The present paper uses an analytical approach to derive approximate closed-form solutions for the asset moments of a real-business-cycle model with idiosyncratic risk. To preserve analytical tractability, risk sharing is completely shut down. Further, the firm is assumed to maximize a variant of value maximization, given that its usual objective is no longer well defined under market incompleteness. When idiosyncratic risk is incorporated into the model, the asset moments can be decomposed into their value under identical households plus a new idiosyncratic term. Under full constrained persistence, in which case the same household determines the asset moments every period, the model is able to generate the risk premium in the data with reasonable parameter values, but it cannot generate the risk return trade-off. While the quantitative impact of idiosyncratic risk is smaller when there is only some persistence in who is constrained, the qualitative predictions are unaltered.

This paper considers a sticky price model with a cash-in-advance constraint where agents forecast inflation rates with the help of econometric models. Agents use least-squares learning to estimate two competing models of which one is consistent with rational expectations once learning is complete. When past performance governs the choice of forecast model, agents may prefer to use the inconsistent forecast model, which generates an equilibrium where forecasts are only constrained rational. Output and inflation then display persistence, inflation responds sluggishly to nominal disturbances, and the dynamic correlations of output and inflation match U.S. data surprisingly well. The rational expectations equilibrium instead has great difficulty in matching any of these features.

This paper examines the dynamic effects of international commodity trade by merging two benchmark environments, namely, the static factor endowments model and the neoclassical growth model. Two main questions are asked. First, how does commodity trade affect the capital-accumulation paths of two trade partners? Second, do the welfare effects associated with these dynamics serve to reinforce or mitigate the well-known welfare effects associated with the static factor endowments model? It is demonstrated that trade will eventually, if not immediately, narrow the difference in domestic capital accumulation paths. This narrowing introduces a negative welfare effect that is large enough to worsen overall welfare for the country whose capital accumulation has declined. Thus, although the dynamic effects of trade are large enough to dominate the static effects, they do not reinforce the concept of mutually advantageous trade.

In this work, we find that the zero capital income tax result might not hold, even at the steady state, when the government discount rate differs from the individual one. As intuitive Pigouvian considerations would suggest, capital income should be taxed (subsidized) when the government is less (more) impatient than individuals are. However, a counterintuitive asymmetry emerges as for the steady state since, in the long run, capital income cannot be taxed because of the explosive distortionary effect of positive taxes. The asymmetry is ruled out with a logarithmic utility function because, in this case, the anticipated policy path does not affect current individual choices and thus the cumulative distortionary effect of taxes disappears.

Born in Calais in 1921, Gérard Debreu died on the last day of 2004 in the Paris area where he spent the last years of his life. He graduated from Ecole Normale Supérieure, one of the elite schools in France with a strong program in mathematics. While studying there he came to economics through the influence of Maurice Allais, who was teaching economics in a neighboring school, Ecole des Mines. In 1949 a Rockefeller fellowship allowed him to visit American universities and, in particular, the University of Chicago. He was then offered a position of research associate by the Cowles Commission for Research in Economics. In 1962, Gérard Debreu accepted a position of professor of economics (transformed later into a joint professorship of economics and mathematics) at the University of California, Berkeley. He was President of the Econometric Society in 1971 and received the Nobel prize in 1983.

In this paper, we study the equilibrium dynamics of an overlapping generations model with capital, money, and cash-in-advance constraints. At each period, the economy can experience two different regimes: Either the cash-in-advance constraint is binding and money is a dominated asset, or the constraint is strictly satisfied and money has the same return as capital. When the second regime occurs, we say that the economy experiences a temporary bubble. We show the existence of temporary bubbles, and we prove that cyclical equilibria may exist. In these equilibria, the economy experiences some periods without bubbles and some periods with bubbles. We also show that monetary creation can be used to eliminate temporary bubbles.

In constitutional democracies, laws take time to be deliberated upon, to be passed, and to be implemented. Motivated by this observation, we study the properties of optimal tax reform when it has to be announced in advance of its implementation. We find that a delay between announcement and implementation has large effects on the optimal fiscal policy during the transition to the new steady state. On the other hand, we find that the welfare gains from optimal tax reform are fairly robust to the introduction of an implementation lag. Increasing the lag from zero to four years reduces the welfare gains by less than a quarter. Moreover, it turns out that this reduction of the welfare gain is mainly due to the delay itself rather than the effect of preannouncement on the character of the optimal tax reform.

This paper analyzes the robustness of the estimate of a positive productivity shock on hours to the presence of a possible unit root in hours. Estimations in levels or in first differences provide opposite conclusions. We rely on an agnostic procedure in which the researcher does not have to choose between a specification in levels or in first differences. We find that a positive productivity shock has a negative impact effect on hours, but the effect is much shorter lived, and disappears after two quarters. The effect becomes positive at business-cycle frequencies, although it is not significant.

Stochastic models with economywide shocks imply that the welfare costs of aggregate volatility are negligible. Empirical evidence suggests that the volatility of idiosyncratic shocks is several times that of aggregate shocks. This paper introduces both types of shocks. We find that if in the process of eliminating aggregate risk the policymaker can reduce idiosyncratic risk by an amount suggested by available empirical evidence, the welfare gains from stabilization can become significant. The introduction of idiosyncratic risk has important implications for asset pricing, and in particular may reduce the risk-free rate substantially, through the precautionary savings motive. Many of our results are sensitive both to the degree of risk aversion and to the flexibility of labor supply. The paper highlights the trade-offs involved in analyzing the effects of risk on growth and welfare and on asset pricing, clarifying the need to examine these issues within a unified stochastic general equilibrium framework.

