We investigate the aggregate and distributional effects of banking spreads in an economy with informality. We build a heterogeneous agents model with incomplete markets, credit frictions, and a rich occupational choice setting, in which informality is an option for both employers and workers. The main finding is that reductions in spreads for formal firms increase wages, output, and welfare but have a deleterious impact on unemployment and inequality. Dropping spreads for informal firms lead to reduction in inequality indicators at the expense of consumption and welfare. By calibrating the model for Brazil, we also find that a hypothetical extinction of the informal sector can be harmful for poor agents, but combined with a spread reduction, it can generate strong positive effects on output and welfare.

This paper examines the heterogeneity of exchange rate pass-through into industry-specific import, producer, and consumer prices. Results show that depending on the imported input contents, price responsiveness to the aggregate and relative exchange rate changes displays significant differences. We found that direct exchange rate impacts are more significant than indirect effects. The importance of the indirect effects is largely influenced from energy, basic metal, and chemical industries that provide intermediate inputs to others. The time horizon plays a role in the transition process: exchange rate pass-through tends to get stronger and spread to different price indices over time. The short-run impacts of aggregate exchange rate changes are not significant, while relative exchange rate changes partially transmit to producer and consumer prices in low-import content industries. In the long run direct impacts of both aggregate and relative exchange rates are significant on import prices in all industries and producer prices in high-import content industries. Another interesting finding is that the relative and aggregate exchange rate changes have opposing impacts on domestic prices: asymmetric information about industry-specific exchange rates can create pricing opportunities.

In a second-best optimal growth setup with only factor taxes, it is in general optimal to fully replace capital by labor income taxation in the long run. We revisit this important issue by developing a human-capital-based endogenous growth model with frictional labor search, allowing each firm to create multiple vacancies and each worker to determine market participation. We find that the conventional efficient bargaining condition is necessary but not sufficient for achieving constrained social optimality. We then conduct tax incidence exercises in balanced growth by calibrating to the U.S. economy with a preexisting 20% flat tax on capital and labor income. Our quantitative results suggest that, due to a dominant channel via the interactions between vacancy creation and market participation, it is optimal to switch only partially from capital to labor taxation in a benchmark economy where human-capital formation depends on both physical and human-capital stocks. This main finding is robust even along the transition with time-varying factor tax rates. Moreover, our quantitative analysis under alternative setups suggests that while endogenous human capital and labor-market frictions are essential for obtaining a positive optimal capital tax, endogenous leisure, nonlinear human-capital accumulation and endogenous growth are not crucial.

This paper integrates seemingly disjoint studies on consumer behavior in micro and macroanalyses via an intertemporal two-stage budgeting procedure with durable goods and liquidity constraints. The model specifies an indirect utility function as a function of nondurable consumption, commodity (nondurables) prices, and durables stock, and derives the demand functions for nondurable goods. A demand function for durable goods is derived in an adjustment cost framework. The consumption growth equation accounts for relative price effects with precautionary saving, durables stock, and liquidity constraints. The stochastic discount factor is approximated by a time-varying linear function of nondurable consumption growth, commodity price growth, durables stock growth, and disposable income growth. The demand functions for six nondurable goods and services are jointly estimated with the Euler equations for bonds, stocks, and durable goods with allowance for liquidity constraints, using US data. Estimation provides new findings for intertemporal consumption and a multifactor consumption-based capital asset pricing model.

In recent years, there has been an explosive increase in the demand for health products and services by people all around the globe, and particularly in advanced economies. Aiming to enhance longevity and also to improve quality of life, individual consumption of pharmaceutical products and services has risen exponentially since the early 1980s. This paper develops a model in which agents invest part of their resources in medical products and time in physical exercise to enhance their health status. In the first part of the paper, we study the steady state and transitional dynamics of the model with special emphasis on the effects of health decisions on aggregate outcomes. In the second part, we explore how public health policies may alter private economic decisions that promote healthier and more productive lives.

Growth in total factor productivity (TFP) in the USA has slowed down significantly since the mid-2000s, reminiscent of the productivity slowdown of the 1970s. This paper investigates the implications of a productivity slowdown on macroeconomic variables using a standard real business cycle (RBC) model, extended with regime-switching in trend productivity growth and Bayesian learning regarding the growth regime. I estimate the Markov-switching parameters using US data and maximum-likelihood methods, and compute the model solution using global projection methods. Simulations reveal that, while adding a regime-switching component to the standard RBC setup increases the volatility in the system, further incorporating incomplete information and learning significantly dampens this effect. The dampening is mainly due to the responses of investment and labor in response to a switch in the trend component of TFP growth, which are weaker in the incomplete information case as agents mistakenly place some probability that the observed decline in TFP growth is due to the transient component and not due to a regime switch. The model offers an objective way to infer slowdowns in trend productivity, and suggests that macroeconomic aggregates in the USA are currently close to their potential levels given observed productivity, while counterfactual simulations indicate that the cost of the productivity slowdown to US welfare has been significant.

We study the implications of patents in an overlapping generations model with horizontal innovation of differentiated physical capital. We show that within this demographic structure of finitely lived agents, weakening patent protection generates two contradicting effects on innovation and growth. Weakening patent protection lowers the (average) price of patented machines, thereby increasing machine utilization, output, aggregate saving, and investment. However, a higher demand for machines shifts investment away from the R&D activity aimed at inventing new machine varieties toward the formation of physical capital. The growth-maximizing level of patent protection is incomplete. Shortening patent length is more effective than loosening patent breadth in spurring growth, due to an additional positive effect on growth, that is decreasing investment in old patents. Welfare can be improved by weakening patent protection beyond the growth-maximizing level.

In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely lived households, under the hypothesis of spirit of capitalism (SOC). I consider heterogeneous households in terms of preferences, endowments, and initial wealth, and capture the SOC through preferences for wealth. Preferences for wealth are the key element of this paper in a twofold aspect. First, they explain the occurrence of asset price fluctuations driven by self-fulfilling changes in expectations. Second, heterogeneity in endowments affects asset price level and dynamics only if preferences are heterogeneous. For instance, if agents with the strongest SOC are also the rich in terms of endowments, heterogeneity in endowments heightens the asset price level in the long run and destabilizes by enlarging the range of parameter values for which expectation-driven asset price fluctuations occur.

This paper examines the mechanisms that determine the “vanishing effect of finance” on economic growth found in recent studies. Based on both current (171 countries, 1960–2014) and historical (21 OECD countries, 1870–2009) data, the results show that financial development promotes growth in poorer countries by increasing education and investment, and by decreasing fertility. The relevance of these transmission channels declines when countries become richer. The growth effect of the financial sector in high-income countries primarily depends on new ideas and potentials for innovation projects. Consequently, the major decline in factor productivity growth since the early 2000s has contributed to the reduction in the financial sector’s average effect on growth.

This study explores the welfare effects of patent protection in a Romer-type expanding variety model in which R&D and capital accumulation are both engines of growth. It shows that the comparison between the productivity of R&D and that of capital plays an important role in the welfare analysis. When the relative productivity of R&D compared to capital is high (low), social welfare takes an inverted-U shape for (is decreasing in) the strength of patent protection, and the welfare-maximizing degree of patent protection is no greater than (identical to) the growth-maximizing degree. Moreover, the model is calibrated to the US economy and the numerical results support these welfare implications.