We devise an endogenous growth model in which agents’ utility depends not only on current consumption but also on the pleasure of anticipated future consumption. We consider the case in which agents derive satisfaction from their own anticipatory feelings—inward-looking or internal anticipation—and the case in which agents derive utility from anticipation of other people’s future consumption—outward-looking or external anticipation. We characterize the effects of introducing a forward-looking consumption reference on the dynamics of the economy. Whereas the inward-looking economy features transitional dynamics, the outward-looking economy does not. The distortions caused by the externality in the economy with external habits can be corrected by subsidizing income at a time-varying rate or by means of a tax on consumption at a decreasing rate. We contrast the equilibrium dynamics of our specification to the more standard specification of the habit formation consumption reference point. Numerical simulations supplement the theoretical analysis.

This paper uses Bayesian methods to estimate a small-scale New Keynesian model with heterogeneous expectations (HE). Agents form expectations via Euler equation adaptive learning (AL) and differ by the model they use to forecast. Type A agents use a correctly specified model, while type B and type C agents use misspecified models. Quarterly US data from the pre-Great Moderation and Great Moderation periods are used to jointly estimate the degree of agent heterogeneity, the AL parameters, and the deep model parameters. Results show that the data exhibit significant expectational heterogeneity, and that the HE model fits the data better than a model with homogeneous agent AL.

Bénabou [(2002) Econometrica 70, 481–517.] demonstrated how progressive redistribution mitigates unequal opportunity for education to promote growth. We ask how effective that policy is when it affects the average quality of education. So, we add a learning externality in his model of human capital accumulation. It captures how knowledge diffusion through global channels—such as a national educational curriculum—influences children’s learning outcomes and, hence, growth. Whether inequality is a curse or a blessing for economic growth depends on how efficiently an economy designs these channels and to what extent they influence children’s education. The greater this efficiency, the lower is the optimal progressiveness of income redistribution for maximizing the long-run output growth rate. Interestingly, if poorly designed global channels exert greater influence in education, the optimal progressivity may increase. Our quantitative analysis reveals new implications for redistributive policies, including a surprisingly low optimal progressivity (approximately 6–7%) for the calibrated US economy.

This paper systematically examines the interrelations between equilibrium indeterminacy, endogenous entry and exit of intermediate input firms, and increasing returns to specialization within two versions of a parsimonious one-sector monopolistically competitive RBC model. The technology for producing an intermediate good is postulated to display internal increasing returns to scale in our benchmark framework, whereas positive productive externalities are considered in the alternative setting. We analytically show that either formulation will exhibit belief-driven cyclical fluctuations provided the equilibrium wage-hours locus is positively sloped and steeper than the household’s labor supply curve. We also find that ceteris paribus our alternative macroeconomy is more susceptible to indeterminacy and sunspots than the baseline counterpart.

The unorthodox estimation procedure, which Phillips (1958) adopted in his original paper, is examined using the Haar wavelet filter. The application of the Haar wavelet transform to Phillips’ original data shows that Phillips’ six pairs of mean coordinates display a striking similarity with the Haar scaling coefficients that represent averages with a period greater than 16 years. This is consistent with Desai’s (1975) intuition on the interpretation of the Phillips Curve. We show that the choice of sorting observations by ascending values of the unemployment rate is crucial for reaching the goal of estimating the eye-catching nonlinear hyperbolic shape of the wage–unemployment relationship that would be otherwise linear. Interestingly, the Haar filter can account not only for the facts characterizing the Phillips’ relationship up to the early 1960s but also for two important facts mostly debated among policymakers: the downward shift of the Phillips Curve and its flattening over time.

The expectational stability (E-stability) property of rational expectations equilibria (REE) in linear macroeconomic dynamic stochastic general equilibrium (DSGE) models is known to be sensitive to the information available to decision makers as well as the structure of the economic environment considered. Models featuring news shocks as a source of macroeconomic fluctuations depart from traditional assumptions regarding both the structure of the economy and the information set of agents. This paper investigates whether E-stability of REE is affected by either the inclusion of news shocks by themselves or the complementary structural changes. The main results find that the E-stability property of REE is robust to the inclusion (or exclusion) of news shocks and that well-known news-shock DSGE models permit REE which are simultaneously E-stable and capable of producing qualitatively realistic expectationally driven business cycles.

A simple asset pricing model with both endogenous stock market participation and subjective risk can explain the negative cross-country correlation between participation rates and the volatility of excess returns, along with the time-varying participation rates in the data. Belief-driven learning dynamics can explain the interplay between participation rates, subjective risk, and stock price volatility. When agents adaptively learn about the risk and return, my model generates 25% of the excess volatility observed in US stock prices, while also matching key moments. With learning about risk, excess volatility of stock prices is driven by fluctuations in the participation rate that arise because agents’ risk estimates vary with prices. I find that learning about risk is quantitatively more important than learning about returns.

