Persistent high unemployment has fostered the employment persistency hypothesis according to which employment changes are driven by unanticipated shocks whereas anticipated shocks that potentially could change employment are absorbed by wage changes. Empirical tests of the persistency hypothesis fail to distinguish between the properties of shocks and endogenous propagation mechanism causing persistency. This paper develops a new test strategy by explicitly distinguishing between these two factors. The methodology is applied to the manufacturing sector in Denmark, and some support in favor of an endogenous propagation mechanism causing employment persistency is found.

Evolutionary game theory provides a fresh perspective on the prospect that agents with heterogeneous expectations might eventually come to agree on a single expectation corresponding to the efficient markets hypothesis. We establish conditions under which agreement on a unique forecast is stable, but also show that persistent heterogeneous expectations can arise if those conditions do not hold. The critical element is the degree of curvature in the payoff weighting functions agents use to value forecasting performance. We illustrate our results in the context of an asset pricing model where a martingale solution competes with the fundamental solution for agents' attention.

What determines the strength of the relationship between money growth and inflation? A large literature suggests that it has weakened since the 1980s, without a definitive explanation of the cause. I explore how population age structure explains changes in the pass through of money growth rates to inflation. I show that the quantity theory of money holds over long time horizons, with sizable estimates of the impact of money growth on inflation in the short to medium term. Various measures of population age structure have significant impact on the strength of this relationship. These demographics account for an increase in the transmission of money growth to prices in the 1970s and a weakening throughout the great moderation. The baby boomer cohort, now in the age groups around retirement, may exert upward pressure on this money transmission to prices at present, with ambiguous implications in the future as low fertility and rising longevity persist.

Credibility is elusive, but Blinder [(2000) American Economic Review 90, 1421–1431.] generated a consensus in the literature by arguing that “A central bank is credible if people believe it will do what it says.” To implement this idea, we first measure people’s beliefs by using survey data on inflation’s expectations. Second, we compare beliefs with explicit (or tacit) targets, taking into account the uncertainty in our estimate of beliefs (asymptotic 95% robust confidence intervals). Whenever the target falls into this interval we consider the central bank credible. We consider it not credible otherwise. We apply our approach to study the credibility of the Brazilian Central Bank (BCB) by using a world-class database—the Focus Survey of forecasts. Using monthly data from January 2007 until April 2017, we estimate people’s beliefs of inflation 12 months ahead, coupled with a robust estimate of its asymptotic 95% confidence interval. Results show that the BCB was credible 65% of the time, with the exception of a few months in the beginning of 2007 and during the interval between mid-2013 throughout mid-2016.

S. James Press's many contributions to statistical research, lecturing, mentoring students, the statistics profession, etc., are summarized. Then some new developments in Bayesian analysis are described and remarks on the future of Bayesian analysis are presented.

This study examines the influence of foreign direct investment (FDI), overseas development aid (ODA), and remittances on the enrollment of girls and boys in 103 countries over the years 1970–2011. The results suggest that remittances have a contemporaneous robust significant influence on enrollment, with the positive effect being slightly higher for girls than for boys. FDI and ODA have an influence on the enrollment of girls and boys only after a significant time lag. The results also suggest that the impact of remittances on enrollment is increased through income and a well-developed financial sector; FDI through better institutions and a well-developed financial sector; and ODA through better government policy.

In this paper, I explore in an overlapping generations framework, a mechanism motivating a neurobiological poverty trap. Poverty causes stress and depression in individuals susceptible to depression. Poor and depressed individuals discount the future at a higher rate and invest less in the human capital of their children than mentally healthy or rich individuals. This gene–environment interaction generates a vicious cycle in which poor individuals inherit not only susceptibility to depression, but also stress and poverty. I show that a successful one-time intervention has the power to permanently eliminate the neurobiological poverty trap.

This paper presents a multi-country version of the Ramsey growth model with cross-country technological interdependence. The results rationalize several stylized facts about growth and convergence. First, individual countries tend to converge toward country-specific balanced growth paths rather than steady-state equilibria. Second, an economy that accounts for a smaller share of the world technology distribution harnesses the “advantages of backwardness” to catch up at a faster speed. Third, countries grow at different rates during the phase of transitional dynamics. However, technological interdependence creates a force toward cross-country convergence in the growth rate and stability of world income distribution in the long run. Finally, cross-country differences in structural characteristics and initial conditions lead to divergences in the level of income per capita.

One questionable aspect of price posting with directed search is the strong commitment by sellers to commit to the advertised terms of trade. In this paper I explore the welfare implications of assuming that sellers cannot commit and vary the quality of their output ex post according to realized demand. I show that such lack of commitment translates into lower participation by buyers, lower average quality, and a consumption-equivalent loss of 0.3% of annual GDP.

This paper studies asymmetric dynamics of real GDP growth by estimating linear and nonlinear quantile persistence over different parts of the conditional distribution for six major developed economies. Several novel quantile-based hypotheses are motivated in this paper and tested for the steepness asymmetry of real GDP growth that hypothesizes that contractions are steeper than expansions. The empirical results show that quantile persistence is generally high at far lower tails, thus requiring much longer half-lives to reverting negative deviations to the mean of real GDP growth and hence leading to gradual economic recoveries. By contrast, less persistence in far upper tails tends to generate sharp and short economic downturns that adjust positive deviations towards the mean of real GDP growth so as to cause abrupt economic recessions. In particular, this asymmetry in quantile persistence strongly supports the steepness asymmetry conjecture, robust to the presence of structural breaks and potential nonlinearities in real GDP growth.

