly, in addition to any indirect impact that may occur through the market place. Ever since the earliest stages of the discipline, externalities have been of prime concern to economists, who have long argued that they provide an important motive for (economic) decision making. To cite one prominent example, in The Theory of Moral Sentiments, Adam Smith notes that “Though it is in order to supply the necessities and conveniences of the body that the advantages of external fortune are originally recommended to us, yet we cannot live long in the world without perceiving that the respect of our equals, our credit and rank in the society we live in, depend very much upon the degree in which we possess, or are supposed to possess those advantages. The desire of becoming the proper objects of this respect . . . is perhaps the strongest of all our desires” [Smith (1759, pp. 348–349)]. In modern terminology, Adam Smith is referring to a consumption externality.

This paper introduces a method of optimization in infinite-horizon economies based on the theory of correspondences. The proposed approach allow us to study time-separable and non-time-separable dynamic economic models without resorting to fixed point theorems or transversality conditions. When our technique is applied to the standard time-separable model it provides an alternative and straightforward way to derive the common recursive formulation of these models by means of Bellman equations.

This paper models the liquidity effects after a contractionary open market operation in a framework that highlights the frictions of limited participation in financial markets and search frictions in labor markets. It is shown that Lucas rigidities, with the aid of labor market rigidities, could generate more persistent liquidity effects even in a context of flexible prices. In addition, the simulation results show that this adapted liquidity and labor search model does a reasonable good job in explaining the observed labor market dynamics in response to shocks of a plausible magnitude, and deliver substantial movements along a downward-sloping Beveridge curve.

This paper analyzes the impact of trade on the stability properties of trading countries and on stationary welfare. We consider a two-country two-good two-factor overlapping generations model where countries differ in terms of their technology. In the autarky equilibrium and the free-trade equilibrium, indeterminacy relies, under dynamic efficiency, on a capital intensive consumption good and intermediate values of the elasticity of intertemporal substitution in consumption. Opening the borders to trade can be a source of a global destabilizing effect. Indeed, considering a free-trade equilibrium in which one country is an exporter of the consumption good and the other country is an exporter of the investment good, indeterminacy can occur with trade even though the two countries are determinate in autarky. Finally, opening to trade increases the stationary welfare of the country that exports the investment good and deteriorates the one of the other country.

This paper analyzes the effect of the sectoral composition of government spending on the stability properties of a two-sector economy with a progressive tax structure. The results suggest that indeterminacy is more likely to occur if the fraction of government spending on consumption goods increases. This study also finds that, under progressive taxation, a sufficiently high public-consumption share is needed to generate indeterminacy. It is shown that, with the benchmark parameterization, a higher fraction of government spending on consumption goods needs to be implemented with a more progressive tax scheme to stabilize the economy. Moreover, it is emphasized that belief-driven economic fluctuations may indeed be a feature of the U.S. economy.

This note uses monotone methods to derive two sets of comparative statics results for monetary directed search models. First, it characterizes the impact of a higher inflation rate or a higher cost of using credit on market outcomes, regardless of the choice of matching function. Second, the seller-to-buyer ratio, output level, and money demand increase as the matching function becomes more efficient in a log-supermodular sense. I also consider an extension with endogenous search intensity and show that search intensity and trade volume always decrease in the nominal interest rate.

Government shares in total output are characterized by significant variation across countries. I noticed a strong negative correlation between government consumption shares and the price of government services in terms of private consumption. Motivated by this empirical observation, I developed a neoclassical growth model with added government that is capable of matching the variation in government shares very closely using only relative prices. In addition, I provide empirical evidence showing that the relative price of government consumption increases with income, which is consistent with distortions prevailing in poor countries. These two observations combined imply that government shares tend to be higher in poorer countries.

We study an impact of the financial intermediation on economic growth. We assume the simple model of the economic growth in the form of an autonomous dynamical system with a financial sector represented by banks and real sector represented by households and firms. We assume that financial intermediation services are described by financial intermediation technology which is a function depending on the share of labor employed by banks. Investments realized by firms depend not only on savings accumulated by banks but also on financial intermediation technology. We obtain a three-dimensional dynamical system and analyze the existence of a saddle equilibrium in the growth process associated with financial intermediation. Using mathematical methods of dynamical systems, we analyze growth paths, and we study the stationary states of the system and their stability. We found that equilibrium is reached only by trajectories located on two submanifolds. The resulting analysis provides an insight into the saddle solution with a stable incoming separatrix lying on one of the invariant manifolds.

Drawing on the empirical evidence that heterogeneity in inflation expectations is persistent and endogenously time-varying, we embed two inflation forecasting strategies—one based on costly ex ante perfect foresight, and the second based on costless ex ante extrapolative trend-following—in a macrodynamic model. Drawing also on the empirical evidence that inflation forecast errors may have to exceed some threshold before agents abandon their previously selected forecasting strategy, we describe agents as switching between forecasting strategies according to evolutionarily satisficing learning. Convergence to a long-run equilibrium consistent with output growth, unemployment and inflation at their natural levels may be achieved even if heterogeneity in inflation forecasting strategies (with predominance of the extrapolative foresight strategy) is an attractor of an evolutionarily satisficing dynamic perturbed by mutant agents. Thus, in keeping with the empirical evidence, heterogeneity in strategies to form inflation expectations (with prevalence of bounded rationality) can be a stable long-run equilibrium.

