What is the relationship between short-run fluctuations in economic activity and the long-run evolution of the economy? There is empirical evidence that more perturbed economies tend to grow less. Yet matching this evidence has proven challenging for growth models without market failures. This paper examines the relationship between short-term fluctuations and long-term growth within a complete-market economy featuring Epstein-Zin preferences and unbounded growth driven by human and physical capital accumulation. With these preferences, risk aversion and intertemporal elasticity of substitution are allowed to be independent of each other. When the model is plausibly calibrated, the relationship between the mean and variance of growth turns out to be negative. In most cases, the effect of fluctuations on welfare is found to be negative and sizable, even when the long-run effect on growth is positive.

This paper assesses the role of political tensions between the USA and China and global market forces in explaining oil price fluctuations. To this end, we take part of the previous literature, which highlights (i) the importance of political events in explaining oil price dynamics, (ii) time-varying patterns in the oil market, and (iii) asymmetries in the impact of political tensions and uncertainty on oil prices. While this literature generally focuses on one of these features, we account for all of them simultaneously, allowing for a complete and meaningful investigation of political tensions on oil prices. To this end, we rely on quantile autoregressive distributed lag error-correction models, which are specifically designed to address both the long-run and short-run dynamics across a range of quantiles in a fully parametric setting. Our results show evidence of a quantile-dependent long-term relationship between oil prices and their determinants over the 1958–2022 period, which is also time varying across quantiles: the adjustment speed toward the long-term equilibrium is faster for the highest quantiles, fluctuating between 4% and 6% in the recent period. Overall, our findings highlight the increased role played by China in the oil market since the mid-2000s.

In a monetary model based on Lagos and Wright (2005) where unsecured credit and money are used as means-of-payments, we analyze how the cost and quality of the record-keeping technology affect welfare. Specifically, monitoring agents’ debt repayment is costly but is essential to the use of unsecured credit because of limited commitment. To finance this cost, fees on credit transactions are imposed, and the maximum credit limit that is incentive compatible depends on such fees and monitoring level. Alternatively, the use of money avoids such costs. A higher credit limit does not necessarily improve welfare, especially when the limit is high: the benefit from increased trade surpluses from a higher credit limit is offset by the increased cost of monitoring to achieve the improvement. Moreover, under the optimal arrangement, optimal credit limit decreases with the marginal cost of monitoring. When the cost is sufficiently low, a pure credit equilibrium is optimal. When the marginal cost is high, it is optimal to have a pure-currency economy. But when the cost is at an intermediate level, we show that credit is sustainable but not socially optimal. In this range, the implementable credit limit leads to a higher trade surplus than in a pure monetary economy, but owing to the cost of operating the record-keeping system, social welfare in credit equilibrium is lower than the welfare in a pure monetary equilibrium. In addition, we show that there can be a non-monotonic relationship between the optimal record-keeping level and the optimal credit limit.

In this paper I examine the effect of introducing an account-based central bank digital currency (CBDC) on liquidity insurance and monetary policy implementation. An asset-exchange model is constructed with idiosyncratic liquidity risk, in which one type of agents require currency and/or CBDC to consume while the other type of agents can use any assets to trade. There arises a liquidity insurance to distribute assets efficiently by type. Since central bank reserve accounts are accessible by the public directly, the large excess reserves (LER) in a floor system can make it difficult to separate the types under private information. Therefore, raising the interest on reserves in the floor system can reduce the aggregate liquidity excessively, and the equilibrium allocation with the LER can be suboptimal.

We propose a stock market model with chartists, fundamentalists and market makers. Chartists chase stock price trends, fundamentalists bet on mean reversion, and market makers adjust stock prices to reflect current excess demand. Fundamentalists’ perception of the stock market’s fundamental value is subject to animal spirits. As long as the stock market is relatively stable, fundamentalists neutrally believe in a normal fundamental value. However, fundamentalists optimistically (pessimistically) believe in a high (low) fundamental value when the stock market rises (falls) sharply. Our framework may produce boom-bust stock market dynamics that coevolve with waves of optimism and pessimism for parameter settings that would ensure globally stable stock market dynamics in the absence of animal spirits. Responsible for such a surprising outcome is the destabilizing nature of temporarily attracting virtual fixed points, brought about by animal spirits.

This paper assesses the information content and predictive capabilities of Divisia monetary indicators concerning sector-specific economic activities. Although existing evidence strongly supports the informative nature and predictive potential of various Divisia indicators at an aggregate level, studies focusing on Divisia information content for specific industries are notably sparse. Sector-level data provide a more detailed insight into economic and labor market dynamics. By analyzing comprehensive sector-specific data on real GDP, value added, employment, and unemployment rates across thirteen diverse sectors in the United States, this paper investigates the predictive abilities of narrow and broad Divisia money across three categories (original, credit card-augmented, and credit card-augmented inside money). The results show that narrow Divisia money serve as robust predictors of sector-specific economic and labor market indicators, often surpassing the predictive capacity of the conventional Fed funds rate and slightly outperforming broad Divisia measures in relation to these indicators.

