This paper examines the quantitative implications of government fiscal policy in a discrete-time one-sector growth model with a productive externality that generates social increasing returns to scale. Starting from a laissez-faire economy that exhibits local indeterminacy, we show that the introduction of a constant capital tax or subsidy can lead to various forms of endogenous fluctuations, including stable 2-, 4-, 8-, and 10-cycles, quasiperiodic orbits, and chaos. In contrast, a constant labor tax or subsidy has no effect on the qualitative nature of the model's dynamics. We show that the use of local steady-state analysis to detect the presence of multiple equilibria in this class of models can be misleading. For a plausible range of capital tax rates, the log-linearized dynamical system exhibits saddle-point stability, suggesting a unique equilibrium, whereas the true nonlinear model exhibits global indeterminacy. This result implies that stabilization policies designed to suppress sunspot fluctuations near the steady state may not prevent sunspots, cycles, or chaos in regions away from the steady state. Overall, our results highlight the importance of using a model's nonlinear equilibrium conditions to fully investigate global dynamics.

We study the impact of a minimum consumption requirement on the rate of economic growth and the evolution of wealth distribution. The requirement introduces a positive dependence between the intertemporal elasticity of substitution and household wealth. This dependence implies a transition phase during which the growth rate of per-capita quantities rise toward their steady-state values and the distributions of wealth, consumption, and permanent income become more unequal. We calibrate the minimum consumption requirement to match estimates available for a sample of Indian villagers and find that these transitional effects are quantitatively significant and depend importantly on the economy's steady-state growth rate.

This paper embeds labor market search frictions into a New Keynesian model with financial frictions. The econometric estimation establishes that labor market frictions substantially improve the empirical fit of the model. The effect of the interaction between labor and financial frictions on aggregate fluctuations depends on the nature of the shock. For monetary policy, technology, and entrepreneurial wealth shocks, labor market frictions amplify the effect of financial frictions, because robust changes in hiring lead to persistent movements in employment and return on capital that reinforce the original effect of financial frictions. For cost-push, labor supply, marginal efficiency of investment, and preference shocks, labor market frictions dampen the effect of financial frictions by reducing the real cost of repaying existing debt, which lowers the external finance premium.

Some recent empirical evidence questions the typically large size of government spending multipliers when the nominal interest rate is stuck at zero, finding output multipliers of around 1 or even lower, with an upper bound of around 1.5 in some circumstances. In this paper, we use a recent estimate of the degree of substitutability between private and government consumption in an otherwise standard New Keynesian model to show that this channel significantly reduces the size of government spending multipliers obtained when the nominal interest rate is at zero. All else being equal, the relationship of substitutability makes a government spending shock crowd out private consumption while being less inflationary, thus, limiting the typically expansionary effect of the fall in the real interest rate. Subject to the nominal interest rate being constrained at zero, the model generates output multipliers ranging from 0.8 to 1.6.

Previous research shows that volatility in oil prices has tended to depress output, as measured by nonresidential investment, gross domestic product, and aggregated measures of industrial production in several countries. This paper investigates the effect of oil price volatility on disaggregated measures of industrial production. The disaggregated measures that we examine are the special aggregates by market groups as calculated by the Federal Reserve Board. Our results are reported for three categories of special aggregates: indexes for industrial production excluding two major industries (technology and motor vehicles), energy-related special aggregates, and non-energy-related special aggregates. Our results indicate that among energy-related market groups, the effects of oil price volatility are concentrated in activities related to primary energy generation and oil and gas drilling. Among non-energy-related market groups, oil price volatility affects a broad range of special aggregates, including aggregates sorted by consumer goods and business equipment.

We evaluate two leading explanations for inventories, the (S,s) and stockout avoidance motives, examining each within dynamic stochastic general equilibrium environments. We find that the (S,s) model is far more consistent with the cyclical behavior of aggregate inventories in the postwar United States when fluctuations arise from technology shocks, rather than preference shocks, whereas the converse is true for the stockout avoidance model. The (S,s) model succeeds in explaining the average magnitude of inventories in the U.S. economy and in reproducing the cyclical regularities involving inventories and other aggregate series. The stockout avoidance model does not. Even with idiosyncratic risk added to strengthen it, the stockout avoidance motive is insufficient to generate stocks near the data without destroying model performance along other important margins. Moreover, it appears incapable of sustaining inventories alongside capital. These findings suggest a fundamental flaw in reduced-form inventory models where stocks are loosely rationalized by this motive.

