We consider an agent-based model of financial markets with asynchronous order arrival in continuous time. Buying and selling orders arrive in accordance with a Poisson dynamics where the order rates depend both on past prices and on the mood of the market. The agents form their demand for an asset on the basis of their forecasts of future prices and their forecasting rules may change over time as a result of the influence of other traders. Among the possible rules are “chartist” or extrapolatory rules. We prove that when chartists are in the market, and with choice of scaling, the dynamics of asset prices can be approximated by an ordinary delay differential equation. The fluctuations around the first-order approximation follow an Ornstein–Uhlenbeck dynamics with delay in a random environment of investor sentiment.

In a very interesting endogenous growth model, Futagami, Iwaisako, and Ohdoi [Macroeconomic Dynamics 12 (2008), 445–462] study the long-run growth effect of borrowing for public investment. Their model exhibits (i) the multiplicity of balanced growth paths (BGPs) in the long run (two steady states) and (ii) a possible indeterminacy of the transition path to the high-growth BGP. The goal of this note is to show that their results depend on a sharp assumption, namely the definition of the public debt target as a ratio to private capital. If the target is defined in terms of public debt–to–GDP ratio, both results vanish: the model exhibits a unique BGP (no multiplicity) and the adjustment path to this unique equilibrium is determinate (no indeterminacy).

We investigate both the rational explosive inflation paths studied by McCallum (2001), and the classification of fiscal and monetary policies proposed by Leeper (1991), for stability under least squares (LS) learning of the rational expectations equilibria (REE). Our first result is that the explosive fiscalist REE is not locally stable under LS learning. In contrast, in Leeper's setting, there are policy regimes for which the fiscalist solution, in which fiscal variables affect the price level, can be a locally stable outcome under LS learning. However, for other policy regimes the monetarist solution is, instead, the locally stable REE.

In this paper, we examine the convergence hypothesis using a long memory framework that allows for structural breaks and does not rely on a benchmark country. We find that even though the long memory framework of analysis is much richer than the simple I(1)/I(0) alternative, a simple absolute divergence and rapid convergence dichotomy produced by the latter is sufficient to capture the behavior of the gaps in per capita GDP levels and growth rates results respectively. This is in contrast to the findings of Dufrénot, Mignon, and Naccache [The Slow Convergence of Per Capita Income between the Developing Countries: Growth Resistance and Sometimes Growth Tragedy. Discussion paper, University of Nottingham (2009)], who found strong evidence of long memory for output gaps. The speed of convergence as captured by the estimated long memory parameter d, is explained by differences in physical and human capital as well as fiscal discipline characteristics of economic policies pursued by different countries.

We use the returns on lottery-like stocks and a dynamic factor model to construct a novel index of investor sentiment. This new measure is highly correlated with other behavioral indicators, but more closely tracks speculative episodes. Our main new finding is that the effects of sentiment are asymmetric: During peak-to-trough periods of investor sentiment (sentiment contractions), high sentiment predicts low future returns for the cross section of speculative stocks and for the market overall, whereas the relationship between sentiment and future returns is positive but relatively weak during trough-to-peak episodes (sentiment expansions). Overall, these results match theories and anecdotal accounts of investor sentiment.

We propose a novel explanation for the observed increase in the correlation of commodity prices over the past decade. In contrast to theories that rely on the increased influence of financial speculators, we examine the effect of interest rates on the volatility and correlation of commodity prices via a panel GARCH model. In theory, lower interest rates decrease the volatility of prices, as lower inventory costs promote the smoothing of transient shocks, and increase price correlation if common shocks are more persistent than idiosyncratic shocks. Empirically, we find that price volatility attributable to transitory shocks declines with interest rates, whereas particularly for metals prices, price correlation increases as interest rates decline.

