Contemporaries and economic historians have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange, especially for the poor. To confront these facts, we build a random-matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist, in the sense that adding small coins to an economy with only large coins is welfare-improving. This effect is amplified by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare-improving.

The objective of the paper is to develop a model of optimal endogenous technological progress that will exhibit two properties sought in growth models: (1) The bias will depend on the parameters of the model—particularly those affecting the cost of inputs—instead of being constrained to be Harrod neutral; (2) factor shares will be constant in steady state. Using previously derived sufficient conditions, we show the conditions under which such a model can be constructed.

This paper considers an endogenous growth model with public capital and heterogeneous agents. Heterogeneity is due to differences in discount factors and inherent abilities. This allows us to closely approximate the 2007 U.S. income and wealth distributions. Government expenditures, including public investment, are financed through a progressive income tax along with a flat tax on consumption. Three revenue-neutral fiscal policy reforms are considered: (i) an increase in the degree of progressivity of the tax schedule that reduces the after-tax income distribution Gini coefficient to its lowest value over the period 1979–2009, (ii) a reduction in the progressivity ratio that causes the Gini coefficient of the wealth distribution to come close to 1, and (iii) an increase in the fraction of output allocated to public investment that has the same positive impact on the growth rate as reform (ii). It is shown that increasing investment in public capital is the only type of policy that simultaneously enhances growth and reduces both types of inequality (income and wealth). We also find that the public-investment-to-output ratio that maximizes social welfare crucially depends on the elasticity of the labor supply. With a more elastic labor supply the optimal ratio is 4.40%, whereas with a less elastic labor supply it is 5.53%.

This paper considers an overlapping-generations model with pay-as-you-go social security and retirement decision making by an old agent. In addition, this paper assumes that labor productivity depreciates. Under this setting, socially optimal allocations are examined. The first-best allocation is an allocation that maximizes welfare when a social planner distributes resources and forces an old agent to work and retire as she wants. The second-best allocation is one that maximizes welfare when a social planner can use only pay-as-you-go social security in a decentralized economy. This paper finds a range of an old agent's labor productivity such that the first-best allocation is achieved in a decentralized economy. This finding differs from that in Michel and Pestieau [“Social security and early retirement in an overlapping-generations growth model”, Annals of Economics & Finance, 2013], which notes that the first-best allocation cannot be achieved in a decentralized economy.

In response to the recession brought about by the COVID-19 pandemic, EU-wide macroeconomic policy has launched an unprecedented coordinated fiscal expansion across the EU (Next Generation EU or NGEU), financed by issuing common debt. Given NGEU’s nature, it is essential to take fiscal spillovers into consideration when assessing the overall macroeconomic effects of this fiscal expansion. We quantify the effects of the additional public investment for all Member States in a rich macro-model with a trade structure. Our model suggests that, on average, GDP effects are around one-third larger when explicitly accounting for the spillover effects from individual-country measures. For small open economies with smaller NGEU allocations, spillover effects account for the bulk of the GDP impact. We also quantify key transmission channels.

Recent papers point to the problem that inflation-targeting models do not as of yet consider financial market stability that can considerably derail inflation-targeting monetary policy, implying significant nonzero crisis probabilities that could come along with large negative output and employment gaps. Credit flows and the instability of credit appear to be at the root of the financial instability problem. On the other hand, some authors recently questioned whether a too early and too strong leaning against the wind policy by central banks might have higher costs than benefits in terms of output and employment losses. In our paper, we include in an inflation targeting model a financial stabilization goal. In contrast to infinite horizon and two-period models, we propose a finite horizon model. The model is solved by using a new global solution algorithm, called Nonlinear Model Predictive Control (NMPC), exploring stabilizing/destabilizing effects of price and nonprice (credit volume) drivers of the output gap, inflation, and credit flows. We substantiate the theoretical part of the paper by approaching the subject empirically, relying to that end on a regime-switching structural vector autoregressive (VAR) for the euro area. The empirical model contains standard macroeconomic variables along with credit flows and loan interest rates, the central bank policy rate, and European Central Bank (ECB) balance sheet variables. The regime-switching feature of the model is meant to capture the state-dependent relationship between the variables, with specific nonlinearities having direct counterparts in the theoretical model. Based on a sign restriction methodology, we explore conventional and unconventional monetary policy shocks, loan supply, and demand shocks, under different regime assumptions to reveal the state-dependent effects of both interest rate and volume-based policies. The empirical results are used as guidance for the calibration of the theoretical model variants.

