This paper aims to estimate the government investment fiscal multipliers in select European countries for the period 1970–2016. To do this, we combine Structural Vector Autoregression (SVAR) modeling with the Local Projections (LP) approach. We estimate models by also controlling for fiscal foresight, excluding the postcrisis period and distinguishing between Northern and Southern countries. Our findings suggest that an increase in government investment generates a “Keynesian effect” by engendering positive and permanent effects on the GDP level, even when government expenditure expectations are considered. Fiscal multipliers are close to 1 on impact and increase in the years after the implementation of a discretionary fiscal policy.

This paper examines the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping-generations model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks into their pricing of loans, a banking system may enter bankruptcy with probability one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low.

This paper studies the problems of measuring economic growth under conditions of high inflation. Traditional bilateral index number theory implicitly assumes that variations in the price of a commodity within a period can be ignored. To justify this assumption under conditions of high inflation, the accounting period must be shortened to a quarter, a month, or possibly a week. However, once the accounting period is less than a year, the problem of seasonal commodities is encountered; i.e., in some subannual periods, many seasonal commodities will be unavailable and hence the usual bilateral index number theory cannot be applied. The paper systematically reviews the problems of index number construction when there are seasonal commodities and high inflation. Various index number formulas are justified from the viewpoint of the economic approach to index number theory by making separability assumptions on consumers' intertemporal preferences. We find that accurate economic measurement under conditions of high inflation is very complex.

Weak separability is a key admissibility property in the Divisia approach to monetary aggregation. We test groups of U.K. household sector monetary assets for weak separability using new data underlying the Bank of England's benchmark revision of its household sector Divisia index. Nonparametric tests are used to identify four monetary asset groupings, which are weakly separable over all or almost all of the post-ERM period (1992:4–2005:1). We construct Divisia monetary aggregates for these four groupings and investigate their information content in two applications. The main findings are that Divisia money has direct effects on aggregate demand and that the growth rates of the nominal Divisia monetary aggregates Granger cause nominal output growth, but not inflation.

Herbert A. Simon, 1978 Economics Nobel Prize laureate, talked about satisficing (his neologism) rather than optimizing as being what economists really need. Indeed, optimization might be an unsuitable solution procedure (in that it suggests a unique “optimal” solution) for problems where many solutions could be satisfactory. We think that looking for an applicable monetary policy is a problem of this kind because there is no unique way in which a central bank can achieve a desired inflation (unemployment, etc.) path. We think that it is viability theory, which is a relatively young area of mathematics, that rigorously captures the essence of satisficing. We aim to use viability analysis to analyze a simple macro policy model and show how some robust adjustment rules can be endogenously obtained.

Hirofumi Uzawa is one of the giants of modern economic theory. Hiro is probably best known to the readers of Macroeconomic Dynamics (MD) for his seminal articles on two-sector economic growth. The two-sector technology is more general than the one-sector technology: it allows a production possibility frontier that is strictly concave to the origin as opposed to being necessarily flat. This generality allows richer and more complex dynamics. This makes it especially useful for the analysis of economic fluctuations. The two-sector model is perfect for dynamic international trade.

Hiro is also well known to macroeconomists for his seminal contribution to endogenous growth. In his article in the 1965 IER, productivity permanently increases as the result of permanent accumulation of human capital. Uzawa was thus a first mover in the new growth theory. The symbol H (for Human Capital, or for Hiro?) is today everywhere in models of economic dynamics.

On his own and through his many students and mentees, Hiro has been the major inspiration for the modern theory of optimal economic growth. He taught a generation of pure and applied economists how to apply Pontryagin's maximum principle in economic dynamics. It seems that Uzawa introduced—or at least pushed the use of—phase diagrams in economic dynamics. Where would we be without this essential tool?

Most readers of MD are likely to think first of Uzawa's contributions to macro, but Hiro is equally well known for his superb works on mathematical economics, general equilibrium, and demand theory. Hiro's mathematics is elegant and often very deep. Like the quality mathematician that he is, he does not apply technique for technique's sake.

