We construct a unified overlapping-generations framework of equilibrium growth that includes the Blanchard “perpetual youth” model, the Samuelson model, and the infinitely lived–agent model as limit specifications for a “realistic” two-parameter survivorship function. We assess how the limit specifications compare with the general survival function, and analyze how exogenous changes in demographic conditions affect equilibrium growth and savings rates. Predicted effects are consistent with some cross-country correlations between demographic conditions and growth rates.

In Mankiw, Romer, and Weil's augmented Solow model [Quarterly Journal of Economics 107 (2) 407–437 (1992)], the marginal product of human capital accrues to three factors of production: directly to human capital, and as an external effect to physical capital and labor. This paper estimates national stocks of human capital in 1990 created from prior investment in schooling and shows that for 36 countries the (macro) marginal product of human capital accruing to workers in 1990 is consistent with estimates of the (micro) marginal return on investment in schooling in workers' earnings studies. This reconciliation provides empirical evidence for the augmented Solow model.

This paper develops a model that endogenizes both directed technologies and demography. Potential innovators decide which technologies to develop after considering available factors of production, and individuals decide the quality and quantity of their children after considering available technologies. This interaction allows us to evaluate potentially divergent development paths. We find that unskilled labor–biased technological growth can induce higher fertility and lower education, exerting downward pressure on growth in per-person income. Despite this, for most plausible developing-country scenarios, unskilled intensive growth produces more per-person income than skill-intensive growth. This result is robust to a variety of growth modeling assumptions.

A negative or nonsignificant empirical correlation between aggregate R&D intensity and the economic growth rate is a well-known fact in the empirical growth literature, but scarcely addressed in the theoretical growth literature. This paper develops an endogenous-growth~model that explores the interrelation~between horizontal and vertical R&D under a lab-equipment specification that is consistent with that stylized fact. A key feature is that the growth rate is fully endogenous both on the intensive and on the extensive margin. Strong composition effects between horizontal and vertical R&D, along both transition and the balanced-growth path, then emerge as the main mechanism producing those results. This setting also allows us to obtain a relationship between economic growth and firm dynamics that is consistent with the empirical facts.

We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer's choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parameterizations than in previous, similar models without these features.

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.

To identify the labor market reforms that offer the highest payoff, we develop a medium-scale two-country model representing a currency union featuring real and nominal rigidities and heterogeneous labor market frictions. A labor market reform is modeled as a permanent structural change in the labor market institutions. We find that changes in the domestic labor market can have drastic welfare implications for both countries. Welfare improvements are observed when a worker (a firm) is more likely to find a job (a worker) or when jobs are less likely to be destroyed. In addition, labor market heterogeneity has sizeable effects on the level of welfare gains. The more flexible the foreign labor market, the higher its welfare. Finally, we show that (i) the way the monetary authorities conduct their policy has negligible welfare effects and (ii) matching frictions can offset the negative effect of price rigidities in the economy.

In this paper we investigate the relationship between money growth uncertainty and the level of economic activity in the United States. We pay explicit attention to the Divisia monetary aggregates. In doing so, we use the new vintage of the data [called MSI (monetary services indices) by the St. Louis Fed], together with the simple sum monetary aggregates, over the period from 1967:1 to 2011:3. In the context of a bivariate VARMA, GARCH-in-mean, asymmetric BEKK model, we show that increased Divisia money growth volatility (irrespective of the level of aggregation and the method of calculation) is associated with a lower average growth rate of real economic activity. However, there are no effects of simple-sum money growth volatility on real economic activity, except with the Sum M1 and perhaps Sum M2M aggregates. We conclude that monetary policies that focus on the Divisia monetary aggregates and target their growth rates will contribute to higher overall economic growth.

