The paper builds a parsimonious US business cycle SVARMA model, establishing identification conditions for independent monetary shocks. The SVARMA model, utilizing Divisia M3 and Divisia M4, is compared to the simple sum M2. The monetary rule with Divisia M3 yields theoretically consistent results marked by the absence of the usual price and liquidity puzzles. As the Federal Reserve (Fed) took a more hawkish approach to curb inflation, significant increases in US interest rates and declines in monetary aggregates were largely influenced by the Fed’s reaction function, which incorporates the Divisia M3 monetary rule. Findings emphasize the monetary impact on the business cycle, highlighting the significance of Divisia monetary aggregates. Historical and variance decompositions reveal diverse, dynamic effects of monetary shocks on macroeconomic variables. The SVARMA model with Divisia M3 and M4 demonstrates superior performance over simple sum M2 in capturing the time path of monetary shocks.

This article studies how sudden changes in bank credit supply impact economic activity. I identify shocks to bank credit supply based on firms’ aggregate debt composition. I use a model where firms fund production with bonds and loans. In the model, bank shocks are the only type of shock that imply opposite movements in the two types of debt as firms adjust their debt composition to new credit conditions. Bank shocks account for a third of output fluctuations and are predictive of the bond spread.

This paper distinguishes news about short-lived events from news about changes in longer term prospects using surveys of expectations. Employing a multivariate GARCH-in-Mean model for the US, the paper illustrates how the different types of news influence business cycle dynamics. The influence of transitory output shocks can be relatively large on impact but gradually diminishes over two to three years. Permanent shocks drive the business cycle, generating immediate stock price reactions and gradually building output effects, although they have more immediate output effects during recessions through the uncertainties they create. Markedly different macroeconomic dynamics are found if these explicitly identified types of news or uncertainty feedbacks are omitted from the analysis.

We quantify the importance of endogenous human capital and of selection effects for counterfactual analysis of social security (SS) reforms. The literature typically performs these analyses by using structural models featuring exogenous productivity profiles. However, this approach faces two issues: (i) the estimation of productivity is subject to selection bias, and (ii) productivity is endogenous to the SS reforms. In this paper, we estimate a quantitative overlapping generations model featuring endogenous human capital accumulation using US data. First, we eliminate the SS and find a large positive effect on aggregate effective labor supply (${+}10.31\%$). Next, we build variants of this model to quantify the two issues (i) and (ii). We find that the endogeneity issue (ii) is quantitatively more important than the selection bias issue (i).

This paper empirically examines the dynamic relationship between stock market volatility and commodity prices through the time-varying risk aversion channel using daily data between December 31 in 1999 and June 14 in 2021. We employ a time-varying structural-form vector autoregressive model (VAR) model with (aggregate, sectoral and sixteen individual) commodity prices. The results suggest that the transmission mechanism of stock market volatility shocks on the commodity prices change over time. The negative effect of stock market volatility on commodity prices is more statistically significant in the 2008–09 Global Financial Crisis than that during the COVID-19 pandemic in 2020. Further, the effect is greater in energy commodities compared to the agricultural and metals markets. The long-lasting negative effect of risk aversion is stronger compared to that of the expected stock market volatility on the commodity price. The change in the stock-commodity transmission mechanism is likely due to changes in underlying sources of risk aversion and expected uncertainty over time.

We extend the growth-at-risk (GaR) literature by examining US growth risks over 130 years using a time-varying parameter stochastic volatility regression model. This model effectively captures the distribution of GDP growth over long samples, accommodating changing relationships across variables and structural breaks. Our analysis offers several key insights for policymakers. We identify significant temporal variation in both the level and determinants of GaR. The stability of upside risks to GDP growth, as seen in previous research, is largely confined to the Great Moderation period, with a more balanced risk distribution prior to the 1970s. Additionally, the distribution of GDP growth has narrowed significantly since the end of the Bretton Woods system. Financial stress is consistently associated with higher downside risks, without affecting upside risks. Moreover, indicators such as credit growth and house prices influence both downside and upside risks during economic booms. Our findings also contribute to the financial cycle literature by providing a comprehensive view of the drivers and risks associated with economic booms and recessions over time.

U.S. states are sovereign entities and can’t declare bankruptcy as cities and municipalities. This paper examines the impact of a switch in sovereign bankruptcy rules that allows declaring bankruptcy from an economics model perspective. Allowing bankruptcy increases ex-ante risks for the government to refuse repayment, but provides ex-post benefits of reducing default costs and saving federal bailouts. This paper provides a simple framework to analyze this tradeoff. Event analysis shows that an unexpected switch in bankruptcy rules that allows for bankruptcy would decrease government debt-to-GDP ratio by 9.2 percentage points, increase consumption by 0.69 percent, but increase spread by 1.1 percentage points.