Hiro has made fundamental contributions to nonlinear programming. For the convex (but not necessarily smooth) case, he employed Slater's condition to obtain Kuhn–Tucker multipliers that satisfy the saddlepoint property necessary for an optimum. For the smooth (but not necessarily convex) case, Arrow, Hurwicz, and Uzawa introduced the current version of the constraint qualification, which ensures that optimality implies the existence of Kuhn–Tucker multipliers satisfying the saddlepoint property.

Hiro's paper “Walras's Existence Theorem and Brouwer's Fixed Point Theorem” in the Economic Studies Quarterly (1962) is a hidden gem on general equilibrium. This paper can be seen as foreshadowing Sonnenschein's result on excess demand functions. Hiro clarified old, important questions about recovering preference maps from demand functions. Hiro was probably the first to convincingly show—in the context of tatonnement adjustment—the important distinction between local stability and global stability in economic dynamics.

We have given here only a glimpse into the very large body of beautiful, influential Uzawa papers. Hiro's splendid bibliography is given at the end of the interview. Some of the work that Hiro has pursued energetically has yet to be widely recognized. One thinks, for example, of the Penrose Effect, Hiro's modeling of the organizational costs incurred in adding capital or making other changes in the way a firm does business.

Hiro has had many successful students and mentees. Your MD interviewers are lucky to have been among those whom Hiro has influenced profoundly. A very incomplete list of the others would also include Dave Cass, Steve Goldman, Harl Ryder, Hajime Oniki, Bob Lucas, George Akerlof, Joe Stiglitz, Miguel Sidrauski, Morris Teubal, Assaf Razin, Guillermo Calvo, Bill Ethier, and Lenny Mirman.

Hiro is widely recognized and even revered in Japan. He was elected to the very selective Japan Academy in 1989 at a remarkably young age. He was named “A Person of Cultural Merit” in 1983 and elected to the Order of Culture in 1997. Hiro has received significant international recognition. He was President of the Econometric Society. He is a Fellow of the Econometric Society, Member of the American Academy of Arts and Sciences, Foreign Honorary Member of the American Economic Association, and Foreign Associate of the U.S. National Academy of Sciences.

This interview took place nearly 10 years ago. We apologize to the readers and to Professor Uzawa for the delay in getting the transcript to the editor. The interview was held at the Research Center on Global Warming of the Development Bank of Japan, at which Hiro plays an important role. Four of us—Uzawa, the two interviewers, and Yumiko Baba, who was then a post-doc in economics at the University of Tokyo, there to operate the tape recorder—were collected at the Meiji Gakuin University in central Tokyo and whisked away in a large black automobile to Hiro's home court at the Bank. Hiro is an imposing figure: tall and erect with a very long, pointed white beard. His eyes are very active. He strokes his beard in a soothing manner. It is not difficult to be in awe of him. The interview took an even more formal tack because there were two in the room with the nickname “Hiro.” It was hence efficient to use last names at times.

The interviewers had agreed to try to steer Uzawa toward a discussion of his well-known basic technical contributions and away from his less well-known and more political contributions. In the end, we failed to steer Hiro onto any course other than his own. This is mostly as it should be. In this interview, you will hear about some of the technical contributions for which Hiro is widely known. You will also hear about what motivated him to enter economics, his strong social concerns and strong political views, the turbulence of the war years and the postwar years, and his recent work and interests. A few of the paragraphs at the end of the interview were added to bring the record up to date. What comes through is a picture of Hirofumi Uzawa, a truly distinguished scholar and a person dedicated to human betterment.

Hiro talked in his usual warm, friendly voice. He peppered the interview with his strong opinions about other major economists, often with lively anecdotes. Of course, Hiro's opinions are his own, not those of the interviewers or the editors. We hope that the readers will get as much out of this conversation with Hiro as we did.