This article analyzes the effect of migration from a less advanced economy to a more advanced economy on economic growth. The analysis is performed in a two-country growth model with endogenous fertility, in which congestion diseconomies are incorporated. The model shows that out-migration increases fertility and reduces human capital in the source economy. At the same time, in-migration reduces fertility and can increase or decrease the average level of human capital in the host economy. I show how migration affects the inter-temporal evolution of human capital in the world economy. I also demonstrate that a tax imposed on immigrants in the host economy can increase human capital accumulation in the receiving and sending economies and the world as a whole.

Using international data, this paper explores whether the efficient market hypothesis for real stock prices is supported for different panels. The stationarity of a real stock price has important implications for modeling and forecasting financial activities. On a global scale, we implement the recently developed nonlinear heterogeneous panel unit root test, which allows us to account for possible nonlinearity and cross-section dependence and to identify how many and which countries of the panel contain a unit root. The primary conclusion is that the stationarity of real stock prices varies between regions and levels of economic development. Overall, our empirical results illustrate that real stock prices in these countries are a mixture of stationary (integrated of order zero) and nonstationary (integrated of order one) processes.

Marshallian demand, supply, and entry models are employed for major sectors of an economy that can be combined with factor market models for money, labor, capital, and bonds to provide a Marshallian macroeconomic model (MMM). Sectoral models are used to produce sectoral output forecasts, which are summed to provide forecasts of annual growth rates of U.S. real GDP. These disaggregative forecasts are compared to forecasts derived from models implemented with aggregate data. The empirical evidence indicates that it pays to disaggregate, particularly when employing Bayesian shrinkage forecasting procedures. Further, some considerations bearing on alternative model-building strategies are presented using the MMM as an example and describing its general properties. Last, data requirements for implementing MMMs are discussed.

This paper estimates a structural New Keynesian model to test whether globalization has changed the behavior of U.S. macroeconomic variables. Several key coefficients in the model–such as the slopes of the Phillips and IS curves, the sensitivities of domestic inflation and output to “global” output, and so forth–are allowed in the estimation to depend on the extent of globalization (modeled as the changing degree of openness to trade of the economy), and, therefore, they become time-varying. The empirical results indicate that globalization can explain only a small part of the reduction in the slope of the Phillips curve. The sensitivity of U.S. inflation to global measures of output may have increased over the sample, but it remains very small. The changes in the IS curve caused by globalization are similarly modest. Globalization does not seem to have led to an attenuation in the effects of monetary policy shocks. The nested closed-economy specification still appears to provide a substantially better fit of U.S. data than various open-economy specifications with time-varying degrees of openness. Some time variation in the model coefficients over the postwar sample exists, particularly in the volatilities of the shocks, but it is unlikely to be related to globalization.

We present a model of endogenous growth in which government consumption and production services are financed by distorting capital taxes. We generalize Barro's public finance model of growth in two ways. First, we study the properties, and the role in growth, of a wider menu of second-best optimal policies, namely, the capital tax rate and the portion of total tax revenues used to finance public production services versus public consumption services. Second, we investigate the possibility of the existence and uniqueness of a long-run equilibrium in which optimal policies do not change and the economy grows at a constant balanced growth path, as well as the possibility of dynamic determinacy of this long-run equilibrium.

This study investigates the rates of technological progress, total output growth, and per capita output growth when population growth is negative using a semiendogenous research and development (R&D) growth model. The analysis shows that within a finite time horizon, the employment share of the final goods sector reaches unity and that of the R&D sector reaches zero; accordingly, the rate of technological progress tends toward zero. In this case, the growth rate of per capita output asymptotically approaches a positive value.

We study how the use of judgment or “add-factors” in forecasting may disturb the set of equilibrium outcomes when agents learn by using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in a standard self-referential environment. Local indeterminacy is not a requirement for existence. We construct a simple asset-pricing example and find that exuberance equilibria, when they exist, can be extremely volatile relative to fundamental equilibria.