We develop a test of evolutionary change that incorporates a null hypothesis of homogeneity, which encompasses time invariance in the variance and autocovariance structure of residuals from estimated econometric relationships. The test framework is based on examining whether shifts in spectral decomposition between two frames of data are significant. Rejection of the null hypothesis will point not only to weak nonstationarity but to shifts in the structure of the second-order moments of the limiting distribution of the random process. This would indicate that the second-order properties of any underlying attractor set has changed in a statistically significant way, pointing to the presence of evolutionary change. A demonstration of the test's applicability to a real-world macroeconomic problem is accomplished by applying the test to the Australian Building Society Deposits (ABSD) model.

This study uses two large datasets to explore the output dynamics following economic disasters, one including 180 economic disasters across 38 countries over the last two centuries and the other including 204 disasters in 182 countries since World War II. Our results suggest that extreme economic crises are associated with huge and remarkably persistent loss. On average, output loss surges to above 26% in the first few years after the outbreak of a disaster and remains above 20% for as long as 20 years. It is only after more than 50 years that the loss is fully recovered.

We provide empirical evidence that the impact of quantitative easing (QE) programs on investment is weaker for countries with high-credit market regulations. We then extend a simple DSGE model with segmented financial markets to include credit regulation and examine its impact on the transmission of conventional and unconventional monetary policies. In our model, the government requires banks to hold a fraction of their assets in government debt. We show that the presence of such regulation can invert monetary transmission under QE policy: An expansionary QE program raises term premiums on corporate bonds and causes a contraction instead of an expansion in the economy. Such a perversion is absent under conventional policy. Further, in contrast to Carlstrom et al. (2017), we show that a simple Taylor rule welfare dominates a term premium peg under financial shocks, while the peg does better in the case of non-financial shocks.

This paper examines the effectiveness of forward guidance shocks in the US. We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimated credibility of the Fed’s forward guidance announcements is relatively high, but anticipation effects are attenuated. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. (2) The so-called “forward guidance puzzle” arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance.

This paper revisits the canonical assumption of nonconvex capital adjustment costs in lumpy investment models as in Khan and Thomas [(2008) Econometrica 76(2), 395–436], which are assumed to follow a uniform distribution from zero to an upper bound, without distinguishing between the mean and the variance of the distribution. Unlike the usual claim that the upper bound stands for the size (represented by the mean) of a nonconvex cost, I show that in order to generate an empirically consistent interest elasticity of aggregate investment, both a sizable mean and a sizable variance are necessary. The mean governs the importance of the extensive margin in aggregate investment dynamics, while the variance governs how sensitive the extensive margin is to changes in the real interest rate. As a result, both the mean and the variance are quantitatively important for aggregate investment dynamics.

If one drops the strong assumption that firms and households know all of the relevant parameters, and instead models agents as learning these parameters, the estimated parameters become random variables. Taking expectations several periods into the future may then involve taking the expectation of a product of random variables. Because the resulting problem is difficult, previous research has avoided it. This paper makes some progress using both analytical and numerical techniques. Focusing especially on consumption, we find that the resulting covariance terms could account for the well-documented empirical result that consumption displays excess sensitivity to lagged income. We show that a similar covariance effect could play a role in many widely used economic models.

This paper offers a reinterpretation of the Fed's time-varying implicit inflation target, based on two considerations. The first is that the need to alleviate the burden of distortionary taxation may justify the choice of a positive inflation rate. The second is based on compelling evidence that the degree of price and wage indexation falls with trend inflation. In fact, we find that a proper characterization of the joint evolution of fiscal variables and nominal rigidities has a strong impact on the Ramsey optimal policies, implying optimal inflation dynamics that are consistent with the observed evolution of U.S. trend inflation. By contrast, tax policies have been too lax, especially at the time of the controversial Bush tax cuts.

This paper examines whether changes in US presidential administration and central bank turnover during the period 1976–2016 caused regime shifts in Taylor rule deviations. Using a dynamic stochastic general equilibrium model to construct the welfare-maximizing policy rule and deviations from the optimal rule, we find evidence that politics indeed play a key role in explaining these deviations. In addition to politics, unemployment rates and the interest rate spread significantly account for regime shifts in Taylor rule deviations.

I develop an assignment model to quantify, in a unified framework, the causal effects of supply and demand forces on the evolution of the college wage premium in the US economy. Specifically, I quantify the relative contributions of four different forces: (i) a within-sector non-neutral technological change, (ii) the creation of new high-skill services/sectors, (iii) polarizing product demand shifts, and (iv) shifts in the relative supply of skilled labor. The model considers endogenous human capital accumulation. I find that positive supply shifts completely explain the fall of the skill premium during the period 1970–1980. Demand forces play a major role in the post-1980 period, when the skill premium rises. Among the demand forces, the results show an increasing contribution of polarizing product demand shifts over the decades. On the other hand, the effect of the within-sector non-neutral technological change is more important in the earlier decades of the post-1980 period.

In this paper, I study the effect that switching to a voucher system of educational finance has on the distribution of income. The model is calibrated to U.S. data, and simulated for two different forms of education finance: a voucher system and a completely private system of schools. All voucher policies considered result in welfare gains and reductions in income inequality. A private system entails a welfare loss and an increase in income inequality. The more important the peer group is to future income, the smaller the welfare gains and reductions in inequality associated with voucher systems, and the greater the welfare cost and increase in inequality associated with a private system.