This study demonstrates how expectation errors in a credit market generate economic fluctuations. To this end, we employ simulation analysis using a dynamic stochastic general equilibrium model. Our model includes two building blocks that are not included in the standard models: the banking sector and matching friction in the labor market. By introducing the banking sector, we can confirm that if economic agents fallaciously expect a rise in future asset prices, such expectations will cause an economic boom and bust. The variation of this fluctuation is quite large and the recession short-lived, but these drawbacks can be avoided by adding matching friction.

We consider a model of economic growth with altruistic agents who care about their consumption and the disposable income of their offspring. The agents' consumption and the offspring's disposable income are subject to positional concerns. We show that, if the measure of consumption-related positional concerns is sufficiently low and/or the measure of offspring-related positional concerns is sufficiently high, then there is a unique steady-state equilibrium, which is characterized by perfect income and wealth equality, and all intertemporal equilibira converge to it. Otherwise, in steady-state equilibria, the population splits into two classes, the rich and the poor; under this scenario, in any intertemporal equilibrium, all capital is eventually owned by the households that were the wealthiest from the outset and all other households become poor.

This paper develops an overlapping-generations model to study the growth-maximizing level of public debt under conditions of demograhic change. It is shown that the optimal debt level depends on a positive marginal productivity of public capital. In general, it also depends on the demographic parameters, but not if the government is not allowed to borrow to cover revenue shortfalls for current age-related spending. In that context, balanced budget rules are not an approriate form of fiscal rule. The implication is that a government facing demograhic change or demands for more welfare spending will have to adjust its fiscal plans to accommodate those changes, most likely downward, if growth is to be preserved. An advantage of this model is that it allows us to determine in advance the way in which fiscal policies need to adjust as demographic parameters change.

This paper develops a firm dynamics model augmented with an endogenous net-worth-building feature at the firm level and investigates how opportunities for entrepreneurs to accumulate wealth can mitigate the implications of limited enforceability for resource allocation, productivity, and macroeconomic development. In the steady-state equilibrium of the model, financially constrained entrepreneurs select short-term investment projects because short-term investment enhances net-worth building and relaxes credit constraints. The limited contract enforceability suppresses macroeconomic output; however, entrepreneurial net-worth building offsets the per capita income losses. I calibrate the steady state of the model for the U.S. economy as a baseline and conduct quantitative exercises. The counterfactual simulations reveal that net-worth building could reduce, for instance, about two-thirds of the per capita income discrepancy between the United States and Brazil that can be attributed to limited enforcement. The theoretical and quantitative results from the paper are highly relevant to financial development and entrepreneurship policies implemented in developing countries.

This paper introduces imperfect knowledge and learning behavior of economic agents into the Kiyotaki and Moore model and studies the interaction of agents' collateral price beliefs, collateral constraint, and aggregate economic activity over the business cycle. It establishes the E-stability condition and the convergence of the real time learning process. In addition, it shows that learning strengthens the role of collateral constraints in aggregate fluctuations.

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.

We generalize a trade model with firm-specific heterogeneity and R&D-based growth to allow for endogenous education and fertility. The framework is able to explain cross-country differences in living standards and trade intensities by the differential pace of human capital accumulation among industrialized countries. Consistent with the empirical evidence, scale matters for relative economic prosperity as long as countries are closed, whereas scale does not matter in a fully globalized world. The average human capital of a country, by contrast, influences its relative economic prosperity irrespective of trade-openness.

In this paper we investigate the growth effect of environmental taxes when time preference is endogenously determined by environmental quality. We find that if people become more patient because of a cleaner environment, raising the environmental tax may reduce pollution and stimulate growth. Moreover, the Pigouvian principle may be inefficient in the presence of endogenous time preference.

Viability theory is the study of dynamical systems that asks what set of initial conditions will generate evolutions that obey the laws of motion of a system and some state constraints, for the length of the evolution. We apply viability theory to Judd's dynamic tax model [The welfare cost of factor taxation in a perfect-foresight model, Journal of Political Economy 95(4), 675–709 (1987)] to identify which economic states today are sustainable under only slightly constrained tax-rate adjustments in the future, when the dynamic budget constraint and the consumers' transversality condition at infinity are satisfied. We call the set of such states the economic viability kernel. In broad terms, knowledge of the viability kernel can tell the planner what economic objectives are achievable and assist in the choice of suitable controls to realize them. We observe that high consumption levels can only be sustained when capital is abundant and, unsurprisingly, that a very high consumption economy lies outside such kernels, at least for annual tax-adjustment levels limited by 20 percentage points. Furthermore, we notice that by and large the sizes of the kernel slices do not diminish as the tax rate rises; hence high-taxation economies are not necessarily more prone to explode, or implode, than their low-taxation counterparts. In fact, higher tax rates are necessary to keep many consumption choices viable, especially when capital approaches the constraint-set boundaries.

This paper examines the dynamic and desirable properties of monetary regimes in a remittances recipient economy, with emphasis on the effect on sectoral output and nontradable inflation dynamics. The findings indicate that under a fixed exchange rate regime, an increase in remittances creates increased demand for nontradable goods, and hence a rise in nontradable inflation, as well as expansion in output of nontradables. Under a nontradable inflation targeting regime, however, a decrease in nontradable inflation and an expansion in tradable goods production are observed following an increase in remittances. A near-zero nontradable inflation rate and managed variability in the nominal exchange rate typify the optimal monetary policy, suggesting that an inflation targeting regime is preferable to a fixed exchange regime under such a scenario. A VAR analysis shows that the dynamics of inflation in El Salvador and the Philippines is in consonance with those observed in the model under the fixed exchange rate and nontradable inflation targeting regimes, respectively.

Empirical studies find that expenditures on both durable and nondurable goods fall following a contractionary monetary policy shock. However, in standard two-sector models with staggered nondurable goods prices and flexible durable goods prices, consumption of durables rises whereas that of nondurables falls in response to a contractionary policy shock. To resolve this co-movement problem, I extend the model to include a realistic financial friction that firms must pay for their productive inputs prior to production, i.e., working capital, along with habit formation in nondurable goods consumption. Following a positive interest rate shock, the working capital channel raises production costs, thereby discouraging production of both durable and nondurable goods. Furthermore, habit formation induces households to smooth the growth rate of nondurable goods consumption, and hence mitigates the fall in the nondurable goods sector. The model solves the co-movement problem and successfully generates a more sensitive response in the durable goods sector, as observed in the data.

When producers are heterogeneous, the degree of competition between them affects aggregate output not only via markups and deadweight losses, but also through aggregate productivity due to specialization. As competition tightens, high-productivity producers gain market share at the cost of low-productivity ones, generating economic growth through increased aggregate productivity and capital accumulation, in line with what is observed empirically. Consequently, competition is not limited to reducing deadweight losses, and can play a greater role in economic growth and development than traditionally assumed. Economic growth spurs profits, which leads to entry and increased competition that generates growth, so competition provides a channel through which the economy generates growth internally. When strong enough, this channel can make the returns to scale in the inputs that the economy accumulates endogenously go from being decreasing to nondecreasing at the aggregate level, thus enabling endogenous growth. In fact, these returns to scale are determined endogenously in our model, and vary with the scale of production, the degree of producer heterogeneity, and the barriers to entry.