Japan’s so-called Lost Decade of the 1990s presents a unique case study of an economy with a recent severe and prolonged recession, with large changes in the labor market and fiscal policy as the main policy available to the government. Japanese unemployment rate surged from 2.1% in 1991 to 5.4% in 2002. Meanwhile, the Japanese economy experienced a rise in government expenditures, while taxes remained fairly stable. This paper quantitatively evaluates the impact of these changes in fiscal policies on labor market variables, in particular the unemployment rate, during the 1990s. We build, calibrate, and simulate a dynamic general equilibrium model with search frictions in the labor market, a productive government sector, heterogenous government spendings, and different categories of taxes. Our model is able to reproduce the paths of the main labor market variables, and the counterfactual experiments show that the changes that took place in the different spending components affected the unemployment rate heterogeneously, although overall they kept unemployment lower than it could have been. We also find that had the government also implemented countercyclical tax policies, unemployment would not have risen as much as it did by 2002.

In a two-country world economy, endogenous interest rate adjustment makes one country's consumption-habit dynamics affected by the other country's habit. External indebtedness depends crucially on international differences in habit-adjusted net output less habitual living standard. Interest rate adjustment enlarges the consumption impact of an income shock. Consistent with the empirical facts, the habit parameter of a large country would thus be underestimated, and the current account volatility overestimated, if they were estimated using a small-country model. An increase in fiscal spending in one country can benefit the country and harm the neighbor one due to reversed intertemporal terms-of-trade effects.

We extend the dynamic Heckscher–Ohlin model in Bond et al. [Economic Theory (48, 171–204, 2011)] and show that if the labor-intensive good is inferior, then there may exist multiple steady states in autarky and poverty traps can arise. Poverty traps for the world economy, in the form of Pareto-dominated steady states, are also shown to exist. We show that the opening of trade can have the effect of pulling the initially poorer country out of a poverty trap, with both countries having steady state capital stocks exceeding the autarky level. However, trade can also pull an initially richer country into a poverty trap. These possibilities are a sharp contrast with dynamic Heckscher–Ohlin models with normality in consumption, where the country with the larger (smaller) capital stock than the other will reach a steady state where the level of welfare is higher (lower) than in the autarkic steady state.

In this paper, we investigate incentives, other than altruism, that developed countries have for improving developing country technologies. We propose a simple model of international trade between two regions, in which individuals have preferences over an inferior good and a luxury good. The poor region has a comparative advantage in the production of the inferior good. Even when costly adaptation of the technology to the poor region's characteristics is required—making the technology inappropriate for local use—there are parameter configurations for which the rich region has an incentive to incur this cost. It benefits from a terms-of-trade improvement and from greater specialization in the luxury good. Indeed, there are cases where the rich region would prefer to improve the poor region's technology for producing the inferior good rather than its own. We apply our model to the Green Revolution and provide a quantitative assessment of its welfare effects.

The reduction in international trade has been more than the reduction in economic activity during the 2008 financial crisis, against the one-to-one relationship between them implied by standard trade models. This so-called the Great Trade Collapse (GTC) has been investigated extensively in the literature resulting in alternative competing stories as potential explanations. By introducing and estimating a dynamic stochastic general equilibrium model using 18 quarterly series from the USA, including those that represent the competing stories, this paper evaluates the contribution of each story to GTC. The results show that retail inventories have contributed the most to the collapse and the corresponding recovery, followed by protectionist policies, intermediate-input trade, and trade finance. Productivity and demand shocks have played negligible roles.

This paper attempts to derive several economic conservation laws and to test the validity of the optimal growth models using the income/wealth ratios for the United States, Japan, and other OECD countries. Conservation laws vary with the type of the objective function depicted, such as the maximization of the aggregate consumption or the maximization of per-capita consumption. The operational concept of “wealth-like quantity” is identified, although the Goldsmith-Kendrick standard definition of “net national wealth” should not always be used. The last section of the paper takes up an empirical analysis to determine how different economies have achieved long-term (optimal) growth. The U.S. economy has been operating rather efficiently, whereas the Japanese economy, after the oil shocks of the 1970's, has behaved differently, leading into the bubble period of the early 1990's.