Recently, Penn World Tables include new data that enable calculation of total factor productivity in addition to output for a large set of countries. We use these new data to examine convergence and divergence across countries by applying a new approach, which differentiates between the dynamics of output and of productivity. Our empirical results lead to two main new contributions to the literature. The first is on the interpretation of “β-convergence” in “growth regressions.” It means that output per worker in each country converges to productivity but does not imply convergence across countries, since productivity tends to diverge from the global frontier. The second contribution is to the literature, which finds that income gaps across countries are due mainly to differential technology adoption. This paper shows that the gaps in technology are not only large but keep growing over time.

Large productivity gaps across sectors persist and the process of structural transformation is stagnant in many developing economies. This wedge between observed and optimal labor allocations reflects the presence of institutional and market frictions, which impose costs on the optimal reallocation of labor from low- to high-productivity sectors. Using a panel of cross-country sector-level data, I estimate a dynamic panel error correction model that captures the dynamics of sectoral labor flows. The model estimates provide a new set of stylized facts on the dynamics of the structural transformation process and a measure of the magnitude of frictions facing labor flows. In addition, I analyze the contribution of labor regulations and reforms to the pace at which labor flows across economic sectors. Results suggest that policy reforms need to steer between the goal of easing job creation and destruction, while supporting labor supply incentives to reallocate through strong social nets, labor protection, and risk sharing.

While Perron and Wada (2009) maximum likelihood estimation approach suggests that postwar US real GDP follows a trend stationary process (TSP), our Bayesian approach based on the same model and the same sample suggests that it follows a difference stationary process (DSP). We first show that the results based on the approach should be interpreted with caution, as they are relatively more subject to the ‘pile-up problem’ than those based on the Bayesian approach. We then directly estimate and compare the two competing TSP and DSP models of real GDP within the Bayesian framework. Our empirical results suggest that a DSP model is preferred to a TSP model both in terms of in-sample fits and out-of-sample forecasts.

The Survey of Consumer Finances (SCF) indicates that, unlike subprime borrowers, prime borrowers are more likely to own investment homes during recessions than during recoveries. Drawing on this empirical fact, we present and estimate a dynamic stochastic general equilibrium (DSGE) model that distinguishes between borrowers through their credit access. We find that the relative ease of credit access among borrowers explains the divergence in investment homeownership seen in the data. This divergence is amplified when subprime borrowers are subject to lax credit conditions prior to a financial shock or when the nominal interest rate is constrained at the zero lower bound (ZLB). An expansionary monetary policy helps bridge this gap across borrowers.

In a standard overlapping generations model, we show how the health effects of pollution impact the balanced-growth path (BGP) and the transition dynamics of the economy. The key driver is the differential between physical and human capital accumulation. The differential occurs because pollution alters the incentives to save and to invest in education via reductions in longevity and alters the effectiveness of education expenditures via impaired cognitive learning. Two predictions of the model are noteworthy. The first prediction is the existence of two stable BGPs with a separating saddle path. One BGP is desirable featuring high economic growth and low pollution, whereas the other should be avoided because it is associated with low economic growth and high pollution. The second prediction is that economic and environmental cycles may emerge, implying inequality between generations. These theoretical results are supported by empirical evidence and imply a role for government to steer the economy toward the desirable BGP and eliminate the cycles.

Exchange rate pass-through (ERPT) into prices and into income loss are shown to be enough to calculate ERPT into welfare loss using implications of a simple model. These ERPT measures are estimated at the good level using a unique micro-price data set from Turkey, and they are combined with income-group-specific expenditure shares at the good level to obtain aggregate-level ERPT measures for alternative income groups. An exchange rate shock resulting in a real depreciation of 1% is shown to decrease welfare by about 0.80% for the average-income consumer, while this estimate ranges between 0.73% and 0.83% for consumers in the lowest- and highest-income quintiles, respectively, suggesting evidence for redistributive effects of an exchange rate shock. Using micro prices has further resulted in showing that traded, nondurable, flexible-price, or income-elastic goods contribute more to ERPT into welfare loss for the average-income consumer, suggesting important policy implications for filtering out the noise in the measurement of aggregate-level prices.

