This paper proposes a linear quadratic approximation approach to dynamic nonlinear rationally inattentive control problems with multiple states and multiple controls. An efficient toolbox to implement this approach is provided. Applying this toolbox to five economic examples demonstrates that rational inattention can help explain the comovement puzzle in the macroeconomics literature.

This paper proposes a dynamic model to capture the interaction among the environment, human capital accumulation, and economic growth. We emphasize the mechanism that pollution stock depresses human capital accumulation, which has received increasing support from empirical studies. The model predicts that the development of pollution-intensive industries can help an economy gear up a short-run prosperity, but it impairs the capability for long-run economic growth, trapping the economy at a low development level. The cost for a dirty economy to switch is expensive and even infeasible if the environmental degradation is irreversible. Policy interventions, such as tax on pollution and subsidy on human capital, can help alleviate but cannot eradicate the economic stagnation.

This study develops a new dynamic general equilibrium model to explore the role of people’s love of novelty as a cultural preference in innovation and innovation-based growth. The model considers (a) an infinitely lived representative consumer who has standard love-of-variety preferences for differentiated products and additional love-of-novelty preferences for new products and (b) technological progress driven by two costly and time-consuming innovation activities, new product development and existing product development. We demonstrate that consumers’ love of novelty is a source of innovation-based growth, wherein economies with a moderate love of novelty can achieve innovation and long-run growth through endogenous cycles between periods in which new product development is active and those in which existing product development is active. However, if love of novelty preference is too weak or too strong, the economy is caught in an underdevelopment trap with less innovation and no long-run growth. We also provide some suggestive empirical evidence that supports our theoretical predictions.

Many economies have recently adopted the defined-contribution retirement financing system, but one disadvantage of this system is that retirees have to bear longevity risk. As a result, several economies have also introduced the public annuity plans. We analyze the similarities and differences between voluntary public annuity with ceiling (VPAc) plan and mandatory public annuity with flexibility (MPAf) plan that are empirically observed. Introducing either plan reduces the severity of adverse selection in public annuities, but further distorts the private annuity market. These two plans have systematically different effects on retirees’ utility levels: the good health group is adversely affected and the average health group benefits. On the other hand, the poor health group benefits from the VPAc plan but may be adversely affected under the MPAf plan.

When bubonic plague arrived in Britain in the mid-14th century, it caused dramatic economic and structural change. Within 50 years, the skill-premium was reduced by half, and another 50 years on, agriculture’s share of the labor force had declined by more than 20 percentage points. This paper develops a two-sector pre-industrial growth model and draws on recent data sources covering Late Medieval and Early Modern Britain to explain these and the ensuing developments. Our main findings are that the skill-premium’s decline was related to the guild and apprenticeship system and that it and the other post-Plague adjustments were crucial determinants of the British trajectory toward industrialization. In particular, prior sectoral transformation and the skill-premium’s determination were important when the Early Modern population boom (1525–1654) threatened to reverse the adjustments caused by the Plague.

We test the neutrality of nominal interest rates taking advantage of recent advances in quantitative financial history using the Schmelzing (2022) global nominal interest rate and inflation rate series (across eight centuries), for France, Germany, Holland, Italy, Japan, Spain, the United Kingdom, and the USA. We pay attention to the integration and cointegration properties of the variables and use the bivariate autoregressive methodology proposed by King and Watson (1997). We argue that meaningful long-run neutrality tests can be performed only for three countries—Japan, Spain, and the United Kingdom—and we find no evidence consistent with the neutrality of nominal interest rates.

This paper compares the impact of setting the money growth rate versus pegging the interest rate on aggregate real variables and their distributions. In either case, the monetary policy, in isolation, requires the price level to jump to ensure intertemporal solvency but has no real dynamic effects. The choice of monetary instrument has consequences for wealth and income inequality, doing so in potentially conflicting ways. Following real shocks, the accompanying monetary policy will influence the ensuing transition. For real variables, this operates entirely through its impact on the speed of convergence and is negligible. For financial variables, the impact also depends upon the initial jump in the price level. These effects vary more substantially between policies and have more significant distributional consequences. Overall, the impact on inequality is dominated by the real shocks themselves, rather than the accompanying monetary policy. Finally, we compare these two policies to inflation targeting, which is shown to be the least favorable for reducing wealth inequality, but the most favorable for reducing income inequality.

