We test the long-run neutrality of money proposition for the United States paying attention to the integration and cointegration properties of the variables. We use quarterly data (over the period from 1967:1 to 2014:1) and the new Center for Financial Stability Divisia monetary aggregates. We make a comparison among the narrower monetary aggregates, M1, M2M, MZM, M2, and ALL, and the broad monetary aggregates, M4+, M4-, and M3, and show that there is no statistically significant evidence against long-run monetary neutrality, consistent with both monetarist and Keynesian macroeconomic theory.

This paper builds on Lucas [Econometrica 68 (2000), 247–274] and on Cysne [Journal of Money, Credit and Banking 35 (2003), 221–238] to derive and order six alternative measures of the welfare costs of inflation (five of them already existing in the literature) for any vector of opportunity costs. We provide examples and closed-form solutions for each welfare measure based both on log–log and on semilog money demands, whenever possible in terms of elementary functions. Estimates of the maximum relative error a researcher can incur when using any of these measures are given. Everything is done for economies with or without interest-bearing deposits.

Most emerging economies have been affected to some degree by the Fed’s quantitative easing (QE) policies. This paper assesses the impact of these measures in terms of key macroeconomic variables for four inflation-targeting small open economies in Latin America. We identify a QE policy shock in a structural vector autoregressive with block exogeneity and a mixture of zero and sign restrictions. Overall, we find that these QE policies have significant effects on financial variables such as the exchange rate, and these effects are larger with respect to those in output and prices. Furthermore, the effects vary across countries, and these are more significant in Chile and Mexico than in Peru and Colombia.

In a standard overlapping generations model, we show how the health effects of pollution impact the balanced-growth path (BGP) and the transition dynamics of the economy. The key driver is the differential between physical and human capital accumulation. The differential occurs because pollution alters the incentives to save and to invest in education via reductions in longevity and alters the effectiveness of education expenditures via impaired cognitive learning. Two predictions of the model are noteworthy. The first prediction is the existence of two stable BGPs with a separating saddle path. One BGP is desirable featuring high economic growth and low pollution, whereas the other should be avoided because it is associated with low economic growth and high pollution. The second prediction is that economic and environmental cycles may emerge, implying inequality between generations. These theoretical results are supported by empirical evidence and imply a role for government to steer the economy toward the desirable BGP and eliminate the cycles.

We explore how tax evasion by firms affects the growth- and welfare-maximizing rates of corporate income tax (CIT) in an endogenous growth model with productive public service. We show that the negative effect of CIT on growth is mitigated in the presence of tax evasion. This increases the benefit of raising the CIT rate for public service provision. Thus, in contrast to Barro [(1990) Journal of Political Economy 98, 103–125], the optimal tax rate is higher than the output elasticity of public service. Through numerical exercises, we demonstrate that the role of tax evasion by firms is quantitatively significant.

This paper uses Bayesian methods to estimate a small-scale New Keynesian model with heterogeneous expectations (HE). Agents form expectations via Euler equation adaptive learning (AL) and differ by the model they use to forecast. Type A agents use a correctly specified model, while type B and type C agents use misspecified models. Quarterly US data from the pre-Great Moderation and Great Moderation periods are used to jointly estimate the degree of agent heterogeneity, the AL parameters, and the deep model parameters. Results show that the data exhibit significant expectational heterogeneity, and that the HE model fits the data better than a model with homogeneous agent AL.

The impact that output has on future total factor productivity is not internalized by competitive agents. As a result, the allocation that a planner would choose cannot be reached as a competitive equilibrium outcome (neither for infinitely lived agents nor for overlapping generations): the market remuneration to capital and labor is too low. The planner's allocation can nonetheless be implemented by a fiscal policy subsidizing the returns to savings and the wage rate as needed. The exact policy differs depending on whether only past investment or total output influences productivity: in the first case only capital returns need to be subsidized, whereas in the second case labor income needs to be subsidized too. The policy is balanced period by period by means of a lump-sum tax.

This paper develops a dynamic dual-economy model and examines how the long-run outcome of an economy depends on the initial distribution of wealth and sectoral productivity. It is shown that, for fast transformation into a developed economy, the initial distribution must be such that extreme poverty is not prevalent so that most people can take education to acquire basic skills and the size of the “middle class” is large enough so that an adequate number of people can access education to acquire advanced skills. Both conditions seem to have held in successful East Asian nations, where, as in the model economy undergoing such transformation, the fraction of workers with advanced skills rose greatly and inequalities between these workers and others fell over time. In contrast, if the former condition holds but the latter does not, which would be the case for many nations falling into the “middle income trap,” consistent with facts, the fraction of workers with basic skills and the share of the modern sector rise, but inequality between workers with advanced skills and with basic skills worsens and the traditional sector persists for long periods. If the former condition does not hold, which would be true for the poorest economies, the dual structure and high inequality between workers without basic skills and others persist for very long periods. Consistently, Hanushek and Woessmann (2012) [Hanushek, Eric A. and Ludger Woessmann (2012) Do better schools lead to more growth? Cognitive skills, economic outcomes, and causation. Journal of Economic Growth 17, 267–321] find that the share of students with basic skills and that of top performance have significant effects on economic growth that are complementary to each other.

This paper integrates seemingly disjoint studies on consumer behavior in micro and macroanalyses via an intertemporal two-stage budgeting procedure with durable goods and liquidity constraints. The model specifies an indirect utility function as a function of nondurable consumption, commodity (nondurables) prices, and durables stock, and derives the demand functions for nondurable goods. A demand function for durable goods is derived in an adjustment cost framework. The consumption growth equation accounts for relative price effects with precautionary saving, durables stock, and liquidity constraints. The stochastic discount factor is approximated by a time-varying linear function of nondurable consumption growth, commodity price growth, durables stock growth, and disposable income growth. The demand functions for six nondurable goods and services are jointly estimated with the Euler equations for bonds, stocks, and durable goods with allowance for liquidity constraints, using US data. Estimation provides new findings for intertemporal consumption and a multifactor consumption-based capital asset pricing model.