This paper develops a model of the optimal timing of interest rate changes. With fixed adjustment costs and ongoing uncertainty, changing the interest rate involves the exercise of an option. Optimal policy therefore has a “wait-and-see” component, which can be quantified using option pricing techniques. We show that increased uncertainty makes the central bank more reluctant to change its target interest rate, and argue that this helps explain recent observed deviations from the Taylor Rule. An optimal wait-and-see policy fits the target interest rates of the Fed and Bank of Canada better than the Taylor Rule.

Are firms and households constrained in the use of a productive input? Theoretical approaches to this question range from exogenously imposed credit allocation rules to endogenous market failures stemming from some sort of limited-commitment or moral-hazard problem. However, when testing for constraints, researchers often simply ask firms or households if they would wish to borrow more at the current interest rate and/or test for suboptimal use of inputs in production functions relative to a full-information, full-commitment benchmark. We demonstrate that if credit is part of a much larger information-constrained (or limited-commitment) incentive scheme, then input use may very well be distorted away from the first-best. Further, households and firms, in certain well-defined circumstances, may, at the true interest rate or opportunity cost of credit, desire to borrow more (or less) than the assigned level of credit. In other, more constrained, contractual regimes, firms and households would say that they do not want to borrow more (or less), but these regimes are decidedly suboptimal, although the magnitude of the loss does depend on parameter values. We conclude with empirical methods that, in principle, could allow researchers armed with enough data to estimate parameters and distinguish regimes. Researchers then could see if firms and households are truly constrained and, if so, what the welfare loss might be.

The limited asset-market participation hypothesis has triggered a debate on DSGE models' determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate in the market for interest-bearing securities hold money. In this case, endogenous monetary transfers between the two groups make it possible to smooth consumption differences, and the model is determinate, provided that the non-negativity constraint on individual money holdings is satisfied.

The present paper uses an analytical approach to derive approximate closed-form solutions for the asset moments of a real-business-cycle model with idiosyncratic risk. To preserve analytical tractability, risk sharing is completely shut down. Further, the firm is assumed to maximize a variant of value maximization, given that its usual objective is no longer well defined under market incompleteness. When idiosyncratic risk is incorporated into the model, the asset moments can be decomposed into their value under identical households plus a new idiosyncratic term. Under full constrained persistence, in which case the same household determines the asset moments every period, the model is able to generate the risk premium in the data with reasonable parameter values, but it cannot generate the risk return trade-off. While the quantitative impact of idiosyncratic risk is smaller when there is only some persistence in who is constrained, the qualitative predictions are unaltered.

This paper uses the old Keynesian representative agent model developed by Roger E. A. Farmer [Expectations, Employment and Prices. New York: Oxford University Press (2010)] to answer two questions: (1) Do increased government purchases crowd out private consumption? (2) Do increased government purchases reduce unemployment? Farmer compared permanent tax-financed expenditure paths and showed that the answer to (1) was yes and the answer to (2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer. However, in contrast to Farmer's experiment, we find that a temporary increase in government purchases can also reduce unemployment.

Most of empirical studies find evidence of the J-Curve, but recent results cast doubt over its standard explanation. By addressing the countercyclicality of the current account and its dynamic link with the terms of trade, this paper revisits the J-Curve phenomenon using a two-good dynamic optimizing small open economy model allowing for a habit-forming behavior and capital adjustment costs. While the nonmonotonic adjustment of the current account relies on the degree of habit persistence in consumption and the magnitude of capital installation costs after an unanticipated terms of trade worsening, we show that the sizes of the long-run intertemporal elasticity of substitution under time nonseparable preferences and the import content of real consumption and investment matter as well after a temporary perturbation. As a consequence of an intertemporal speculation effect and an inertia effect, the small country reaches the long-term equilibrium with higher foreign assets after a short-lived terms of trade worsening.

This paper analyzes the dynamics of public debt in a simple two-period overlapping-generations model of endogenous growth with productive public goods. Alternative fiscal rules are defined, with particular attention devoted to the golden rule. Conditions under which multiple equilibria may emerge are characterized. The analysis is then extended to consider the case of partial depreciation, an endogenous risk premium, an endogenous primary surplus rule, a generalized golden rule, a nonseparable utility function, and network externalities. If network effects are sufficiently strong, an increase in public investment may shift the economy from a low-growth equilibrium to a steady state characterized by both higher public debt ratios and higher output growth. This shift may enhance welfare as well. These results illustrate the importance of preserving, even in a context of fiscal retrenchment, the allocation of resources to specific types of public investment.