The Generalized Axiom of Revealed Preference (GARP) can be violated because of random measurement errors in the observed quantity data. We study two tests proposed by Varian (1985) and de Peretti (2004), which test GARP within an explicit stochastic framework. Both tests compute adjusted quantity data that are compliant with GARP. We compare and contrast the two tests in theoretical terms and in an empirical application. The empirical application is based on testing a large group of monetary assets for the United States over multiple sample periods spanning 1960–1992. We found that both tests provided reasonable results and were largely consistent with each other.

This paper presents a dynamic specific-factors model with money introduced through a cash-in-advance constraint. Two types of consumption goods are produced, and three types of factors—labor, capital, and land—are used. The cash-in-advance constraint is imposed on different sets of goods. When the constraint is imposed exclusive of the investment, inflation affects the pattern (and volume) of trade through a commodity-substitution effect. When the constraint is imposed inclusive of the investment, inflation may affect the pattern of trade through both the commodity-substitution effect and the factor-supply effect. In each case, we examine and prove the dynamic stability property of the steady-state equilibrium.

Recent emphasis has been placed on exploring behavioral aspects of individual agents in explaining macroeconomic phenomena. Of particular interest is augmenting New Keynesian models to produce costly disinflation, as empirics and consensus suggest. We presume a fraction of agents using rule-of-thumb behavior in price setting in an otherwise standard New Keynesian model. Our findings suggest that relatively small amounts of rule-of-thumb behavior are required to offset the net effects of Ball's disinflationary boom. Moderate levels of rule-of-thumb behavior can produce delayed recessions consistent with some VAR evidence. However, high proportions of rule-of-thumb behavior are needed to produce immediate reductions in output following implementation.

We investigate the dynamics of a cobweb model with heterogeneous beliefs, generalizing the example of Brock and Hommes (1997). We examine situations where the agents form expectations by using either rational expectations, or a type of adaptive expectations with limited memory defined from the last two prices. We specify conditions that generate cycles. These conditions depend on a set of factors that includes the intensity of switching between beliefs and the adaption parameter. We show that both Flip bifurcation and Neimark–Sacker bifurcation can occur as primary bifurcation when the steady state is unstable.

We study the sustainability of long-run growth in a two-sector economy where a renewable natural resource is exploited under private property rights. We obtain short- and long-run growth trajectories in closed form, examine transitional dynamics, and characterize convergence properties. We find conditions for sustainable long-run growth, which depend on the harvesting rate, and show that the speed of convergence decreases during transition. We identify a stronger version of Hartwick's rule and analyze parameter dependences for endogenous variables. Economic growth relies less on abundance or scarcity of natural resources than on the way they are managed.

I study the bias of actuarially fair measures commonly used to evaluate the impact of a social security system on the well-being of individuals. I investigate how the magnitude of this bias is affected by different features of a pay-as-you-go social security system. Social security affects an individual's welfare in ways other than through its direct effect on her lifetime income. It influences labor and savings decisions and hence factor prices, affecting labor income and the return to savings. Although social security can provide insurance against risk, it can also push borrowing-constrained individuals further away from their optimal consumption paths. I show that, by ignoring these features, actuarially fair measures can grossly misevaluate the impact of social security on the well-being of an individual.

This paper introduces a general procedure that tests the significance of the departures from utility maximization, departures defined as violations of the general axiom of revealed preference (GARP). This general procedure is based on (i) an adjustment procedure that computes the minimal perturbation in order to satisfy GARP by using the information content in the transitive closure matrix and (ii) a test procedure that checks the significance of the necessary adjustment. This procedure can be easily implemented and programmed, and we run Monte Carlo simulations to show that it is quite powerful.

I model an international payments system with a financial center and periphery to reproduce various aspects of the International Gold Standard. This period was characterized by frequent crises associated with scarce stocks of reserves, high short-term interest rates with subsequent gold inflows, and transmission of output contractions across countries. I find that a common international currency and no legal restrictions on exchange help the periphery share reserves with the financial center, improving the world's welfare and mitigating output losses due to reserve crises. Also, the center has incentives for restrictive rediscounting while the periphery has motives for developing central banking.

This paper studies a growth model with public and private education alternatives. The impact of education vouchers on economic growth and the evolution of income inequality are considered. Results indicate that introducing education vouchers can increase economic growth. Households switching from public to private education experience higher incomes. This raises the tax base, in turn raising public education expenditures and growth of the whole economy. Vouchers are found to generally increase income inequality. Welfare comparisons show that voucher schemes may in some cases gain majority support, depending on assumptions and parameters. The results add a new dimension on which vouchers can be evaluated in the continuing policy debate.

We present an endogenous growth model with two sectors: a real sector where the final good is produced, and a banking sector that intermediates between savers and firms. Banking concentration exerts two opposite effects on growth. On the one hand, it induces economies of specialization, which is beneficial to growth. On the other hand, it results in duplication of banks' investment in fixed capital, which is detrimental to growth. The trade-off between the two opposing effects is ambiguous and can vary along the process of economic development. Hence, there is a potential nonlinear and nonmonotonic relationship between concentration and growth. We test this implication, using cross-country data on income and industry growth. We find that banking concentration is negatively associated with per-capita income growth and industrial growth only in low-income countries. This suggests that reducing concentration is more likely to promote growth in low-income countries than in high-income ones.

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.