In this work, we find that the zero capital income tax result might not hold, even at the steady state, when the government discount rate differs from the individual one. As intuitive Pigouvian considerations would suggest, capital income should be taxed (subsidized) when the government is less (more) impatient than individuals are. However, a counterintuitive asymmetry emerges as for the steady state since, in the long run, capital income cannot be taxed because of the explosive distortionary effect of positive taxes. The asymmetry is ruled out with a logarithmic utility function because, in this case, the anticipated policy path does not affect current individual choices and thus the cumulative distortionary effect of taxes disappears.

The relationship between the price of oil and the level of economic activity is a fundamental empirical issue in macroeconomics. Hamilton (1983) showed that oil prices had significant predictive content for real economic activity in the United States prior to 1972, whereas Hooker (1996) argued that the estimated linear relations between oil prices and economic activity appear much weaker after 1973. In the debate that followed, several authors suggested that the apparent weakening of the relationship between oil prices and economic activity is illusory, arguing that the true relationship between oil prices and real economic activity is asymmetric, with the correlation between oil price decreases and output significantly different from the correlation between oil price increases and output—see, for example, Mork (1989) and Hamilton (2003).

There are suggestions that increased uncertainty makes fiscal policy temporarily less effective. In this paper, I examine the relationship between business uncertainty and fiscal policy effectiveness in Germany. I use measures of business uncertainty that are derived from the firm-level data of the Ifo Business Climate Survey and interact them with the parameters of a structural vector autoregression to produce state-dependent spending multipliers. The impact of increased uncertainty on the spending multiplier is generally small and often statistically not significant in the short run. By contrast, I obtain a significant positive impact on the long-run multiplier. These baseline results are supported by a variety of robustness checks and specifications.

The paper compares the effects of market-based (M-B) and command-and-control (C&C) climate policies on the direction of technical change and the prevention of environmental disasters. Drawing on a model of endogenous growth and directed technical change, we show that M-B policies (carbon taxes and subsidies toward clean sectors) suffer from path dependence and exhibit bounded window of opportunities: delays in their implementation make them ineffective both in redirecting technical change, (i.e. triggering a transition toward clean energy) and in avoiding environmental catastrophes. On the contrary, we find that C&C interventions are favored by path dependence and guarantee policy effectiveness irrespectively of the timing of their introduction. As the hypothesis of path dependence in technological change has received vast empirical support and it is a key feature of many models of growth, we argue that C&C policies should be seen as a valuable and non-equivalent alternative to M-B interventions.

We investigate local strong rationality (LSR) in a one-step-forward-looking univariate model with memory one. Eductive arguments are used to determine when common knowledge (CK) that the solution is near some perfect-foresight path is sufficient to trigger complete coordination on that path (i.e., the path is LSR). Coordination of expectations is shown to depend on three factors: the nature of the CK initial beliefs, the degree of structural heterogeneity, and the information structure. Our sufficient conditions for LSR precisely reflect these features and provide basic consistent justifications for the choice of the saddle-path solution.

This paper analyzes the effects of corporate tax liability on firm-level total factor productivity (TFP) as the key driver of economic performance. This is a new dimension in the UK productivity puzzle that has not attracted attention so far. We use 6559 manufacturing firms over 2004–2011 to investigate whether higher levels of corporate tax affect the productivity catch-up process by reducing after-tax earnings that could alternatively be used for productivity-enhancing investment, particularly focusing on R&D- and export-intensive firms. Our key results are summarized as follows: first, higher levels of corporate taxation impact adversely on TFP and this finding is robust to different tax measures and insensitive to endogeneity bias; second, as R&D- and export-intensive firms tend to have relatively higher TFP growth, higher levels of tax liability as a share of earnings before interest and taxes decelerate TFP growth of these firms.

A simple technique for directly testing the parameters of a time-series regression model for instability across frequencies is presented. The method can be implemented easily in the time domain, so that parameter instability across frequency bands can be conveniently detected and modeled in conjunction with other econometric features of the problem at hand, such as simultaneity, cointegration, missing observations, and cross-equation restrictions. The usefulness of the new technique is illustrated with an application to a cointegrated consumption-income regression model, yielding a straightforward test of the permanent income hypothesis.

Little is known about the accuracy of expert outlooks, so heavily relied upon by industry participants and policy makers, regarding the future path of oil prices. Using the regular publications by the Energy Information Administration (EIA), we examine the accuracy of annual recursive oil price forecasts generated by the National Energy Modeling System model of the Agency for forecast horizons of up to 15 years. Our results reveal that the EIA model outperforms the benchmark random walk model around the two ends of the forecast horizon spectrum. Additionally, at the longer horizons, simple econometric forecasting models often produce similar, if not better accuracy than the EIA model. Time varying such specifications generally also exhibit stability in their forecast performance. Finally, although combining forecasts does not change the overall patterns, some additional accuracy gains are obtained at intermediate horizons, and in some cases, forecast performance stability is also achieved.

This paper studies the role played by differences in risk aversion in affecting the long-run distribution of wealth across agents in the context of an endowment economy. The economy is populated by two types of Epstein-Zin agents who differ only in their attitudes toward risk. By choosing riskier portfolio strategies, less-risk-averse agents enjoy returns on their investments characterized by a higher mean and a higher variance than the ones enjoyed by more-risk-averse agents. The former effect tends to make less-risk-averse agents wealthier over time, whereas the latter tends to make them poorer. The paper shows that, contrary to the results obtained using standard expected utility preferences, for some parameter values the long-run distribution of wealth is dominated by more-risk-averse agents.

