In recent years, there has been an explosive increase in the demand for health products and services by people all around the globe, and particularly in advanced economies. Aiming to enhance longevity and also to improve quality of life, individual consumption of pharmaceutical products and services has risen exponentially since the early 1980s. This paper develops a model in which agents invest part of their resources in medical products and time in physical exercise to enhance their health status. In the first part of the paper, we study the steady state and transitional dynamics of the model with special emphasis on the effects of health decisions on aggregate outcomes. In the second part, we explore how public health policies may alter private economic decisions that promote healthier and more productive lives.

We offer an explanation for why perks are overprovided to high-profile CEOs. Hidden saving by an agent makes it difficult for a principal to control the agent's moral hazard problem. However, an agent typically cannot save perks; for example, a CEO who owns the right to use a private jet for personal use cannot bank the unused airplane hours. Thus, the principal may oversupply the agent perks to avoid the hidden saving problem. When the agent can both exert lower effort and save wage income, i.e., in the presence of the double deviation problem, we show that the principal supplies more perks than the agent would have purchased on his own (i.e., excessive perks).

This paper presents a dynamic specific-factors model with money introduced through a cash-in-advance constraint. Two types of consumption goods are produced, and three types of factors—labor, capital, and land—are used. The cash-in-advance constraint is imposed on different sets of goods. When the constraint is imposed exclusive of the investment, inflation affects the pattern (and volume) of trade through a commodity-substitution effect. When the constraint is imposed inclusive of the investment, inflation may affect the pattern of trade through both the commodity-substitution effect and the factor-supply effect. In each case, we examine and prove the dynamic stability property of the steady-state equilibrium.

Table 4 of this article was incorrectly published with subheadings in Table 4 missing. The publisher regrets this error and the correct version of Table 4 is presented here. Table 4.

Present-value multipliers for different specifications of fiscal policy in the new Keynesian model with rational expectations and with adaptive learning

	Rational expectations				Adaptive learning
	Impact	1 year	4 years	6 years	Impact	1 year	4 years	6 years
Strategy 1: Lump-sum financing (baseline model)
$\frac{{PV\left( {\Delta Y} \right)}}{{PV\left( {\Delta G} \right)}}\$	0.51	0.50	0.46	0.43	1.01	1.00	0.99	0.97
$\frac{{PV\left( {\Delta C} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.29	−0.30	−0.34	−0.37	0.09	0.09	0.07	0.06
$\frac{{PV\left( {\Delta I} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.20	−0.20	−0.20	−0.20	−0.08	−0.08	−0.09	−0.09
Strategy 2: Capital tax financing
$\frac{{PV\left( {\Delta Y} \right)}}{{PV\left( {\Delta G} \right)}}\$	0.32	0.29	0.12	0.02	0.43	0.38	0.20	0.08
$\frac{{PV\left( {\Delta C} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.23	−0.26	−0.40	−0.48	−0.08	−0.12	−0.27	−0.37
$\frac{{PV\left( {\Delta I} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.68	−0.69	−0.70	−0.71	−0.80	−0.80	−0.81	−0.82
Strategy 3: Labor tax financing
$\frac{{PV\left( {\Delta Y} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.64	−0.68	−0.85	−0.95	0.48	0.47	0.43	0.40
$\frac{{PV\left( {\Delta C} \right)}}{{PV\left( {\Delta G} \right)}}\$	−1.07	−1.10	−1.24	−1.33	−0.37	−0.38	−0.41	−0.43
$\frac{{PV\left( {\Delta I} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.71	−0.71	−0.73	−0.74	−0.17	−0.18	−0.18	−0.18

We study a model in which parents care about the economic and social status of their offspring. The chances of an individual achieving social status depends on innate traits, that is, IQ, ability, social and cultural environment, and other price-insensitive endowments, passed on by their parents, on human capital investments and on chance events. Parents can, through human capital investments, increase the offspring’s probability of climbing the social ladder, although they cannot borrow against the children’s perspective earning. Consequently, income and trait heterogeneity are the determinants of unequal opportunities and of intergenerational mobility.

