This paper studies the growth and fiscal policy implications of the assumption that public policy generates an externality in the individual rate of time preference through the aggregate public capital stock. We examine the competitive equilibrium properties and we solve for endogenous growth–maximizing fiscal policy. We investigate the behavior of the government size and the growth rate to the sensitivity of time preference to public capital and the magnitude of public capital externality on production. We find that the Barro taxation rule [Barro, Robert J., Journal of Political Economy 98 (1990), 103–125], which states that the elasticity of public capital in the production function should equal the government size, is suboptimal. We show that the government does not necessarily have to increase income taxation following a rise in public capital intensity because of the externality of public capital on time preference and, in turn, on growth and the tax base of the economy.

James Heckman is one of the most important and influential scholars to have graced the economics profession. His work is deeply rooted at the intersection of economic theory and empirical microeconomics, and he has made significant contributions to the study of labor economics, microeconometrics, and the use of micro data in macroeconomic analysis. Heckman's work is motivated by the scientific method, in which theory is held up to the scrutiny of the data and empirical analysis is informed by economic theory. During the course of his work, he has made lasting contributions to the study of sample selection bias, duration analysis, heterogeneity, and treatment effects in microeconometrics. In labor economics, he has applied these econometric methods to the study of labor supply and life-cycle dynamic models of unemployment, wage growth, and skill formation. In addition, he is the leading scholar on the evaluation of active labor market programs. As an applied microeconomist, one cannot do research on labor supply, sample selection, duration models, or life-cycle dynamics without encountering Jim Heckman's work.

Daily financial returns (and daily stock returns, in particular) are commonly modeled as GARCH(1, 1) processes. Here we test this specification using new model evaluation technology developed by Ashley and Patterson that examines the ability of the estimated model to reproduce features of particular interest: various aspects of nonlinear serial dependence, in the present instance. Using daily returns to the CRSP equally weighted stock index, we find that the GARCH(1, 1) specification cannot be rejected; thus, this model appears to be reasonably adequate in terms of reproducing the kinds of nonlinear serial dependence addressed by the battery of nonlinearity tests used here.

The paper analyzes a multicountry extension of the Barro model of productive public expenditure. In the presence of positive infrastructural externalities between countries, the provision of infrastructure will be inefficiently low if countries do not coordinate. This provides a role for a supranational body, such as the European Union, to coordinate the policies of the individual governments. It is shown how intervention by a supranational body can raise welfare by internalizing the infrastructural externality. Infrastructural externalities increase the importance of tax policy in the growth process and distribute the benefits of taxation across countries.

A standard timing protocol in a cash-in-advance model allows the government to elude the inflation tax. That matters. Altering the timing of tax collections to make the government hold cash overnight disables some classical propositions but enables others. The altered timing protocol loses a Ricardian proposition and also the proposition that open market operations, accompanied by tax adjustments needed to finance the change in interest on bonds due the public, are equivalent to pure units changes. The altered timing enables a Modigliani–Miller equivalence proposition that does not otherwise prevail.

This paper examines optimal monetary policy under uncertainty about fundamental parameters of a dynamic stochastic general-equilibrium model. In contrast to previous studies, a microfoundation of the model leads this uncertainty to generate uncertainty not only about the transmission of monetary policy but also about the transmission of shocks and about a social welfare loss function. In the presence of such uncertainty, this paper finds conditions under which optimal discretionary policy responds to shocks more aggressively than in the absence of the uncertainty. These conditions depend crucially on the persistence of shocks and the magnitude of policy multipliers. To obtain the conditions, taking proper account of uncertainty about the transmission of shocks and about the welfare loss function is of crucial importance.

It is well known that the performance of simple models of economic growth improves substantially through the introduction of subsistence consumption. How to compute subsistence needs, however, is a difficult and controversial issue. Here, I reconsider the linear (Ak) growth model with subsistence consumption and show that the evolution of savings rates and economic growth rates over time is independent of the size of subsistence needs. The model is thus more general and less subject to arbitrariness than might have been thought initially. Quantitatively, it is shown that, although there is no degree of freedom to manipulate transitional dynamics, the model approximates the historical evolution of savings rates and growth rates reasonably well.

Empirical evidence shows that entrepreneurs hold a large fraction of wealth, have higher saving rates than workers, and face substantial uninsurable entrepreneurial and investment risks. This paper constructs a heterogeneous-agent general equilibrium model with uninsurable entrepreneurial risk and capital-market imperfections to explore the implications of uninsurable entrepreneurial risk for wealth distribution and aggregate activity in an incomplete market economy. It is shown that entrepreneurial risk can substantially affect both the wealth distribution and the macroeconomy.

The DICE (for Dynamic Integrated model of Climate and the Economy) introduced two important policy aspects to the economic discussion of global warming. First, it argues for a “climate-policy ramp” that deems back-loading of mitigation optimal. Second, it demonstrates that an intergenerational tradeoff is at the heart of the mitigation problem. In this paper we argue that both of these findings rest on contestable assumptions. To demonstrate this a recast DICE is presented. Its outcomes show that DICE's predictions are not robust with higher migitations earlier on and slower temperature increases along the optimal path. The adoption of a baseline scenario in which pollution is a negative externality makes mitigating climate change a Pareto improvement. The alleged sacrifice of present generations vanishes. This strengthens the case for immediate policy action.

One of the most prominent and consistent findings of the recent empirical literature on fiscal policy is that investment expenditure is crowded out by public spending in the short run. In this contribution, we address this empirical fact using a dynamic general equilibrium model and show that the introduction of habit-forming behavior plays a major role in accommodating the observed negative relationship between investment and government expenditure. Our numerical experiments point out the role of consumption inertia in determining the reactions of the open economy: as habit persistence gets stronger, fiscal expansion crowds out real consumption by a smaller amount and investment by a larger one, while the current account enters into a greater deficit.