Multiple equilibria arise in standard New Keynesian models when the nominal interest rate is set according to the Taylor rule and constrained by a zero lower bound (ZLB). One of these equilibria is deflationary and referred to as an expectations-driven liquidity trap (ELT) as it arises because of the de-anchoring of inflation expectations. This study demonstrates that a simple tax rule responding to inflation can prevent a liquidity trap from arising without increasing government spending or debt. We analytically investigate the necessary and sufficient conditions to prevent an ELT and show that both the frequency and persistence of ELT episodes affect the extent to which the tax rule must respond to inflation. In brief, the higher the frequency or the longer the persistence of the ELT, the greater the response of the tax rate must be.

This paper studies the effects of China’s one-child policy on human capital and income. I build and calibrate a quantitative OLG model with intergenerational transfers. The model generates a quantity–quality trade-off, so a restriction on fertility leads to an increase in human capital, and higher human capital then contributes to higher individual income and welfare. Calibrating the model to match survey data on urban households, I find that the one-child policy increases the human capital of affected agents by about 47% relative to a counterfactual with no fertility restrictions. However, the effect on aggregate income is negative as the size of the labor force falls.

Many recent digital innovations (like video games) augment the value of leisure time, which is not captured by Gross Domestic Product. Therefore, the productivity impact of such innovations may be understated. I develop the theoretical foundations for measuring the value of leisure when it is produced using the household’s leisure time and recreational durable goods. I apply this framework to estimate the value of US leisure from 1948 to 2016. While the value of leisure is large, it has become less important over time. I find that productivity growth of leisure time has slowed in the digital era. Household stocks of digital goods are small, so have relatively little impact on leisure value. I conclude that mismeasurement due to household digital goods is not a first-order cause of the recent productivity slowdown.

This paper investigates the long-run effects of immigration on wages and welfare in a model with endogenous technology choice (ETC) where firms are allowed to choose their optimal skill intensity from a menu of available technologies. I embed the ETC framework into the Auerbach and Kotlikoff model (1987) that features a large set of overlapping generations, a rich collection of population dynamics, and a social security system. I calibrate the model to match with the U.S. data and evaluate the effect of ETC with the help of two experiments. In the first experiment, I increase the share of high-skilled immigrants and compare the wage and welfare predictions of the model with ETC to a standard model where the skill intensities in production technology are fixed. In the standard model, since the skill intensities are constant, increase in the supply of high-skilled labor leads to a decrease in high-skilled wages and an increase in low-skilled wages. On the other hand, in the model with ETC, negative supply-side effects are counterbalanced by an increase in the intensity of the more abundant high-skilled labor, leading to a smaller decrease in their wages. The discrepancy between wage predictions of these two models is also reflected in the welfare: while the model with ETC predicts an increase in both high- and low-skilled natives’ welfare, the standard model would predict a decrease in the welfare of the high skilled and a larger increase in the welfare of the low skilled. In the second experiment, I examine the effects of an increase in low-skilled immigration and find that in this case, since the initial production technology is low-skilled intensive, the ETC effects are smaller. These results imply that if ETC is ignored, both in the short run and long run, wage and welfare analyses of immigration will be incomplete, and even misleading.

We use a New Keynesian DSGE model with search frictions on the housing market to evaluate how financing a labor tax reduction by higher property taxation affects the real economy and welfare. Search on the housing market enables us to explicitly model stocks and flows, which is necessary to differentiate between recurrent property taxes (levied on stocks) and property transaction taxes (levied to flows). We find that using recurrent property taxation as financing instrument outperforms other instruments although all policy measures increase aggregate economy-wide welfare. Our simulations suggest that using property transaction taxation as financing instrument is the least favorable measure.

We assess the impact of fiscal and monetary policy shocks on US survey-based consumer expectations within states of low and high public debt. Following an unexpected increase in government spending, consumption intentions rise in the low-debt state and fall in the high-debt state. Overall, such a shock has adverse effects on expectations in high-debt states. Similarly, contractionary monetary policy shocks induce pessimistic expectations in the high-debt state but not in the low-debt state. The estimated responses suggest that higher public debt fuels considerations regarding its repayment, giving rise to state dependencies in the updating of expectations in response to both fiscal and monetary policy shocks.

The monetary authority’s choice of operating procedure has significant implications for the role of monetary aggregates and interest rate policy on the business cycle. Using a dynamic general equilibrium model, we show that the type of endogenous monetary regime, together with the interaction between money supply and demand, does well to capture the actual behavior of a monetary economy—the USA. The results suggest that the evolution toward a stricter interest rate-targeting regime renders central bank balance sheet expansions ineffective. In the context of the 2007–2009 Great Recession, a more flexible interest rate-targeting regime would have led to a significant monetary expansion and more rapid economic recovery in the USA.