This paper shows, in an overlapping-generations economy à la Diamond [American Economic Review 55, 1126–1150 (1965)], that when savings in an unbacked asset (e.g., fiat money) bear some risk of becoming suddenly worthless, the market does not implement the best steady state attainable with that asset. Nonetheless, in the absence of absolutely riskless fiat money and excluding resorting to redistributive fiscal policies that would make it possible to attain the first-best steady state, this best monetary steady state can be implemented as a competitive equilibrium with the adequate policy of taxes on returns to capital, subsidies to returns to monetary savings, and lump-sum transfers. The policy is, at the steady state, balanced every period and nonredistributive.

The paper looks at the role of inventories in U.S. cycles and fluctuations. It concentrates on the goods-producing sector and constructs a model that features both input and output inventories. A range of shocks are present in the model, including sales, technology, and inventory cost shocks. It is found that the presence of inventories does not change the average goods sector–cycle characteristics in the United States very much. The model is also used to examine whether new techniques for inventory control might have been an important factor contributing to the decline in the volatility of U.S. GDP growth. It is found that these would have had little impact upon the level of volatility.

This paper aims to investigate impacts of public provision of universal health insurance (UHI) in an environment with household heterogeneity and financial market incompleteness. Various UHI polices with both distortionary and nondistortionary financing methods are compared to address the trade-off between risk reduction and tax distortion, as well as the corresponding welfare implications. We use a dynamic equilibrium model with endogenous insurance choice and labor supply decisions to perform quantitative analysis. The results suggest that the UHI expenditure coverage rate is too high in most OECD countries when the distortion effect is considered. We find a clear crowding-out effect on asset holdings. Implications for private health insurance (PHI) purchases when UHI is introduced depend on the pricing and the design of coverage. We find that the rich are sensitive to the price of PHI, and would prefer a supplemental plan when UHI is introduced.

In this paper I develop a dynamic stochastic general equilibrium model of credit frictions in which the production technology provides a U-shaped average cost curve, enabling endogenous solutions for firm size and quantity. Firms weigh the present value of future net revenues against the opportunity cost of staying in business in their entry or exit decisions. I find that credit frictions increase variable investment costs and result in a larger firm size and a smaller number of firms in the steady state. As the economy deviates from the steady state, however, the presence of credit frictions increases fluctuation in the number of firms, raising market entry during an economic upturn and market exit during a downturn. Also, I find that allowing free entry mitigates some of the effects of credit frictions due to macroeconomic fluctuations. In addition to the homogeneous-firm model, I examine the model when firms have heterogeneous access to credit and find that different credit access gives rise to different firm sizes in the steady state. Firms with easier access to credit become larger than those with less access to credit. Heterogeneous credit access also means that these two types of firms will respond differently to a common technology shock.

In this paper, we study the effects of government debt on macroeconomic aggregates in a non-Ricardian framework. We develop a microfounded framework that combines time-varying markups, endogenous labor supply, and overlapping generations based on infinitely lived families. The main contribution of this paper is to provide a new transmission mechanism for public debt through the countercyclical markup movements induced by external deep habits. We analyze the effects of a positive shock to public debt. We show that the interest rate rises, entailing higher markups and a fall in employment and consumption. Interestingly, even without capital, a crowding-out effect of government debt is obtained in the long run. In addition, we show that when prices are sticky, public debt has a short-run expansionary effect, which is strengthened by the presence of deep habits.

This paper compares the effects of pro- and countercyclical government spending on income inequality and welfare in a small open economy. We examine the consequences of alternative government spending rules following shocks to productivity, domestic interest rates, terms of trade, and export demand. The simulated results show that welfare and income inequality indices can move in opposite directions for government spending rules, with countercyclical spending improving welfare and procyclical spending improving income equality.