I add intangible capital to a variant of the neoclassical growth model that already features physical and human capital, and study the implications for international income differences. I calibrate the parameters associated with intangible capital by using new estimates of investment in intangibles by Corrado et al. [Review of Income and Wealth 55, 661–685 (2009)] and depreciation rates by Corrado and Hulten [American Economic Review 100, 99–104 (2010)]. I find that for a given efficiency difference between rich and poor countries, the model with intangible capital can explain more than double the income differences of the model without. Put another way, in the benchmark case, differences in intangible capital account for 14.3% of the observed income differences. I also examine the role played by intangible capital in versions of the model with barriers to accumulation. In all the variants that I consider, differences in intangible capital account for 10% to 22% of the observed income differences.

This paper compares the stochastic behavior of fiscal variables under optimal fiscal policy for the cases of full commitment by the government (Ramsey problem) and no commitment by the government (focusing on differentiable Markov perfect equilibrium). It shows that the cyclical properties of fiscal variables are similar for both commitment assumptions. These conclusions are robust to two different specifications of the structure of public bonds (risk-free and state-contingent) and to different sets of the parameters. The cyclical properties of fiscal variables, regardless of commitment assumptions, can be determined by the parameters of the utility function.

This paper applies smooth transition regressions to incorporate nonlinearity into the impact of trading volume on exchange rate volatility, the so-called mixture distribution hypothesis (MDH). Linking this analysis to the Tobin tax debate, we provide the first empirical corroboration that such a tax may be effective in limiting speculation and reducing exchange rate volatility, especially in turbulent times. Our study points to two main results. First, we show that nonlinearities should be taken into account to explain the MDH. When volatility, spreads, and volume are simultaneously high, the relationship between trading volume and volatility tends to grow stronger and thus the MDH holds in turbulent periods. Second, on the assumption of constant trading volume elasticity, a Tobin tax would have been stabilizing and effective in the 2008 crisis.

This paper is the first part of a two-part survey reviewing some basic concepts and methods of the modern theory of dynamical systems. The survey is introduced by a preliminary discussion of the relevance of nonlinear dynamics and chaos for economics. We then discuss the dynamic behavior of nonlinear systems of difference and differential equations such as those commonly employed in the analysis of economically motivated models. Part I of the survey focuses on the geometrical properties of orbits. In particular, we discuss the notion of attractor and the different types of attractors generated by discrete- and continuous-time dynamical systems, such as fixed and periodic points, limit cycles, quasiperiodic and chaotic attractors. The notions of (noninteger) fractal dimension and Lyapunov characteristic exponent also are explained, as well as the main routes to chaos.

This paper proposes a simple theory to explain the productivity slowdown observed in Japan during the 1990s. Under a forbearance policy by the government toward nonperforming loans, one keeping insolvent firms afloat, other economic agents become exposed to a higher risk of not being paid by their customers (payment uncertainty). It is shown that the payment uncertainty, working through a competitive market, causes an endogenous decline in the number of firms that are involved in the production of one good. Resulting disruptions of the division of labor among firms lower macroeconomic productivity. The performance of the model is compared with that of the Japanese economy in the 1990s.

We examine “Forward Guidance Contracts,” which penalize central bankers for choosing high interest rates. We integrate those contracts into the New Keynesian Framework and show that they can be used to overcome a liquidity trap. Moreover, although the government takes only a share of the social benefits into account when it has to decide whether to offer the contract, we demonstrate that for plausible parameter values the government will always find it desirable to offer the contract in a liquidity trap but not in normal times. Finally, we show that the optimal duration of such contracts is typically very short.

This paper argues that trade specialization played an indispensable role in supporting the Industrial Revolution. We calibrate a two-good and two-sector overlapping generations model for England's historical development and investigate how much different England's development path would have been if it had not globalized in 1840. The open-economy model is able to match the data closely, but the closed-economy model cannot explain the fall in the value of land relative to wages observed in the nineteenth century. Without globalization, the transition period in the British economy would have been considerably longer than that observed in the data and key variables, such as the share of labor force in agriculture, would have converged to figures very distant from the actual ones.