This study examines the expectational stability of rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is nonzero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous, forecast, or lagged data) introduced in the Taylor rule. Our results suggest that high macroeconomic volatility during the period of high trend inflation can be explained well by introducing the concept of expectational stability.

This paper investigates the effects of monetary policy on long-run economic growth via different cash-in-advance (CIA) constraints on R&D in a Schumpeterian growth model with vertical and horizontal innovations. The relationship between inflation and growth is contingent on the relative extents of CIA constraints and diminishing returns to two types of innovation. This model can generate a mixed (monotonic or non-monotonic) relationship between inflation and growth, given that the relative strength of monetary effects on growth between different CIA constraints and that of R&D-labor-reallocation effects between different diminishing returns vary with the nominal interest rate. In the empirically relevant case where horizontal R&D is subject to larger diminishing returns than vertical R&D, inflation and growth can exhibit an inverted-U relationship when the CIA constraint on horizontal R&D is sufficiently larger than that on vertical R&D. Finally, we calibrate the model to the US economy and find that the growth-maximizing rate of inflation is around 2.4%, which is consistent with the recent empirical estimates.

We aim at establishing whether the institutional adoption of inflation targeting has changed the conduct of monetary policy. To do so, we test the hypothesis of inflation targeting translating into a stronger response to inflation in a Taylor rule with three alternative econometric models: a structural break model, a time-varying parameter model with stochastic volatility, and a Markov-switching VAR model. We conclude that inflation targeting has not led to a stronger response to inflation in the reaction function of the monetary authority. This result suggests that inflation targeting being meant to anchor inflation expectations through enhanced credibility and accountability, it may enable a central bank to stabilize inflation without pursuing aggressive action toward inflation variations.

We study labor-income and consumption taxation in an overlapping-generations model featuring endogenous growth due to interfirm investment externalities. Consumption, saving, and labor supply display life-cycle features because mortality and labor productivity are age-dependent and because annuity markets may be imperfect. The government's method of revenue recycling critically affects the growth consequences of taxation. Purely consumptive government spending has a negative impact on growth. Redistribution of tax revenue from dissavers to savers may lead to an increase in growth due to beneficial intergenerational transfer effects.

A quantitative framework of firm dynamics is developed where the size of the informal sector is determined by financial constraints and the burden of taxation. Improving access to credit for formal sector firms increases aggregate total factor productivity and output while reducing the size of the informal sector. Introducing size-dependent taxes reduces the gains from financial development as they incentivize firms to produce at a relatively limited scale. The aggregate effects of eliminating formal sector registration costs are positive but modest relative to previous theoretical models and the gains generated by financial development, and consistent with empirical evidence based on micro-level data.

We systematically evaluate how to translate a Calvo wage duration into an implied Rotemberg wage adjustment cost parameter in medium-scale New Keynesian DSGE models by making use of the well-known equivalence of the two setups at first order. We consider a wide range of felicity functions and show that the assumed household insurance scheme and the presence of labor taxation greatly matter for this mapping, giving rise to differences of up to one order of magnitude. Our results account for the inclusion of wage indexing, habit formation in consumption, and the presence of fixed costs in production. We also investigate the conditional and unconditional welfare implications of the wage-setting schemes under efficient and distorted steady states.

This paper investigates the impact of the desire to keep up with the Joneses (KUJ) on economic growth and optimal tax policy in a continuous-time, overlapping-generations model with AK technology and exogenous, gradual retirement. Due to the desire to KUJ, the propensity to consume out of total wealth rises (declines), and the balanced growth rate declines (increases), when the households' individual total (physical and human) wealth is increasing (decreasing) with age. The rate of retirement determines whether or not a household's total wealth is increasing with age. If total wealth is increasing (decreasing) with age, an optimal allocation is decentralized by an intergenerationally progressive (regressive) lump-sum tax system. The desire to KUJ strengthens the intergenerational regressivity (progressivity) of the optimal tax system. The optimal tax implications of the desire to KUJ are a key finding of this paper.