This paper examines the effects of heterogeneous biased expectations between the young and old on business cycles and explores its policy implications. Empirical findings reveal that individuals, particularly the young, can have more optimistic or pessimistic views about the future state of the economy compared to the data-generating measure. This study relates these results to the learning-from-experience literature, which suggests that individuals, particularly the young, place greater weight on recent observations when forming their expectations. Incorporating household weighting schemes into a life-cycle learning model, I show that household sensitivity to recent observations amplifies the effects of economic shocks. However, the amplification effects become less extensive as the population ages due to the lower sensitivity of the old. My simulation results indicate that a 10 percentage point increase in the old population ratio leads to a 16 percent decrease in output volatility. Regarding policy implications, this paper suggests that the government spending multiplier declines by approximately 10 percent when the old population ratio rises by 10 percentage points due to weak amplification effects. Moreover, the weakened output effects deteriorate the welfare of the population, particularly that of the young.

Data show that an increase in the Gini coefficient is associated with a falling bottom $p_{B}$% income share and an increasing top $p_{T}$ % income share where, for example $p_{B}$ = 40 and $p_{T}$ = 1. This relationship, which we call the $X$ inequality relationship, is pervasive in the sense that it is observed in many countries, including the US, the UK, France and others. The purpose of this paper is (i) to construct a Schumpeterian growth model to explain the relationship, and (ii) to identify/quantify factors behind it via calibration of the US economy. Our model gives rise to a double-Pareto distribution of income as a result of entrant and incumbent innovations. Its advantage is that it allows us to develop iso-Gini loci and iso-income share schedules in a tractable way. Using a double-Pareto distribution as an approximation of an underlying income distribution, calibration analysis reveals that a declining business dynamism and fiscal policy changes in the past decades played a significant role in generating the $X$ inequality relationship in the US.

This article analyses the endogenous choice of farmers to be organic or conventional in a groundwater evolutionary model when a tax on fertiliser on conventional farmers is implemented by a regulatory agency. The analysis of the model shows that the coexistence of both type of farmers only occurs when the decrease in productivity due to organic production is relatively low and the price premium for organic products is relatively high. However, even if conversion is welfare improving, our results show that this conversion may be done at the expense of the water resource with a lower water table. An application to the Western la Mancha aquifer (Spain) illustrates the main results.

Rising income and wealth inequality across the developed world has prompted a renewed focus on the mechanisms driving inequality. This paper contributes to the existing literature by studying the impact from life-cycle savings, intergenerational transfers, and fertility differences between the rich and the poor on the wealth distribution. We find that bequests increase the level of wealth inequality and that fertility differences between the rich and the poor amplify this relationship. The counterfactual exercises show that the interaction between bequests and differential fertility is quantitatively important for understanding wealth inequality in the United States.

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 dependence structure and risk spillovers between oil prices and exchange rates in both oil-exporting and oil-importing countries. Using a flexible dependence switching copula model, we analyze both positive and negative dependence and transitions between the dependence regimes. Additionally, we investigate the directional risk spillovers between oil and currency markets in both their downsides and upsides. Based on empirical data from 1999 to 2024 for major oil-exporting and oil-importing countries, we find that oil price-currency dependence is predominantly positive for oil-exporting countries, with infrequent transitions, but mainly negative for oil-importing countries, with frequent transitions between the two dependence regimes. These transitions often occur around crisis or war times. Furthermore, we observe that during downturns in the oil market, tail dependence between oil prices and currencies becomes more pronounced than during upturns. Our results indicate the presence of risk spillovers between oil and currency markets, with the downside spillover effects outweighing the upside ones. Moreover, we find that risk spillover is stronger from oil markets to currency markets than the reverse direction. These insights substantially enrich the existing literature and would offer valuable implications for effective risk management strategies and policymaking.

Relying upon an original (country-sector-year) measure of robotic capital ($RK$), we investigate the degree of complementarity/substitutability between robots and workers at different skill levels. We employ nonparametric methods to estimate elasticity of substitution patterns between $RK$ and skilled/unskilled labor over the period 1995–2009. We show that: i) on average, $RK$ exhibits less substitutability with skilled workers compared to unskilled workers, indicating a phenomenon of “RK-Skill complementarity”. This pattern holds in a global context characterized by significant heterogeneity; ii) the dynamic of “RK-Skill complementarity” has increased since the early 2000s; iii) the observed strengthening is more prominent in OECD countries, as opposed to non-OECD countries, and in the Manufacturing sector, compared to non-Manufacturing industries.