This study explores the growth and welfare effects of monetary policy in a scale-invariant Schumpeterian growth model with endogenous human capital accumulation. We model money demand via a cash-in-advance (CIA) constraint on research and development (R&D) investment. Our results can be summarized as follows. We find that an increase in the nominal interest rate leads to a decrease in R&D and human capital investment, which, in turn, reduces the long-run growth rates of technology and output. This result stands in stark contrast to the case of exogenous human capital accumulation in which the long-run growth rates of technology and output are independent of the nominal interest rate. Simulating the transitional dynamics, we find that the additional long-run growth effect under endogenous human capital accumulation amplifies the welfare effect of monetary policy. Decreasing the nominal interest rate from 10% to 0% leads to a welfare gain that is equivalent to a permanent increase in consumption of 2.82% (2.38%) under endogenous (exogenous) human capital accumulation.

This paper focuses on the demand for money in the United States in the context of five popular locally flexible functional forms—the generalized Leontief, the basic translog, the almost ideal demand system, the Minflex Laurent, and the normalized quadratic reciprocal indirect utility function. We pay explicit attention to the theoretical regularity conditions of positivity, monotonicity, and curvature and argue that much of the older empirical literature ignores economic regularity. We treat the curvature property as a maintained hypothesis and provide a comparison in terms of violations of the regularity conditions and in terms of output in the form of a full set of elasticities. We also provide a policy perspective, in that a strong case can be made for abandoning the simple sum approach to monetary aggregation, on the basis of the low elasticities of substitution among the components of the popular M2 aggregate of money.

A canonical flexible-price international real–business cycle model with incomplete financial markets can address the exchange rate–volatility puzzle, the exchange rate–persistence puzzle, and the consumption real–exchange rate anomaly, as well as the quantity anomaly. Crucial for the success of the model is the choice of the elasticity of substitution between home and foreign produced goods. The paper shows that the range of this parameter that allows the model to address these international macroeconomics anomalies is very narrow. Furthermore, the paper highlights an anomalous relationship between real–exchange rate persistence and the elasticity of substitution between home- and foreign-produced goods.

We study counterfeiting of currency in a search-theoretic model of monetary exchange. In contrast to Nosal and Wallace [Journal of Monetary Economics 54, 229–246 (2007)], we establish that counterfeiting does not pose a threat to the existence of a monetary equilibrium; i.e., a monetary equilibrium exists irrespective of the cost of producing counterfeits, or the ease with which genuine money can be authenticated. However, the possibility of counterfeiting fiat money can affect its value, velocity, output, and welfare, even if no counterfeiting occurs in equilibrium. We provide two extensions of the model under which the threat of counterfeiting can materialize: counterfeits can circulate across periods, and sellers set terms of trade in some matches. Policies that make the currency more costly to counterfeit or easier to recognize raise the value of money and society's welfare, but the latter policy does not always decrease counterfeiting.

The ideas production function is at the heart of endogenous growth theory. Using data for Europe, its offshoots, and the Asian Tiger economies over the period from 1870 to 2010, this paper provides direct estimates of an ideas production function that explicitly distinguishes between the first- and second-generation endogenous growth models while allowing for human capital and international knowledge spillovers through various channels. The estimates show strong intertemporal and cross-country knowledge spillovers, provide robust support for Schumpeterian growth theory, and suggest that human capital and some channels of international knowledge spillover are influential for ideas production.

Empirical evidence suggests that the instrument rule describing the interest rate–setting behavior of the Federal Reserve is nonlinear. This paper shows that optimal monetary policy under parameter uncertainty can motivate this pattern. If the central bank is uncertain about the slope of the Phillips curve and follows a min–max strategy to formulate policy, the interest rate reacts more strongly to inflation when inflation is further away from target. The reason is that the worst case the central bank takes into account is endogenous and depends on the inflation rate and the output gap. As inflation increases, the worst-case perception of the Phillips curve slope becomes larger, thus requiring a stronger interest rate adjustment. Empirical evidence supports this form of nonlinearity for post-1982 U.S. data.

In this paper, we analyze the relationship between unconventional monetary policy (UMP), measured through shadow interest rates, and housing markets for the USA, the United Kingdom, Japan, and the Euro Area using a set of time-varying parameter vector autoregressive models. Our findings suggest that the monetary policy transmission mechanism to the housing market has not changed with the implementation of quantitative easing or forward guidance for most economies considered. A counterfactual exercise provides some evidence that UMP has been particularly successful in dampening the consequences of the financial crisis on housing markets in the USA, while the effects are more muted in the remaining countries considered.

This paper surveys the contributions of David Cass, Tjalling Koopmans, and Edmond Malinvaud over the decades during which modern optimal growth theory was developed. By utilizing material ranging from dissertations, drafts, and working papers through conference presentations, discussions, and published papers, we show that both Malinvaud and Cass had significant impacts on the evolution of Koopman's thought, and the development of his part of what is known as “the Cass–Koopmans model.” Based on our findings, we conclude that the modern optimal growth model should include the contributions of Malinvaud, and be retitled “the Cass–Malinvaud–Koopmans” model accordingly.