One of the challenges of population aging is the rising demand of elder care. Adult children fill a substantial portion of this care need. To understand its implication on their labor market choices and welfare outcomes, we build a simple static model where households can spend time and money producing care. We calibrate the model using data from the American Community Survey, the Health and Retirement Study, and National Health and Aging Trends Study/National Study of Caregiving to match moments in the labor market and caregiving patterns. With the calibrated model, we consider a few government programs under a projected aging population structure. Our results show that care subsidy and Medicaid expansion both cause a shift from informal care to formal care, relieving adult children from care burdens and thus improving their welfare. Caregiver allowance appears to have little effects on caregiving behaviors, which leads to minimal welfare improvement.

This paper develops a monetary R&D-driven endogenous growth model featuring endogenous innovation scales and the price-marginal cost markup. To endogenize the step size of quality improvement, we propose a tradeoff mechanism between the risk of innovation failure and the benefit of innovation success in R&D firms. Several findings emerge from the analysis. First, a rise in the nominal interest rate decreases economic growth; however, its relationship with social welfare is ambiguous. Second, either strengthening patent protection or raising the professional knowledge of R&D firms leads to an ambiguous effect on economic growth. Third, the Friedman rule of a zero nominal interest rate fails to be optimal in view of the social welfare maximum. Finally, our numerical analysis indicates that the extent of patent protection and the level of an R&D firm’s professional knowledge play a crucial role in determining the optimal interest rate.

This study investigates the effect of government size, as measured by the tax revenue to gross domestic product (tax-GDP) ratio, on output responses to increases in government purchases. First, we show that in a standard static neoclassical model, the stimulus effect of fiscal expansion on output increases with the tax-GDP ratio. This finding is quantitatively confirmed using a dynamic neoclassical model with standard functional forms and parameter values. To empirically test the theoretical findings, we analyze the responses of macroeconomic variables to an unanticipated increase in government purchases for 12 Organisation for Economic Cooperation and Development (OECD) countries during 1985–2019 using a state-dependent local projection method. The estimation results reveal that while output responses to an unanticipated fiscal expansion are significantly positive when the tax-GDP ratio is high, they are statistically indistinguishable from zero when the ratio is low. Overall, our findings suggest that fiscal expansion can stimulate output more effectively at high tax rates, unlike the well-known predictions of the traditional Keynesian model.

While the competitive behavior of firms with regard to entry and exit activities serves as a driving force behind the business cycle, little attention has been paid to the issue of industry clusters when discussing belief-driven cyclical fluctuations. Faced with this deficiency, this study analyzes the possibility of the emergence of equilibrium indeterminacy from the perspective of industrial organization. By analyzing the effects of endogenous overhead costs in the market, this paper finds that belief-driven business cycle fluctuations are related to industry clusters. More specifically, a stronger spillover effect or a less pronounced congestion effect tends to increase the likelihood of local indeterminacy.

Over the last 40 years, the massive increase in average years of schooling in developing countries was not accompanied by a similar increase in Gross Domestic Product (GDP) per capita. We investigate this apparent disconnect between education and growth by focusing on the role of education quality. We propose an overlapping generations model which features an endogenous tradeoff between quantity and quality of education. A policy that increases average years of schooling then has an ambiguous effect on long-run human capital and GDP per capita. We also consider a quantitative version of the model to understand the Latin American experience between 1970 and 2010.

Monetary policy in the USA affects borrowing costs for state and local governments, incentivizing municipal borrowing and spending, which in turn affects economic outcomes. Using municipal bond indices and transaction-level data, I find that responses to monetary policy are dampened relative to treasuries and heterogeneous across location and bond characteristics. In my baseline estimate, muni yields move 26 bp after a 100 bp monetary shock. To study implications for local fiscal policy, I model US localities as small open economies in a monetary union with independent fiscal agents. In a calibrated model, monetary transmission is significantly affected by municipal borrowing costs.

This paper sets up a small open economy model with habit persistence in consumption in which distortionary taxation is available in a flexible price environment. In open economy, the habit persistence in consumption aggravates the terms of trade externality, absent in closed economy, calling for more aggressive fiscal policy. While optimal labor income taxes are time-invariant in a closed economy with internal habit, they should be time-varying in an open economy to alleviate the terms of trade externality, even if the intertemporal elasticity of substitution equals the intratemporal elasticity of substitution. In a small open economy composed of households with habit persistence in consumption, households’ decision to gradually adjust their consumption and labor hours intensifies the undesirable terms of trade externality or the terms of trade channel. This generates a time-varying wedge between the efficiency conditions of the Ramsey planner and the market equilibrium conditions, calling for a time-varying taxation which takes into account the intertemporal elasticity of substitution and the intratemporal elasticity of substitution between home and foreign goods, in addition to the degree of habit and goods market distortion. The volatility of optimal tax rate increases with the degree of habit, whether households have external or internal habit. The volatility of tax rate shows an inverted U-shape in the degree of openness in the small open economy with habit. Finally, the optimal labor income tax rate moves countercyclically for low degree of intratemporal elasticity of substitution, while it moves procyclically for high degree of intratemporal elasticity of substitution.