Using a polynomial cointegration technique, this paper shows that the bilateral US current account balance with China has a U-shaped relationship with the life expectancy gap between the US and China. A narrowing gap initially increases the US deficit with China, but eventually, this increased US deficit falls with the further catching-up of Chinese life expectancy. The life expectancy gap between the two countries has been below the threshold level since 2013, and this demographic trend has the potential to improve the US deficit with China. This U-shaped relationship can be theoretically reproduced. A two-country overlapping generations model indicates that the effect of life expectancy is decomposed into four components: retirement savings, social security burden, the number of elderly workers, and the productivity of elderly workers. The total effect of foreign life expectancy on the home current account balance exhibits a sign change in the catching-up of foreign life expectancy.

This paper examines how credit guarantees and government subsidies impact investment in a regime-switching model. We provide new explicit pricing formulas for a general standard asset. Almost all common corporate securities’ prices can be easily derived by the explicit formulas though project cash flows are driven by both a Brownian motion and a two-state Markov chain. We provide a method about how governments should specify a proper tax subsidy standard for a given tax rate to motivate a firm to invest in a project in the way they wish. If the tax subsidy is sufficiently high (low), an overinvestment (underinvestment) occurs. The higher the tax rate, the more significant the overinvestment (underinvestment). We pin down the subsidy amount required for motivating a firm to invest immediately and fix the optimal capital structure with government subsidies.

This paper evaluates (i) the transmission of global uncertainty shocks to the expectations of professionals and disagreement among them and (ii) the relevance of policy choices in open economies in the context of the impossible trinity. Relying on a large set of survey data covering a wide range of expected macroeconomic outcomes for 33 countries, we establish evidence for an expectation channel of global uncertainty shocks. Global uncertainty exerts significant and adverse effects on expectations over domestic macroeconomic outcomes across the board and also frequently spills over to disagreement over these outcomes, increasing domestic uncertainty. Finally, we identify nonlinear relationships between the policy choices in an open economy and the transmission of uncertainty shocks. Policy choices affect the expected downswing in GDP in the aftermath of uncertainty shocks, the expected response of monetary policy, and the exchange rate and disagreement over future macroeconomic outcomes.

We analyze the effect of green patents on G7 stock market returns. First, we build a small IS-LM model to identify the relevant channels, augmented with open-economy channels and the Green Tobin’s q (Faria et al., 2022). The model highlights that the intertemporal impacts of greening on stock returns are ambiguous. We then turn to an estimated global vector autoregressive model to more rigorously analyze the effect of monetary and green patenting shocks across the G7. Both shocks influence green patents through real and financial markets. As regards green patent shocks, results suggest that a tension exists over time between promoting pollution reduction and energy efficiency and the profitability of (green and brown) companies in the aggregate. We perform a variety of robustness exercises around our main results. Our results provide something of a challenge to the literature and call for more research effort to understand the various channels that might explain this dynamic—and in turn whether any particular policy recommendations follow.

Why did the human brain evolve? This study develops a Malthusian growth model with heterogeneous agents and natural selection to explore the evolution of human brain size. We find that if the cognitive advantage of a larger brain dominates its higher metabolic costs, then the average brain size increases over time, which is consistent with the rising trend in human brain size that started over 2 million years ago. Furthermore, an improvement in hunting-gathering productivity (e.g., the discovery of using stone tools and fire in hunting animals and cooking food) helps to trigger this human brain size evolution. As the average brain size increases, the average level of hunting-gathering productivity also rises over time. Quantitatively, our model is able to replicate the trend in hominin brain evolution over the last 10 million years.

We find significant evidence of model misspecification, in the form of neglected serial correlation, in the econometric model of the U.S. housing market used by Taylor (2007) in his critique of monetary policy following the 2001 recession. When we account for that serial correlation, his model fails to replicate the historical paths of housing starts and house price inflation. Further modifications allow us to capture both the housing boom and the bust. Our results suggest that the counterfactual monetary policy proposed by Taylor (2007) would not have averted the pre-financial crisis collapse in the housing market. Additional analysis implies that the burst of house price inflation during the COVID-19 pandemic was not caused by the deviations from the Taylor rule that occurred during this period.