We study the interaction between endogenous growth and Ricardian trade working solely through comparative advantage. The model is built on several facts about research and development and trade. Trade and growth affect each other in ways previously unexplored. The model can explain and reconcile in a single framework several phenomena usually analyzed separately. Because of a possible dynamic inefficiency, trade may raise or lower the growth rate of each trading partner. Trade leads to “effective technology transfer,” with the growth rate looking as if a country adopts its partner’s technology even though it does not. Economic growth can endogenously change the trading regime from incomplete to complete specialization (the Ricardian corner and interior, respectively), which can explain why trade helps some countries catch up but leaves others behind. Trade may raise or lower social welfare. The model specifies the conditions under which each possible outcome occurs. We examine a few of the model’s many testable implications and find them in agreement with the data.

A wage setting process defined in terms of wage per hour is the key factor for obtaining negative optimal trend inflation in a closed economy. However, this inflation will be zero if the process is established on the wage per unit of human capital. The origin of both results is a dynamic mechanism that, with some differences, makes possible the attainment of a situation equivalent to wage flexibility. Finally, while the effect of trend inflation on the long-run growth rate is tiny in the first case, it is much more important in the second, highlighting the relevance of this approach.

This paper investigates the effects of estate taxation when firms cannot directly observe worker skill levels. Imperfect labor market signaling gives rise to an information externality that causes workers to free-ride off of others’ human capital acquisition. Inherited wealth exacerbates the information externality because risk averse workers with larger inheritances exert less effort to acquire skills. By reducing these inheritances, an estate tax induces greater skill acquisition effort and increases the number of skilled workers. In a quantitative model with employer learning and capital accumulation, the optimal estate tax is significantly above zero, increases wages and output, and benefits a large majority of households.

Country risk premia can substantially affect macroeconomic dynamics. We concentrate on one of their most important determinants—a country’s net foreign asset (NFA) position and—in contrast to the existing research—investigate its nonlinear link to risk premia. The importance of this particular nonlinearity is two-fold. First, it allows to identify the NFA level above which the elasticity becomes much (possibly dangerously) higher. Second, such a nonlinear relationship is a standard ingredient of dynamic stochastic general equilibrium (DSGE) models, but its proper calibration/estimation is missing. Our estimation shows that indeed the link is highly nonlinear and helps to identify the NFA position where the nonlinearity kicks in at approximately −70% to −75% of GDP. We also provide a proper calibration of the risk premium—NFA relationship which can be used in DSGE models and demonstrate that its slope matters significantly for economic dynamics in such a model.

The convergence hypothesis, which is developed in the context of growth economics, asserts that the income differences across countries are transitory, and developing countries will eventually attain the level of income of developed ones. On the other hand, convergence clubs hypothesis claim that the convergence can only be realized across groups of countries that share some common characteristics. In this study, we propose a new method to find convergence clubs that combines a pairwise method of testing convergence with maximum clique and maximal clique algorithms. Unlike many of those already developed in the literature, this new method aims to find convergence clubs endogenously without depending on a-priori classifications. In a Monte Carlo simulation study, the success of the method in finding convergence clubs is compared with a similar algorithm. Simulation results indicated that the proposed method perform better than the compared algorithm in most cases. In addition to the Monte Carlo, a new empirical evidence on the existence of convergence clubs is presented in the context of real data applications.

This paper focuses on the question of what monetary and fiscal policy can do and should do in a “fiscal dominance” world. I first highlight that both “amplification” and “fiscal cushion” effects are always at work jointly in determining the evolution of inflation. I find the threshold of maturity of government bonds beyond which more aggressive monetary policy dampens inflation volatility is three quarters. In addition, I conduct welfare analysis to quantitatively evaluate the costs and benefits brought by long-term debt. My results show that the threshold of government debt maturity above which an aggressive monetary policy improves welfare is eight quarters. More importantly, I characterize optimal monetary and fiscal policy using simple and implementable rules. My results indicate an optimal monetary and fiscal combination calls for an aggressive response in both rules. Finally, I find that optimized simple monetary-fiscal rule is significantly welfare inferior to the Ramsey optimal policy.

This paper examines how strengthening patent protection affects welfare in a nonscale quality-ladder model, which was developed by Segerstrom [American Economic Review 88, 1290–1310] and generalized by Li [American Economic Review 93, 1009–1017]. In the Segerstrom–Li model, patent protection creates no distortion in static allocation among the production sectors. In order to examine the welfare effects of strengthening patent protection adequately, we incorporate a competitive outside good into the Segerstrom–Li model. In the general model, we derive the welfare-maximizing degree of patent protection analytically by utilizing a linear approximation of the transition path. The result shows that the welfare-maximizing degree of patent protection is weaker when the market share of the outside good is positive than when it is zero. In other words, disregarding the static distortion that patent protection creates leads to excessive patent protection.

This paper extends the Chamley–Judd framework by introducing preference externalities in a neoclassical growth model, and finds that the optimal capital tax increases with the extent of social-status seeking or negative leisure externalities. Furthermore, this paper finds that differences in leisure externalities lead to a distinct impact on optimal factor income taxes, and hence may serve as a plausible vehicle to explain the empirical differences in factor income taxation in the United States and Europe.