This paper proposes that an International Monetary Fund (IMF) policy shift was the reason behind major changes in sovereign debt negotiation outcomes observed in 1989. The new policy, in marked departure from past policy, allowed the IMF to lend to nations in default. The paper highlights the stark improvements in debt forgiveness and post-negotiation debt servicing ability coincident with the IMF policy shift. A theoretical framework is proposed in which the IMF policy shift causes the observed changes in negotiation outcomes. The model highlights the policy’s potential to improve a country’s outside option during negotiations of defaulted debt. In the model, this improvement leads to increased debt forgiveness which in turn leads to less post-negotiation debt servicing difficulties. The model is then used to address an important question regarding the nature of post-negotiation default risk. The case is made that countries face persistent, rather than temporary, default risk after such negotiations. To avert such risk, they moderate their borrowing.

We analytically characterize the comparative statics of the macroeconomy after income tax reductions in which production is organized in networks around the inefficient economy. We contribute to the literature by showing that in production networks, income taxes have different effects from revenue taxes which are assumed to be real distortions in the literature. The sectoral income tax reductions’ first-order effect on the GDP is given by a sufficient statistics: the product of the sectoral labor demand elasticity and sectoral Domar weight minus the sectoral labor share in the total labor supply, the latter of which is adjusted for labor supply elasticity if labor is elastic. We apply this model to quantify the effects of income tax reductions during the COVID-19 pandemic in the USA.

The literature investigates trade-environment relationship at the firm level, but does not focus on the environmental effect of trade policy uncertainty. In the context of de-globalization and Sino-US trade friction, trade policy uncertainty significantly increases. How does trade policy uncertainty affect firms’ pollution emissions? In this study, we incorporate energy, pollution, and trade policy uncertainty into Melitz’s (2003) framework and construct a theoretical model to reveal the relationship between trade policy uncertainty and pollution emissions. Then, we employ the event that the USA granted permanent normal trade relationship to China as a quasi natural experiment. We use difference-in-difference-in-difference model and the data of Chinese manufacturing firms for empirical analysis. Our results indicate that the decrease in trade policy uncertainty reduces emission intensity of exporting firms, but has no significant impact on emission levels. Given that these firms do not aggravate emission levels under the condition of expanding output scale, we conclude that the decrease in trade policy uncertainty can improve environmental performance. Mechanism analysis shows an interesting finding that the decrease in trade policy uncertainty reduces emission intensity mainly by improving energy efficiency rather than improving abatement technology and optimizing energy structure. In addition, pollution reductions mainly occur in pollution-intensive and capital-intensive industries as well as coastal regions. Altogether, this study contributes to the literature on trade-environment relationship and trade policy uncertainty.

According to the real business cycle theory, business cycles mainly result from random exogenous shocks. In this paper, this argument is tested. I extend the Wald–Wolfowitz runs test under the assumption that a recession lasts for two periods at least and an expansion lasts for $k$ periods at least with k ≥ 2. I apply the extended runs test to the three two-valued data recession-expansion series generated by the National Bureau of Economic Research and the Center for Economic and Policy Research. The test results reject the null hypothesis that they are generated in a random way for any $k$ even at the 1% significance level.

Stock market bubbles arise as a joint monetary and financial phenomenon. We assess the potential of monetary policy in mitigating the onset of bubbles by means of a Markov-switching Bayesian Vector Autoregression model estimated on US 1960–2019 data. Bubbles are detected and dated from the regime-specific interplay among asset prices, fundamental values, and monetary policy shocks. We rationalize the empirical evidence with an Overlapping Generations model, able to generate a bubbly scenario with shifts in monetary policy, and where agents form beliefs over transition dynamics. By matching the VAR impulse responses, we find that procyclicality and financial instability align with high equity premia and the presence of asset price bubbles. Monetary policy tightening, by increasing real rates, is ineffective in deflating bubble episodes.