This study investigates the time-varying effects of international uncertainty shocks. I use a global vector autoregressive model with drifting coefficients and factor stochastic volatility in the errors to model the G7 economies jointly. The measure of uncertainty is constructed by estimating a time-varying scalar driving the innovation variances of the latent factors, which is also included in the conditional mean of the process. To achieve regularization, I use Bayesian techniques for estimation, and rely on hierarchical global–local priors to shrink the high-dimensional multivariate system towards sparsity. I compare the obtained econometric measure of uncertainty to alternative indices and discuss commonalities and differences. Moreover, I find that international uncertainty may differ substantially compared to identically constructed domestic measures. Structural inference points towards pronounced real and financial effects of uncertainty shocks in all considered economies. These effects are subject to heterogeneities over time and the cross-section, providing empirical evidence in favor of using the flexible econometric framework introduced in this study.

The paper estimates public consumption multipliers and whether they vary depending on the slack of the economy. To this aim, linear and smooth-transition panel local projections are applied to a data set composed of quarterly data on nine selected Euro area countries for the period 1999Q1−2018Q4. The results show that the linear multiplier is approximately 1.3 and so above unity. This is, however, an “average result” as clear evidence is found in favor of state dependency. Particularly, the findings indicate that the multiplier is approximately 2.0 in the slack regime, while it is below 0.5 in the good regime. These results are robust along several dimensions, such as alternative measures of slack and controlling for fiscal foresight. Some linear and state-dependent transmission channels are also investigated.

An article published in 2018 by J.D. Hamilton gained significant attention due to its provocative title, “Why you should never use the Hodrick-Prescott filter.” Additionally, an alternative method for detrending, the Hamilton regression filter (HRF), was introduced. His work was frequently interpreted as a proposal to substitute the Hodrick–Prescott (HP) filter with HRF, therefore utilizing and understanding it similarly as HP detrending. This research disputes this perspective, particularly in relation to quarterly business cycle data on aggregate output. Focusing on economic fluctuations in the United States, this study generates a large amount of artificial data that follow a known pattern and include both a trend and cyclical component. The objective is to assess the effectiveness of a certain detrending approach in accurately identifying the real decomposition of the data. In addition to the standard HP smoothing parameter of $\lambda = 1600$, the study also examines values of $\lambda ^{\star }$ from earlier research that are seven to twelve times greater. Based on three unique statistical measures of the discrepancy between the estimated and real trends, it is evident that both versions of HP significantly surpass those of HRF. Additionally, HP with $\lambda ^{\star }$ consistently outperforms HP-1600.

This paper revisits the long-run relationship between inflation and economic growth by exploring the impact of inflation on investment. I illustrate that inflation may have a positive effect on growth by mitigating the liquidity risks of investment projects. Together with the traditional effect of the “inflation tax” on investment, a hump-shaped relationship between inflation and economic growth can be obtained in a calibrated model, which is consistent with the US postwar data. Sensitivity analysis suggests that the degree of financial development and the magnitude of the aggregate liquidity demand help explain the mixed empirical findings.

Macroeconomic performance in the Economic and Monetary union (EMU) will be impaired if national fiscal policy flexibility and monetary flexibility of the ECB is limited, goods markets adjust sluggishly, labor mobility is low, and automatic stabilization from federal taxes and government spending is low. This paper analyzes the stabilization of output fluctuations induced by symmetric and asymmetric macroeconomic shocks in the EMU. It is shown how national fiscal flexibility and flexibility of the monetary policy of the ECB can stabilize fluctuations of the average EU business cycle that are generated by symmetric shocks. Furthermore, it is demonstrated how, under EMU, national fiscal flexibility and a system of fiscal transfers are able to stabilize differences in national business cycles that are generated by asymmetric shocks.