In his monograph The Conquest of American Inflation (Princeton, NJ: Princeton University Press, 1999), Sargent suggests that the sharp reduction in U.S. inflation that took place under Volker may vindicate the type of econometric policy evaluation famously criticized by Lucas (Carnegie–Rochester Conference Series on Public Policy, 19–46, 1976). At the core of this vindication story is the escape dynamics, recurrent sliding away from the path leading to the time-consistent suboptimal equilibrium level of inflation and toward the low-inflation, optimal, time-inconsistent Ramsey outcome: by recurrently estimating a reduced-form model, in fact, the policy maker could periodically learn an approximate version of the natural rate hypothesis and therefore be induced to disinflate the economy. Two elements seem important in this story: the type of model used by the policy maker to represent the economy, whether structural or reduced-form, and the policy specification, whether derived taking the private sector's expectations as given or as endogenous to the policy design. Although Sargent (1999) stresses the first element, we find that it is instead the second aspect that is crucial to generate recurrent periods of low inflation: the policy maker has to recognize the endogeneity of the private sector's expectations and refrain from exploiting ephemeral short-run trade-offs between inflation and unemployment.

The aim of this paper is to discuss the effect on returns to scale on the local determinacy properties of the steady state in a continuous-time two-sector economy with endogenous labor supply and sector-specific externalities. First we show that when labor is inelastic and the elasticity of intertemporal substitution in consumption is large enough, for any configuration of the returns to scale, local indeterminacy is obtained if there is a capital intensity reversal between the private and the social levels. Second, we prove that when labor is infinitely elastic, saddlepoint stability is obtained if the investment good sector has constant social returns, whereas local indeterminacy arises if the investment good sector has increasing social returns and the elasticity of intertemporal substitution in consumption admits intermediate values. Finally, our main conclusion shows that local indeterminacy requires a low elasticity of labor when the investment good has constant social returns, but requires either a low enough or a large enough elasticity of labor when the investment good has increasing social returns.

Although several targeted welfare programs across the world have made owner-occupied housing exempt from the means test, relatively little is known about the impact of such exemption on portfolio choice and consumption. We study the Australian age pension scheme and argue that current uncapped exemption may lead to distortionary incentives for high levels of housing wealth to be sheltered from the means test. We set up a life-cycle model with explicit housing choice and borrowing constraints to match some key features of the Australian economy. We find that abolishing the exemption of owner-occupied housing in the assets test increases aggregate output, capital accumulation, and welfare, but decreases housing investment and homeownership. However, removing such distortions does not necessarily imply that all households would be better off. Lowering taxes to maintain fiscal balance would result in wealthy households experiencing a large welfare loss, whereas the majority of the population would benefit.

Skill-biased technical change occupied empirical economists for much of the 1990s. The empirical literature firmly established a positive correlation between technology indicators and demand shifts. In the minds of many, that has established a causal relationship. This leap of faith, however, is at odds with Hicks's conventional wisdom that endogenous technological change will be biased toward using cheap and abundant resources. In addition, if the rate of technical change is considered to be endogenous, the assumption of an exogenous bias toward skilled labor should at least be questioned. Two hypotheses explaining endogenous skill bias in technical change have been suggested in the theoretical literature: the acceleration effect and the market size effect. In this paper these are studied in a single endogenous-growth model to derive the sufficient and necessary conditions for both hypotheses. After confronting these conditions with the evidence, the paper concludes that it strongly favors the acceleration hypothesis.

This paper develops a two-sector small open economy model to analyze the effects of the currency denomination of debt on default risk and interest rates in emerging market economies. Default risk is determined endogenously and depends on the incentives for repayment. The economy can borrow using tradable-denominated nonindexed bonds or bonds whose return is indexed to the domestic price index, which are used as proxies for foreign currency and domestic currency debt, respectively. The model predicts that foreign currency debt leads to lower default risk for high output levels and domestic currency debt reduces the default risk for low output levels. Although the effect of debt denomination on default risk changes with the output level, the default rate of the economy and average interest rates decline as domestic currency borrowing increases. In addition, domestic currency borrowing is found to reduce the countercyclicality of interest rates and the trade balance.

The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan, King, and Wolman [Review of Economic Studies 10 (4), 825–860] uses a richer model but still finds deflation optimal. In an otherwise standard New Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.