This paper derives the optimal unemployment insurance (UI) transfer scheme, UI benefits, and UI contribution fees: When a worker has to earn his or her UI eligibility through work, the UI benefits do not last forever, and the UI agency has imperfect monitoring power on the strategic behavior of the worker. We show that the consideration of the UI eligibility rule generates the effective entitlement effect, which serves as an additional incentive device and alters the nature of the optimal UI transfer scheme established in literature. In contrast with previous studies, we find that when the effective entitlement effect is large, it completely removes the moral hazards in job searches, job acceptances, and job quits. As a result, the optimal UI benefits and contribution fees become constant. Calibrated to the data in the United States, the model reproduces some key features of the existing UI system.

In an exogenous-growth economy with overlapping generations, the Cobb–Douglas production, any positive life-cycle productivity, and time-separable constant elasticity of substitution (CES) utility, we analyze local stability of a balanced growth equilibrium (BGE) with respect to changes in consumption endowments, which could be interpreted as a transfer policy. We show that generically, in the space of parameters, equilibria around a BGE are locally unique and are locally differentiable functions of endowments, with derivatives given by kernels. Furthermore, those equilibria are stable in the sense that the effects of temporary changes decay exponentially toward ±∞.

We examine technical efficiency in the Middle East and North Africa (MENA). In addition to economic indicators, political and social ones play a role in development and efficiency profiles. The MENA have been characterized by increasing economic efficiency over time but with marked polarization. We analyze and nest many key hypotheses, e.g., the contributions of religion, of natural resources, demographic pressures, human capital, etc. The originality of our contribution is the use of a large data set (including principal components), and extensive robustness checks. It should set a comprehensive benchmark and cross-check for related studies of development and technical efficiency.

This paper shows that the optimal monetary policies recommended by New Keynesian models still imply a large amount of inflation risk. We calculate the term structure of inflation uncertainty in New Keynesian models when the monetary authority adopts the optimal policy. When the monetary policy rules are modified to include some weight on a price path, the economy achieves equilibria with substantially lower long-run inflation risk. With either sticky prices or sticky wages, a price path target reduces the variance of inflation by an order of magnitude more than it increases the variability of the output gap.

The paper utilizes a common approach to derive sufficient conditions for strictly monotonic behavior of three ratios along the transition to the steady state in the Ramsey–Cass–Koopmans model: the consumption–capital ratio, the consumption–output ratio (and the saving rate), and the consumption–wage ratio. These conditions are then applied to derive additional results on the transitional dynamics of the distribution of wealth in the model (when individual consumers are differentiated by their initial wealth endowments).

It was always considered to be a major achievement of modern business cycle economics that it was solidly grounded in neoclassical growth theory. Preserving this joint foundation, however, imposes a discipline on the specification of models with variable capital utilization. In this note we show that conventional specifications of the depreciation cost of capital utilization and the labor supply elasticity, introduced into business cycle theory to generate a satisfactory amplification of shocks, entail counterfactual growth dynamics: the positive association between capital stock and GDP along the growth path turns negative. Across economies with access to the same technology, the economy with the lowest capital stock per capita is predicted to produce the highest output per capita. We compute lower and upper bounds for the involved elasticities between which these counterfactual dynamics are avoided.

This paper extends the Chamley–Judd framework by introducing preference externalities in a neoclassical growth model, and finds that the optimal capital tax increases with the extent of social-status seeking or negative leisure externalities. Furthermore, this paper finds that differences in leisure externalities lead to a distinct impact on optimal factor income taxes, and hence may serve as a plausible vehicle to explain the empirical differences in factor income taxation in the United States and Europe.

We develop an N-regime Markov-switching model in which the latent state variable driving the regime switching is endogenously determined with the model disturbance term. The models structure captures a wide variety of patterns of endogeneity and yields a simple test of the null hypothesis of exogenous switching. We derive an iterative filter that generates objects of interest, including the model likelihood function and estimated regime probabilities. Using simulation experiments, we demonstrate that the maximum likelihood estimator performs well in finite samples and that a likelihood ratio test of exogenous switching has good size and power properties. We provide results from two applications of the endogenous switching model: a three-state model of US business cycle dynamics and a three-state volatility model of US equity returns. In both cases, we find statistically significant evidence in favor of endogenous switching.

Anticipating a bailout in the event of a crisis distorts financial intermediaries’ incentives in multiple dimensions. Bailout payments can, for example, lead intermediaries to issue too much short-term debt while simultaneously underinvesting in liquid assets. To correct these distortions, policymakers may choose to regulate the composition of both the assets and liabilities of intermediaries. I examine these regulations in a version of the Diamond and Dybvig [(1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401–419] model with limited commitment. I demonstrate that, contrary to common wisdom, introducing a minimum liquidity requirement can increase intermediaries’ susceptibility to a run by their investors.

This note provides a formal justification for the Friedman and Savage nonconcavity in the utility of money. This is based on the possibility of indivisibilities in the consumption possibilities set. A precise characterization of when gambling is optimal (and the optimal type) is provided in one special case. Some possible limitations are considered.

We present a class of stochastic regime-switching models. The time-series models may have periodic transition probabilities and the drifts may be seasonal. In the latter case, the model exhibits seasonal dummy variation that may change with the regime. The processes entail nontrivial interactions between so-called business and seasonal cycles. We discuss the stochastic properties as well as their relationship with periodic ARMA processes. Estimation and testing are also discussed in detail.