Economists typically use seasonally adjusted data in which the assumption is imposed that seasonality is uncorrelated with trend and cycle. The importance of this assumption has been highlighted by the Great Recession. The paper examines an unobserved components model that permits nonzero correlations between seasonal and nonseasonal shocks. Identification conditions for estimation of the parameters are discussed from the perspectives of both analytical and simulation results. Applications to UK household consumption expenditures and US employment reject the zero correlation restrictions and also show that the correlation assumptions imposed have important implications about the evolution of the trend and cycle in the post-Great Recession period.

We construct a theory of forward guidance in economic policy making in order to provide a framework for explaining the role and strategic advantages of including forward guidance as an explicit part of policy design. We do this by setting up a general policy problem in which forward guidance plays a role, and then examine the consequences for performance when that guidance is withdrawn. We show that forward guidance provides enhanced controllability and stabilizability—especially where such properties may not otherwise be available. As a by-product, we find that forward guidance limits the scope and incentives for time-inconsistent behavior in an economy whose policy goals are ultimately reachable. It also adds to the credibility of a set of policies.

We explore bifurcation phenomena in the open-economy New Keynesian model developed by Galí and Monacelli in 2005. We find that the open economy framework brings about more complex dynamics, along with a wider variety of qualitative behaviors and policy responses. Introducing parameters related to the open economy structure affects the values of bifurcation parameters and changes the location of bifurcation boundaries. As a result, the stratification of the confidence region, as previously seen in closed-economy New Keynesian models, remains an important research and policy risk to be considered in the context of the open-economy New Keynesian functional structures. In fact, econometrics and optimal policy design become more complex within an open economy. Dynamical inferences need to be qualified by the risk of bifurcation boundaries crossing the confidence regions. Policy design needs to take into consideration that a change in monetary policy can produce an unanticipated bifurcation, without adequate prior econometrics research.

We propose a unified identification scheme to identify monetary shocks and track their propagation through the economy. We combine three approaches dealing with the consequences of monetary shocks. First, we adjust a state space version of the P-star type model employing money overhang as the driving force of inflation. Second, we identify the contemporaneous impact of monetary policy shocks by applying a sign restriction identification scheme to the reduced form given by the state space signal equations. Third, to ensure that our results are not distorted by the measurement error exhibited by the official monetary data, we employ the Divisia M4 monetary aggregate provided by the Center for Financial Stability. Our approach overcomes one of the major difficulties of previous models by using a data-driven identification of equilibrium velocity. Thus, we are able to show that a P-star model can fit U.S. data and money did indeed matter in the United States.

We analyze expectations coordination on a stationary sunspot equilibrium (SSE) using an eductive approach in which agents forecast the forecasts of others. This approach is grounded in some common-knowledge assumptions. We show that two institutional contexts may be envisaged; we also distinguish between stationary and nonstationary beliefs. We show that the conditions for eductive stability depend mainly on whether stationarity of beliefs is imposed. We also prove the existence of eductively stable SSEs by means of the Poincaré–Hopf theorem and show that eductively stable SSEs exist in a neighborhood of some indeterminate steady states.

This paper explores the dynamics of semiendogenous versus fully endogenous growth models in “lab equipment” specifications of the models with expanding sectors. Capital is allowed to accumulate and is used, together with other inputs, to produce new knowledge. The stability of the steady state path is found to be determined by the inequality and/or knife-edge restrictions needed to produce steady state growth. This paper takes the ratio of the shadow price of capital to knowledge and the level of consumption as jump variables. Semiendogenous growth models lead to a 4 × 4 dynamic system where the sign of the coefficient matrix of the log linearized dynamic system is indefinite, leading to a potential for both stable and unstable equilibria. The knife-edge restrictions needed to generate policy influences on growth are shown to be restrictions that reduce the system to 3 × 3 with a positive definite coefficient matrix, thereby guaranteeing a globally stable equilibrium. Implications for empirical testing are addressed.

This paper analyzes the effects of stronger intellectual property rights (IPR) protection in the South on innovation, imitation, the pattern of production, and wage inequality based on a North–South product-cycle model with foreign direct investment (FDI) and skills accumulation. This quality-ladder model features innovative R&D in the North and imitative R&D in the South. Two types of innovations are considered: innovation targeting all products and innovation targeting only imitated products. We find that for both types of innovations, strengthening IPR protection reduces the innovation rate and raises the imitation rate. There is also an increase in the proportion of Northern unskilled labor and a decrease in Northern wage inequality. As for the pattern of production, strengthening IPR protection may reduce the extent of FDI.