I examine the robustness of monetary equilibria in a random-matching model, where a more efficient mechanism for trade is available. Agents choose between two trading sectors: the search and the intermediated sector. In the former, trade partners arrive randomly and there is a trading externality. In the latter, a costly matching technology provides deterministic double-coincidence matches. Multiple equilibria exist with the extent of costly matching endogenously determined. Money and “mediated” trade may coexist. This depends on the size of the probability of a trade, relative to the cost of deterministic matching. This outcome is inferior for an increasing-returns externality. Under certain conditions, regimes with only costly matching are welfare superior to monetary regimes with random matching.

We develop and apply bootstrap methods for diffusion models when fitted to the long run as characterized by the stationary distribution of the data. To obtain bootstrap refinements to statistical inference, we simulate candidate diffusion processes. We use these bootstrap methods to assess measurements of local mean reversion or “pull” to the center of the distribution for short-term interest rates. We also use them to evaluate the fit of the model to the empirical density.

The Generalized Axiom of Revealed Preference (GARP) can be violated because of random measurement errors in the observed quantity data. We study two tests proposed by Varian (1985) and de Peretti (2004), which test GARP within an explicit stochastic framework. Both tests compute adjusted quantity data that are compliant with GARP. We compare and contrast the two tests in theoretical terms and in an empirical application. The empirical application is based on testing a large group of monetary assets for the United States over multiple sample periods spanning 1960–1992. We found that both tests provided reasonable results and were largely consistent with each other.

A challenge that faces many advanced economies is how to finance age-related spending programs as the population ages. In this paper, we investigate two policy options–pension cuts and tax hikes–to mitigate fiscal pressure arising in the special context of Australia, whose population is ageing fast while growing substantially in size due to immigration. Using a computable overlapping generations model, we find that while both policy reforms can achieve a similar fiscal goal, they lead to different distributional and welfare effects across income groups over time. Future generations prefer pension cuts, whereas current generations prefer tax hikes to finance government spending commitments. Moreover, within the tax hike option, taxing income or consumption results in opposing macroeconomic and welfare effects. Indeed, our opposing intra- and inter-temporal welfare outcomes highlight some political complexity when devising a more sustainable tax-transfer system.

In this paper, unemployment, growth, and income inequality are interdependent and endogenously determined in a unified model of a trade union. Analytically, we show that the effective labor force exhibits an intensive margin response, in the sense that in response to higher unionization the number of employed workers decreases, but each individual employed worker provides more working hours. This intensive margin response leads to the possibility of the coexistence of high unemployment and high growth. Moreover, unionization gives rise to an ambiguous effect on income inequality, whereas it has an unambiguously positive effect on the labor income share and growth rate. Our numerical study shows that the elasticity of substitution between labor and capital plays an important role in governing the steady-state consequences and affecting the impact of (de-) unionization. These results provide not only a plausible explanation of the empirical evidence, but also a reconciliation for the disparity in the empirical findings.

Ramsey equilibrium models with heterogeneous agents and borrowing constraints are shown to yield efficient equilibrium sequences of aggregate capital and consumption. The proof of this result is based on verifying that equilibrium sequences of prices satisfy the Malinvaud criterion for efficiency.

It has been widely known that neoclassical growth models with sufficient increasing returns in production may feature indeterminacy. This note analytically shows that investment adjustment costs increase the required degree of increasing returns for indeterminacy to arise. Under empirically plausible levels of investment adjustment costs, we need an implausibly large degree of increasing returns to generate indeterminacy.

This paper estimates the price–marginal cost markup for U.S. manufacturing using a new methodology. Most existing techniques of estimating the markup are a variant on the Hall (1988) framework that involves manipulating the Solow Residual. However, this paper argues that this notion is based on the unreasonable assumption that labor can be costlessly adjusted at a fixed wage rate. By relaxing this assumption we are able to derive a generalized markup index, which, when estimated using manufacturing data, is highly countercyclical and decreasing in trend since the 1960s. When we then seek to explain what causes the manufacturing markup to behave in this way, the most important determinant is the share of imported goods in the industry. Thus, increasing foreign competition in manufacturing has led to a decline in the industry's markup over time.

We develop business-cycle models with financial constraints, the driving force of which is news about the future (i.e., changes in expectations). We assume that an asset with fixed supply (“land”) is used as collateral, and firms need to hold collateral to finance their input costs. The latter feature introduces an interaction between the inefficiencies in the financial market and in the factor market. Good news raises the price of land today, which relaxes the collateral constraint. It, in turn, reduces the inefficiency in the labor market. If this force is sufficiently strong, the equilibrium labor supply increases. So do output, investment, and consumption. Our models also generate procyclical movement in Tobin's Q. We also show that when the news turns out to be wrong, the economy may fall into a recession.

This paper presents a model that generates a nonmonotonic evolution of the return to education. The model highlights the role played by socioeconomic stratification in the joint determination of the supply of educated labor and the supply of physical capital. The recent theoretical literature attributes the increased education premium of the last decades to skill-biased technological progress. In contrast, our explanation is based on capital–skill complementarity and endogenous accumulation of physical and human capital in an environment characterized by credit constraints.

A well-documented property of the Beveridge–Nelson trend–cycle decomposition is the perfect negative correlation between trend and cycle innovations. We show how this may be consistent with a structural model where permanent innovations enter the cycle or transitory innovations enter the trend, and that identification restrictions are necessary to make this structural distinction. A reduced-form unrestricted version is compatible with either option, but cannot distinguish which is relevant. We discuss economic interpretations and implications using U.S. real GDP data.