We study the sustainability of long-run growth in a two-sector economy where a renewable natural resource is exploited under private property rights. We obtain short- and long-run growth trajectories in closed form, examine transitional dynamics, and characterize convergence properties. We find conditions for sustainable long-run growth, which depend on the harvesting rate, and show that the speed of convergence decreases during transition. We identify a stronger version of Hartwick's rule and analyze parameter dependences for endogenous variables. Economic growth relies less on abundance or scarcity of natural resources than on the way they are managed.

In their landmark paper, Bray and Savin note that the constant-parameters model used by their agents to form expectations is misspecified and that, using standard econometric techniques, agents may be able to determine the time-varying nature of the model's parameters. Here, we consider the same type of model as employed by Bray and Savin except that our agents form expectations using a perceived model with parameters that vary with time. We assume agents use the Kalman filter to form estimates of these time-varying parameters. We find that, under certain restrictions on the structure of the stochastic process and on the value of the stability parameter, the model will converge to its rational expectations equilibrium. Further, the restrictions on the stability parameter required for convergence are identical to those found by Bray and Savin.

We analyze the consequences of overleveraging and the potential for destabilizing effects from financial- and real-sector interactions. In a theoretical model, we demonstrate that, in the presence of regime-dependent macro feedback relations, a highly leveraged banking system can result in instabilities and downward spirals. To investigate this question empirically, we analyze time series from eight advanced economies on industrial production and the components of the country-specific financial stress indices constructed by the IMF. Employing nonlinear, multiregime vector autoregressions, we examine how industrial production is affected by the individual risk drivers making up the indices. Our results strongly suggest that financial-sector stress has a substantial, nonlinear influence on economic activity and that individual risk drivers affect output rather differently across stress regimes and across groups of countries.

This paper proposes a new theoretical framework aimed at understanding the link between technological change, skill premium, and employment. We build an endogenous growth model of directed technological change with vertical research and development (R&D) in which low-skilled workers might be organized in a trade union. This union can act as a monopoly seller of labor and decide unilaterally the low-skilled wage, or as a managerial union that bargains wage and employment with the employers' federation, i.e., firms. Our results suggest that (i) the impacts of trade unions on technological-bias and on the level of (un)employment crucially depend on their type and preferences; and (ii) trade unions can actually increase low-skilled wages and employment if they have some bargaining power and are employment-oriented. Furthermore, our framework provides some highlights to explain the relationship between wage dispersion and the deunionization process that occurred in the United Kingdom and the United States during the 1980s.

The next international version of the System of National Accounts will recommend that R&D (Research and Development) expenditures be capitalized instead of being immediately expensed as in the present System of National Accounts 1993. An R&D project creates a new technology, which in principle does not depreciate like a reproducible asset. A new technology is, however, subject to obsolescence, which acts in a manner that is somewhat similar to depreciation. The paper looks at the net benefits of an R&D project in the context of a very simple intertemporal general equilibrium model and suggests that R&D expenditures be amortized using the matching principle that has been developed in the accounting literature to match the fixed costs of a project to a stream of future benefits. Of particular interest is the evaluation of the net benefits of a publicly funded project where the results are made freely available to the public.

During the typical recovery from U.S. postwar period economic downturns, employment recovers to its prerecession level within months of the output trough. However, during the past two recoveries, employment has taken up to three years to achieve its prerecession benchmark. We propose a formal empirical model of business cycles with recovery periods to demonstrate that the past two recoveries have been statistically different from previous experiences. We find that this difference can be attributed to a shift in the speed of transition between business cycle regimes. Moreover, we find this shift results from both durable and nondurable manufacturing sectors losing their cyclical characteristics. We argue that this finding of acyclicality in post-1980 manufacturing sectors is consistent with previous hypotheses (e.g., improved inventory management) regarding the reduction in macroeconomic volatility over the same period. These results suggest a link between the two phenomena, which have heretofore been studied separately.

Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature, which is in sharp contrast to the implausibly low values under RE. Positive effects of fiscal policy are demonstrated during times of economic stress like the recent Great Recession. Finally, it is shown how learning can lead to consumption and investment dynamics empirically documented during some episodes of “fiscal consolidations.”

We analyze the effects of children’s health on human capital accumulation and on long-run economic growth. For this purpose, we design an R&D-based growth model in which the stock of human capital of the next generation is determined by parental education and health investments. We show that (i) there is a complementarity between education and health: if parents want to have better educated children, they also raise health investments and vice versa; (ii) parental health investments exert an unambiguously positive effect on long-run economic growth, (iii) faster population growth reduces long-run economic growth. These results are consistent with the empirical evidence for modern economies in the twentieth century.

We develop an overlapping-generations model of growth and the environment in relation to public policy on education. Beyond the traditional mechanisms through which knowledge, growth, and the environment interplay, we stress the role played by education in environmental awareness. Assuming first that environmental awareness is constant, we show the existence of a balanced-growth path (BGP) along which environmental quality increases continually. Then, if education enhances environmental awareness, the equilibrium properties are modified: the economy can reach a steady state or converge to an asymptotic BGP. Therefore, education does not necessarily promote sustained and sustainable growth.

The behavior of postwar real U.S. GNP, the inputs to an aggregate production function, and several formulations of the associated Solow residuals for the presence of nonlinearities in their generating mechanisms are examined. Three different statistical tests for nonlinearity are implemented: the McLeod-Li test, the BDS test, and the Hinich bicovariance test. We find substantial evidence for nonlinearity in the generating mechanism of real GNP growth but no evidence for nonlinearity in the Solow residuals. We further find that the generating mechanism of the labor input series is nonlinear, whereas that of the capital services input appears to be linear. We therefore conclude that the observed nonlinearity in real output arises from nonlinearities in the labor markets, not from nonlinearities in the technical shocks driving the system. Finally, we investigate the source of the nonlinearities in the labor markets by examining simulated data from a model of the Dutch economy with asymmetric adjustment costs.

This work shows the asymmetric effect of the reduction in transportation costs across different sectors in the process of the Great Divergence. Specifically, the analysis indicates that reductions in transportation costs of industrial goods enhance convergence of the growth rates of trading economies. In contrast, reductions in transportation costs of nonindustrial goods contribute to a further divergence across countries.

We study the relationships between various concepts of financial development and balanced economic growth. A model of endogenous growth that incorporates roles for both financial efficiency and access to financial services permits a better understanding of the relationship between the size of the financial sector (value added) and growth. Higher financial value added results from some, but not all, kinds of finance-driven growth. If greater access rather than greater efficiency generates higher growth, then value added and growth can be positively correlated. We present some preliminary empirical results that support the importance of access alongside efficiency in explaining cross-country variations in growth.

We propose a simple short-run Post-Keynesian model in which the key aspects of shadow banking, namely securitization and the production of structured finance instruments, are explicitly formalized. To the best of our knowledge, this is the first attempt to broaden purely real-side Post-Keynesian models and their traditional focus on shareholder-value orientation, the financialization of non-financial firms, and the profit-led vs. wage-led dichotomy. We rather put emphasis on the role of financial institutions and rentier-friendly environment in determining the predominance of specific growth and distribution regimes. First, we illustrate the macroeconomic rationale of shadow banking practices. We show how, before the 2007–08 crisis, securitization and shadow banking allowed for an increase in profitability for the whole financial sector, while apparently keeping leverage under control. Second, we define a variety of shadow-banking-led regimes in terms of economic activity, productive capital accumulation, and income distribution.

We generalize existing fair wage models to allow effort to vary over the business cycle. When effort is variable, wage fluctuations are partially compensated for by endogenous effort fluctuations, so that the sensitivity of marginal cost to output and employment variations is decreased. This new mechanism decreases the need for sluggishness to explain the observed high inflation persistence.