Motivated by distributional concerns raised by recent breakthroughs in AI and robotics, we ask how workers would prefer to manage an episode of automation in a task-based model, which distinguishes between automation and traditional technical progress. We show that under majority voting with the option to implement a “partial” UBI (as transfers to workers) it is optimal to tax capital at a higher rate than labor in the long run to fund the partial UBI. We show that, unlike traditional technical progress, automation always lowers the labor share in the long run, justifying distributional concerns. A quantitative analysis of an episode of automation for the US economy shows that it is optimal from the workers’ perspective to lower capital taxes and transfers over the transition. Nevertheless, this policy increases worker welfare by only 0.7% in consumption-equivalent terms, compared with a 21.6% welfare gain to entrepreneurs, because the welfare gains to workers from lower capital taxes are second-order, while the gains to entrepreneurs are first-order.

Teenage childbearing is a common incident in developed countries. However, teenage births are much more likely in the USA than in any other industrialized country. Most of these births are delivered by female teenagers from low-income families. The hypothesis put forward here is that the welfare state (a set of redistributive institutions) has a significant influence on teenage childbearing behavior. We develop an economic theory of parental investments and the risky sexual behavior of teenagers. The model is estimated to fit stylized facts about income inequality, intergenerational mobility, and the sexual behavior of teenagers in the USA. The welfare state institutions are introduced via tax and public education expenditure functions derived from US data. In a quantitative experiment, we impose Norwegian taxes and education spending in the economic environment. The Norwegian welfare state institutions go a long way in explaining the differences in teenage birth rates between the USA and Norway.

In this paper, we construct an elaborate general equilibrium model with a continuum of production fragments for an intermediate good, then incorporate it in a growth model to address the effects of global production fragmentation, vertical specialization, and trade on growth and inequality for a small developing country. Among other things, we show that a small developing economy grows faster than the rest of the world as a result of global fragmentation and trade in intermediates if it is skilled-labor scarce. We further address the effects of such a trade opening on wage inequality.

We use the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) framework and Vector Autoregressive (VAR) to investigate the usefulness and relevancy of monetary services, augmented to include credit card transaction services. We use the new credit-card-augmented Divisia monetary aggregates in the models to further the existing research on their usefulness and relevancy. In this research, we compare three different monetary aggregates within the New Keynesian framework: (1) the aggregation-theoretic “true” monetary aggregate, (2) the credit-card-augmented Divisia monetary aggregate, and (3) the simple sum monetary aggregate.

We acquire the following primary results. (1) The credit-card-augmented Divisia monetary aggregate tracks the theoretical (true) monetary aggregate, while simple sum does not. Although this result would be expected from the theory in classical economic models, the result is not an immediate implication of the theory in New Keynesian models and therefore needs empirical confirmation. (2) Under the recursive VAR framework, the credit-card-augmented Divisia monetary aggregate serves as a preferable monetary policy indicator compared to the traditional federal funds rate. (3) On theoretical grounds, we find that the separability condition for existence of a monetary aggregator function could fail, if credit card deferred payment services were excluded from the monetary services block, unless all markets are perfect.

The international migration literature has highlighted four key stylized facts from the perspective of the source country: (i) Migration rates are notably high, with some nations seeing over ten percent of their population living abroad. (ii) Certain developing countries have witnessed a significant exodus of skilled workers, commonly referred to as brain drain, spanning several decades. (iii) Migrants often maintain strong ties to their country of origin, evidenced by the substantial remittances they send back to their relatives. (iv) Migration is not necessarily permanent, as a considerable number of individuals return to their home country after a period spent abroad. In this paper, we present a theoretical model that endogenously explains these facts. Our model allows us to explore key issues in migration literature from a theoretical standpoint. We analyze the general equilibrium effects of migration, its long-term implications, and its welfare consequences. Additionally, we investigate whether the combined impact of return migration and remittances can counterbalance the effects of skilled migration. Finally, we evaluate the efficacy of policy interventions designed to mitigate the adverse effects of brain drain.

This paper identifies several ways in which “measurement matters” in detecting quantity-theoretic linkages between money growth and inflation in recent data from the Euro Area, United Kingdom, and USA. Elaborating on the “Barnett critique,” it uses Divisia aggregates in place of their simple-sum counterparts to gauge the effects that monetary expansion or contraction is having on inflationary pressures. It also uses one-sided time series filtering techniques to track, in real time, slowly shifting trends in velocity and real economic growth that would otherwise weaken the statistical money growth-inflation relationship. Finally, it documents how measures of inflation based on GDP were distorted severely, especially in the EA and UK, during the 2020 economic closures. Using measures based on consumption instead, estimates from the P-star model confirm that changes in money growth have strong predictive power for subsequent movements in inflation.

Is the working capital channel big, and does it vary across industries? To answer this question, I estimate a dynamic stochastic macro-finance model using firm-level data. In aggregate, I find a partial channel —about three-fourths of firms’ labor bill are borrowed. However, the strength of this channel varies across industries, reaching as low as one-half for retail firms and as high as one for agriculture and construction. This provides evidence that monetary policy could have varying effects across industries through the working capital channel.