This paper investigates optimal capital taxation in an innovation-driven growth model. We examine how the optimal capital tax rate varies with externalities associated with R&D and innovation. Our results show that the optimal capital tax rate is higher when (i) the “stepping on toes effect” is smaller, (ii) the “standing on shoulders effect” is stronger, or (iii) the extent of creative destruction is smaller. The optimal capital tax rate is more likely to be positive when there is underinvestment in R&D. Moreover, the optimal capital tax rate and the monopolistic markup exhibit an inverted-U relationship. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 6.6%. Finally, we consider a number of extensions and find that the result of a positive optimal capital tax is robust.

This paper studies the relationship between rational herding and cross correlations in security returns. It demonstrates analytically and numerically that herding, as a temporary, fragile convergence of investment behavior, can endogenously induce asset dependency. Furthermore, there exists a self-reinforcing process, in which market extreme events amplify the herd effect, which further exacerbates asset dependency. Considering the Taiwan and U.K. equity markets, we find that the simulated markets in the presence of herding have results closer to the real patterns of asset dependency than a static model with isolated, noninteracting individuals. Our findings cast doubts on the current view that transparent financial regulation is always desirable. Moreover, this paper finds statistical evidence of asymmetric correlation patterns in both the top 50 stocks in the U.K. and Taiwan equity markets. This suggests that portfolio diversification as a means of managing portfolio risk is unlikely to be effective in periods of extreme losses in these markets.

This paper considers the political economy of financial development in an overlapping generations model that incorporates credit market imperfections, and shows that income inequality is a determinant of financial and economic development. Individuals have an opportunity to start an investment project at a fixed cost, but their income to finance the cost is unequal. The government proposes a policy financed by taxation that mitigates credit market imperfections, the implementation of which is determined through majority voting. The policy benefits middle-income individuals who can start the investment only after the implementation of the policy. The policy is, however, against the interest of the rich who wish to block such new entry, and that of the poor who wish to avoid the tax burden. Whether the policy obtains majority support depends on income inequality. High income inequality makes the policy hard to implement, which causes financial and economic underdevelopment.

Typically, contractionary monetary policy shocks increase the nominal and real rate of interest, which reduces both inflation and output . In contrast, the neo-Fisher effect (NFE) suggests that a transitory but persistent increase in the nominal rate of interest increases inflation in the short run. In a New Keynesian model augmented with several frictions, including the cost channel of monetary policy, real wage rigidity, habit formation in consumption, dampened expectations, and anticipated monetary policy shocks, we derive analytical conditions that give rise to (or avert) the NFE. We show that the NFE can arise due to the interplay between these frictions, and not only when the persistence of the policy shock is large, or when agents are forward-looking, as documented by the existing literature.

The US Social Security program was created in part as an explicit response to the Great Depression. We evaluate the performance of Social Security as a protective safety net against a rare episode of sudden and significant loss of private wealth such as the Great Depression. We construct a model in which a rare event causes a shock to wealth at an unknown time. How well does Social Security function as a safety net against such risk? The answer depends critically on whether households optimize in the face of this risk. If the household has full information on the distribution of rare event risk and solves a dynamic stochastic problem to hedge this risk, then Social Security is unnecessary along this dimension. Alternatively, if the household does not account for rare event risk in its financial planning, then Social Security can provide very large welfare gains as a safety net.

The purpose of this note is to analyze the capability of bandpass filters to extract a known periodicity. The specific bandpass filters considered are a conventional discrete Fourier transform (DFT) filter and the filter recently proposed by Iacobucci and Noullez. We employ simulation methods to investigate cycle extraction properties. We also examine the implications arising from the Gibbs effect in practical settings that typically confront applied macroeconomists

We show that the introduction of a constant tariff or subsidy levied on foreign energy can lead to a rich set of endogenous fluctuations around the unique steady state, including stable 2-, 4-, 8-, and 15-cycles, quasiperiodic orbits, and chaos. This is demonstrated in a standard neoclassical growth model with social increasing returns to scale. Numerical exercises could be viewed from a methodological perspective as illustrating that capital income taxes and tariffs are equivalent in generating endogenous fluctuations because Guo and Lansing [Guo, J.T. and K.J. Lansing (2002) Fiscal policy, increasing returns and endogenous fluctuations. Macroeconomic Dynamics 6, 633–664] show that a constant capital tax or subsidy has the same effect on the model dynamics in a one-sector closed economy.

Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage private-sector expectations by means of publishing one-period ahead inflation projections in a New Keynesian learning-to-forecast experiment. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage private-sector expectations and that this management strongly supports monetary policy in stabilizing the economy. Moreover, published central bank inflation projections drastically reduce the probability of a deflationary spiral after strong negative shocks to the economy.

We investigate the sectoral and the distributional effects of a food subsidy program, where food consumption in the economy is subsidized by taxing the manufacturing good producers. In a two-agent model comprising of farmer and industrialist households, agents consume food to accumulate health. Simulations indicate that while the subsidy program increases food output and agents’ health both in the short run and the long run, manufacturing output and aggregate real GDP appear to fall in the short run and increase only in the long run. The program does not make both agents better off and exhibits social welfare gains for a limited range of subsidies.