This study documents the cyclical properties of business credit in the United States and in the Euro area and constructs a theoretical model that can successfully replicate the observed characteristics. I find that real business loans lag output; i.e., business credit is more strongly correlated with past output than with current output. Furthermore, real business loans correlate negatively with future output and investment and positively with past output and investment. I show that a fairly standard model of business and credit fluctuations with agency costs can neither generate the lagging behavior of business credit nor induce the observed cross-correlation patterns of output, investment, and business loans. I introduce a costly financial intermediation mechanism into an otherwise standard macroeconomic framework and show that the evolution of intermediary balance sheets and the interaction of intermediation and agency costs can induce the observed regularities.

In this paper I study the impact of increasing longevity on pay-as-you-go pension systems. First, I show that increasing longevity increases the internal rate of return. The size of the effect differs for different policy regimes. It is higher for the case where the retirement age is increased to keep the system in balance than for the case where the necessary adjustment is achieved by reducing pension benefits. Second, I study optimally chosen retirement decisions and I show that the socially optimal policy involves a shorter working life than the private optimum. The social optimum can be implemented by the use of a PAYG system that combines an actuarial and a flat pension.

The October 1929 crash led to a complete freeze of New York open markets. Studying the Fed monetary policy conduct in a nonlinear framework, using credit spreads between open market rates and the Fed's instrument rates as a proxy for liquidity risk, we present econometric evidence that the Fed was well aware of such risks as early as 1930, reacted to the financial stress and altered its monetary policy in consequence. Our outcomes revisit conventional wisdom about the presumed passivity of the Fed throughout the 30s.

We develop an open economy model of a currency union with frictional goods markets and endogenous search decisions to study optimal monetary and fiscal policy. Households finance consumption with a common currency and can search for locally produced goods across regions that differ in their market characteristics. Equilibrium is generically inefficient due to regional spillovers from endogenous search decisions. While monetary policy alone cannot correct this distortion, fiscal policy can help improve allocations by taxing or subsidizing production at the regional level. When households of only one region can search, optimal policy entails a deviation from the Friedman rule and a production subsidy (tax) if there is underinvestment (overinvestment) in search decisions. Optimal policy when households from both region search requires the Friedman rule and zero production taxes in both regions.

This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet. We construct a general equilibrium model where agents have rational expectations, and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet affects equilibrium asset prices and economic activity. We prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is self-financing and leads to a Pareto efficient outcome.

A static economy in which nominal taxes and transfers are balanced, as proposed by Balasko and Shell (1993), typically has a continuum of equilibrium money prices. This paper presents a constructive example in which the set of equilibrium money prices is not connected. By allowing negative consumption as a mathematical construct, closed form solutions for equilibrium tax-adjusted income are derived. The main result of the example implies that bankrupt taxpayers with negative tax-adjusted income can be free from bankruptcy as the price of money increases. This paradoxical outcome is similar to that of the transfer paradox, as suggested by Gale (1974), where tax-transfer plans make taxpayers better off.

This interview was completed in May 2004, well before Stan Fischer had any idea he would become Governor of the Bank of Israel, a position he took up in May 2005. The interview took place in April 2004 in my office at the Russell Sage Foundation in New York City, where I was spending a sabbatical year. We completed it while running together in Central Park during the following weeks.

Our meeting at Russell Sage was just like the many meetings we have had over the years. I was not sitting with a Master of the Universe, a world VIP, but with the same Stan Fischer I had first met in 1973 when he was a young associate professor, freshly imported from Chicago. There was the same ability to listen carefully, the same ability to talk and to explain simply and straightforwardly. In addition, there was the accumulated wisdom of a professional life spent developing and applying macroeconomics to the very real world.