Cross-country studies of economic growth have been hampered by the scarcity of reliable data on productivity at the industry level; see Bernard and Jones [American Economic Review, 91 (4) (2001), 1168–1169] and Rogerson [Journal of Political Economy, 116 (2) (2008), 235–259]. We bring together literature on industry prices, human capital, and capital assets to construct industry-level productivity measures that are well grounded in neoclassical production theory. These theory-based measures differ widely from the crude measures commonly used in the literature. We use these to confirm and strengthen the finding of Bernard and Jones [American Economic Review, 86 (5) (1996), 1216–1238] that for advanced OECD countries, patterns of convergence across sectors have differed since 1970: whereas productivity in market services converged, there is no convergence in manufacturing. More detailed analysis confirms that patterns of convergence are highly industry-specific. There is no dominant convergence trend in sectoral productivity growth across advanced countries.

The capital intensity takes an important role in two-sector and multisector growth models. Surprisingly very few empirical studies have been conducted so far except by Kuga (1967). This fact implies that few people have ever tried to perform any empirical research to study whether the two-sector and multisector optimal growth models could explain the economic development properly based on the empirical data. Although we witnessed fairly active theoretical research on two-sector and multisector growth models in the 1990s and recent years, R. M. Solow has thrown doubt on the capital intensities [in Philippe Aghion and Steven Durlauf (eds.), Handbook of Economic Growth, Vol. 1A (2005, pp. 3–10)]. Our purpose is to measure the capital intensities of the consumption good and the investment good sectors mainly in the postwar Japanese economy, and also in other OECD countries. By so doing, we will demonstrate that the capital intensity does matter and our empirical evidence will strongly support the common assumption that the consumption goods sector is more capital-intensive than the capital goods sector.

We investigate how stochastic asset price dynamics with herding and financial constraints explains the presence of a period of financial distress (PFD) following the peak and preceding the crash of a bubble [Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crisis, 4th ed. (New York: Wiley, 2000, Appendix B)] as common among most major historical speculative bubbles. Simulations show that the PFD is due to (1) agents' wealth distribution dynamics and (2) positive and sufficiently high transaction costs generating losses for a significant mass of the agents' distribution after the peak of the bubble. The use of transaction costs to get the result is only a modeling tool. Many other mechanisms—able to generate losses for a large mass of the agents' distribution in periods in which financial constraints bind—can produce the same result. The paper also shows how the PFD is affected by a variation of the sensitivity of price to the excess demand and by the switching strategy.

Inspired by the theoretically oriented dynamic analysis of moving average rules in the model of Chiarella, He, and Hommes (CHH) [Journal of Economic Dynamics and Control 30 (2006), 1729—1753], this paper conducts a dynamic analysis of a more realistic microstructure model of continuous double auctions in which the probability of heterogeneous agents trading is determined by the rules of either fundamentalists mean-reverting to the fundamental or chartists choosing moving average rules based on their relative performance. With such a realistic market microstructure, the model is able not only to obtain the results of the CHH model but also to characterize most of the stylized facts including volatility clustering, insignificant autocorrelations (ACs) of returns, and significant slowly decaying ACs of the absolute returns. The results seem to suggest that a comprehensive explanation of several statistical properties of returns is possible in a framework where both behavioral traits and realistic microstructure have a role.

In the modern world, the main assets are immaterial ideas. Such assets are much more easily stolen than traditional factors such as physical capital and land. In this paper, we investigate the long-run growth effects of intellectual misappropriation at the R&D level. We adopt a generalized framework with both vertical and horizontal innovation. Inspired by recent evidence and by the patent law, we assume that only vertical innovations can be spied, because they are less easily patented than horizontal innovations. The main results are: (1) despite growing population, the fraction of labor engaged in spying activities tends to be constant; (2) in economies in which the R&D process is more vulnerable to ideas theft, growth rates are lower but product differentiation will be more intense; (3) intellectual misappropriation neutralizes the positive growth effect of R&D subsidies but not their positive level effects.

The paper employs an extended Yaari-Blanchard model of overlapping generations to study how the macroeconomy is affected over time by various demographic changes. It is shown that a proportional decline in fertility and death rates has qualitatively similar effects to capital income subsidies; both per capita savings and per capita consumption increase in the new steady state. A drop in the birth rate, although keeping the death rate constant, reduces per capita savings, but increases per capita consumption if the generational turnover effect is dominated by the intertemporal labor supply effect. If the generational turnover effect is sufficiently strong, however, a decline in the birth rate may, contrary to standard results, give rise to an increase in per capita savings. Finally, a fertility rate reduction that leaves unaffected the rate of generational turnover is shown to have effects qualitatively similar to those of a fall in public consumption. Both per capita savings and per capita output decline, but per capita private consumption rises.