Our growth model explores the complex relationship between income, obesity, and changes in exercise-related behavior. Combining Becker’s theory of time allocation (The Economic Journal 75(299), 493–517, 1965) with Veblen’s theory of conspicuous leisure (The Theory of the Leisure Class, 1st ed. New York: Macmillan, 1899), we determine conditions for dynamic and static obesity Kuznets curves. Considering food consumption and exercise choices, we show that dynamic and static Kuznets curves result from the rising opportunity cost of exercise and peer influence, both increasing with income. Focusing on calorie expenditure, we investigate the rise and slowdown in obesity prevalence in the USA and the correlation between obesity and income per worker. Our numerical simulations indicate that, as the economy grows, exercise choices slow down the rise in obesity prevalence but do not generate a dynamic Kuznets curve in the USA. By contrast, they generate a static Kuznets curve for a population cross section. We discuss policy implications of our findings.

We examine a theoretical model of liquidity with three assets—money, government bonds, and equity—that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.

This paper investigates the relationship between credits and sector-level output dynamics in a sample of 41 advanced and developing countries. The existing literature shows that household credits are associated with boom-bust cycles in aggregate output, whereas business loans do not cause such output dynamics. The present paper expands these findings in terms of advanced versus developing countries and manufacturing versus services sectors. The new findings indicate that the resulting boom-bust cycles in the aggregate output in response to household credits are generally observed in the sample of developing countries, with no similar dynamics in the advanced countries. Another significant conclusion is that the boom-bust cycles are generated mostly in the services sector. No equivalent boom-bust dynamics are observed in the manufacturing sector, but the negative medium-run effects of household credits are larger in this sector. These findings indicate that credit mechanisms and consequences can significantly vary across countries and sectors.

This paper studies the role of stochastic volatility in a setting where housing serves as an important propagation mechanism. After showing time-varying volatility in US house prices, we estimate a dynamic stochastic general equilibrium model with housing, financial frictions, and stochastic volatility using a nonlinear approximation and Bayesian econometric techniques. Incorporating stochastic volatility into the model greatly improves model fit and accounts for approximately half of the increased volatility in house prices observed during the Great Recession. Increased stochastic volatility escalates uncertainty which has significant effects on macroeconomic variables. While uncertainty in most sectors has negative effects on the economy, uncertainty on collateral constraints has the largest role. Unlike other uncertainty shocks, the housing demand uncertainty creates positive spillovers in the economy. Credit conditions, adjustment costs of capital and housing, and monetary policy are important transmission mechanisms for the stochastic volatility shocks.

Over the past decade, the most salient changes in macroeconomic conditions in developed economies have included rising government debt and population aging, which are strongly correlated with each other. This paper investigates fiscal multipliers by disentangling the effects of population aging from those of government debt. Our analysis, which uses heterogeneous panel data from 24 OECD economies, shows that while fiscal policy is ineffective for economies with high-debt levels, it is effective for economies with low-debt levels. Furthermore, the estimation results reveal that fiscal policy is ineffective for aged economies, regardless of the level of government debt. However, for nonaged economies, while fiscal policy leads to negative effects on output in times of high debt, its positive effects are more pronounced in times of low debt. Our results suggest that, for the effective implementation of fiscal stimulus policies, policy-based stimulation of employment in the labor market is essential.

In this paper, we empirically explore the endogeneity of uncertainty and the interaction between different types of uncertainty and monetary policy using a shock-restricted vector-autoregression model. We find that a contractionary monetary policy shock reduces financial uncertainty, opposite to the findings in the previous literature, while at the same time it also heightens real uncertainty. This discrepancy arises because the model allows endogenous shifts in uncertainty. We also show that endogenous responses of uncertainty amplify the effects of monetary policy on real activity.

We provide new evidence about US monetary policy using a model that: (i) estimates time-varying monetary policy weights without relying on stylized theoretical assumptions; (ii) allows for endogenous breakdowns in the relationship between interest rates, inflation, and output; and (iii) generates a unique measure of monetary policy activism that accounts for economic instability. The joint incorporation of endogenous time-varying uncertainty about the monetary policy parameters and the stability of the relationship between interest rates, inflation, and output materially reduces the probability of determinate monetary policy. The average probability of determinacy over the period post-1982 to 1997 is below 60% (hence well below seminal estimates of determinacy probabilities that are close to unity). Post-1990, the average probability of determinacy is 75%, falling to approximately 60% when we allow for typical levels of trend inflation.