When I arrived as a PhD student at MIT in 1973, it was clear that Stan would quickly play a central role in the department. Within a few years, he was one of the most popular teachers, and one of the most popular thesis advisers. We flocked to his office, and I suspect that the only time for research he had was during the night. What we admired most were his technical skills (he knew how to use stochastic calculus)—, and his ability to take on big questions and to simplify them to the point where the answer, ex post, looked obvious. When Rudi Dornbusch joined him in 1975, macro and international quickly became the most exciting fields at MIT. Imitation is the sincerest form of admiration, and this is very much what we all did.

When I came back to MIT in 1982, this time as a faculty member, Stan had acquired near-guru status. Teaching the advanced macro courses with him, and writing “Lectures on Macroeconomics,” which we finished in 1988, was one of the most exciting intellectual adventures of my life. We both felt that there was a new macroeconomics, more micro-founded and full of promises and that we understood its architecture and its usefulness. Although we had not thought of it as a textbook, it quickly became one, and it is nice to know that it still sells surprisingly well today.

As the years had passed, Stan had taken more and more interest in applying theory to the real world, working with Rudi on hyperinflation, being involved in the economics of peace with George Shultz in the Middle East. In 1988, he decided to jump from academia to the real world, and became Chief Economist of the World Bank. After a brief return to MIT, he then returned to Washington in 1994 to become First Deputy Managing Director of the IMF, where he remained until 2001. That part of his life has been well documented in newspapers and magazines: While at the IMF, he was on the front lines during the Mexican crisis, the Russian crisis, the Asian crises, and many others. From the peeks I got of him during those times, what strikes me most is how he remained the same as he had been at MIT: calm, careful about the facts, analytical, using macroeconomic theory even in the middle of the most intense fires. Many thought and hoped that he would become the managing director of the IMF. Antiquated rules and country politics prevented it from happening. The IMF's loss turned out to be the private sector's gain. In 2002, Stan joined Citigroup, where he is the President of Citigroup International. He is still active in macro policy debates and remains one of the wise men of our profession.

We employ a novel approach for analyzing the effects of relative consumption and relative wealth preferences on economic growth. In the pertinent literature, these effects are usually assessed by examining the dependence of the growth rate on the two parameters of the utility function that seem to measure the strength of the relative consumption and the relative wealth motives. Applying our fundamental factor approach, we identify specifications in which the traditional approach yields incorrect qualitative conclusions. The problematic specifications have the common unpleasant property that the parameter that seems to determine the strength of the relative consumption motive actually also affects the elasticity of intertemporal substitution of absolute consumption (and the strength of the relative wealth motive). Since the standard approach is unaware of the additional effect(s), it attributes the total change in the growth rate incorrectly to the change in the strength of the relative consumption motive.

Equilibrium indeterminacy due to economies of scale (ES) in financial intermediation is quantitatively examined in a monetary business-cycle environment. Financial intermediation provides deposits that serve as a substitute for currency to purchase consumption, and depositing decisions are susceptible to nonfundamental shocks to confidence. The analysis considers various assumptions on nominal rigidities and the timing of deposit decisions. The results suggest that indeterminacy arises for small ES, and the resulting confidence shocks qualitatively mimic monetary shocks. A calibration exercise concludes that U.S. economic volatility from this nonfundamental source has increased over time while volatility from fundamental sources has decreased.

This paper examines how wealth and income inequality dynamics are related to fluctuations in the functional income distribution over the business cycle. In a panel estimation for OECD countries between 1970 and 2016, although inequality is, on average countercyclical and significantly associated with the capital share, one-third of the countries display a pro- or noncyclical relationship. To analyze the observed pattern, we incorporate distributive shocks into an RBC model, where agents are ex ante heterogeneous with respect to wealth and ability. We find that whether wealth and income inequality behave countercyclically or not depends on the elasticity of intertemporal substitution and the persistence of shocks. We match the model to quarterly US data using Bayesian techniques. The parameter estimates point toward a non-monotonic relationship between productivity and inequality fluctuations. On impact, inequality increases in response to TFP shocks but subsequently declines. Furthermore, TFP shocks explain 17% of inequality fluctuations.