This paper explores the growth effects of both consumption- and wealth-induced social comparisons in a unified small open endogenous growth model. We analytically show that in an open economy not only do these two distinct status-seeking motives have very different growth effects, but these growth effects are also quite different from the conventional wisdom based on a closed economy. Status-seeking behavior need not favor economic growth. The asset portfolios of households and the imperfection of the international asset market both play an important role and jointly govern the growth effects of social status seeking. We also perform a quantitative experiment, showing that our analytical findings are robust and empirically plausible. Our analysis provides novel implications for social comparisons and new insights into the literature.

We calculate that the extension of unemployment insurance benefits during downturns has significantly increased the variability of unemployment and vacancies in the United States. Taking this into account reduces the value of leisure necessary to match the wide labor market business cycles experienced in the United States using the Mortensen--Pissarides model. For this calculation, we analyze a version of the model where unemployment insurance benefits not only expire but must be earned with prior employment. With these features, we can calibrate the model to be consistent with unemployment responding strongly to productivity shocks and mildly to changes in unemployment insurance policies. Our preferred calibration predicts that the standard deviation of unemployment since 1945 would have fallen by around 37% if there had not been programs extending unemployment benefits during recessions. We also find that the enactment of the Emergency Unemployment Compensation program in 2008 increased the unemployment rate by 0.5 percentage points.

This paper adds to the large body of literature on the effects of technology shocks empirically and theoretically. Using a structural vector error correction model, we first provide evidence that not only hours but also investment decline temporarily following a technology improvement. This result is robust to important data and identification issues addressed in the literature. We then show that the negative response of inputs is consistent with an estimated monetary model in which the presence of strategic complementarity in price setting, in addition to nominal rigidities, lowers the sensitivity of prices to marginal costs, and monetary policy does not fully accommodate the shock.

I investigate a simple continuous-time overlapping generations model with a neoclassical production function. I demonstrate that the degree of wealth inequality is positively related to the difference between the real interest rate r and the growth rate of income g, and if g falls, the r – g gap widens and inequality worsens. I also argue that a wealth tax reduces the wealth inequality. All these results are consistent with the famous predictions advanced by Thomas Piketty in Capital in the Twenty-First Century (2014).

To identify the labor market reforms that offer the highest payoff, we develop a medium-scale two-country model representing a currency union featuring real and nominal rigidities and heterogeneous labor market frictions. A labor market reform is modeled as a permanent structural change in the labor market institutions. We find that changes in the domestic labor market can have drastic welfare implications for both countries. Welfare improvements are observed when a worker (a firm) is more likely to find a job (a worker) or when jobs are less likely to be destroyed. In addition, labor market heterogeneity has sizeable effects on the level of welfare gains. The more flexible the foreign labor market, the higher its welfare. Finally, we show that (i) the way the monetary authorities conduct their policy has negligible welfare effects and (ii) matching frictions can offset the negative effect of price rigidities in the economy.

This note evaluates whether a New Open Economy model can reproduce qualitatively the observed fluctuations of the tradeable and nontradeable sectors of the U.S. economy. The answer is positive: both in the model and in the data, the standard deviations of tradeable inflation, output, and employment are significantly higher than the standard deviations of the corresponding nontradeable sector variables. The key role in generating this result is played by the greater responsiveness of tradeable sector variables to monetary shocks.

In this paper we investigate the issue of whether a floating currency is the right exchange rate regime for Canada or whether Canada should consider a currency union with the United States. In the context of the framework recently proposed by James L. Swofford, we use a semi-nonparametric flexible functional form—the asymptotically ideal model (AIM), introduced by William A. Barnett and A. Jonas—and pay explicit attention to the theoretical regularity conditions of neoclassical microeconomic theory, following the suggestions of William A. Barnett and William A. Barnett and Meenakshi Pasupathy. Our results indicate that U.S. dollar deposits are complements to domestic (Canadian) monetary assets, suggesting that Canada should continue the current exchange rate regime, allowing the exchange rate to float freely with no intervention in the foreign exchange market by the Bank of Canada.