This paper considers the effects of patent length and price regulation in an R&D growth model with variety expansion. Innovation requires lower bounds on patent length and price. Increasing patent duration promotes growth; increasing the cap on the price of patented products promotes growth below the monopoly-pricing level. Each policy instrument can raise welfare unless excessively used, and their welfare ranking depends on parameterizations. It is desirable, on welfare grounds, to limit patent protection along both dimensions, namely by limiting patent length and capping the price of patented products. Such limits raise welfare despite reducing the growth rate.

The aim of this paper is to study the optimal duration of unemployment benefit entitlement across the business cycle. We analyze whether the entitlement duration should be prolonged in bad and shortened in good times. Because of consumption smoothing, such a countercyclical policy can be welfare-enhancing as long as it does not affect labor market adjustment too severely and/or as long as it can even help to reduce inefficiencies there. If, however, the labor market is already quite inflexible, procyclical behavior may be preferable. In a calibrated dynamic business cycle framework, we find that countercyclical benefit entitlement duration may be preferable in the United States but not in Europe.

This article questions the rather pessimistic conclusions of Allen and Carroll [Macroeconomic Dynamics 5 (2001), 255–271] about the ability of consumers to learn the optimal buffer-stock-based consumption rule. To this end, we develop an agent-based model in which alternative learning schemes can be compared in terms of the consumption behavior that they yield. We show that neither purely adaptive learning nor social learning based on imitation can ensure satisfactory consumption behavior. In contrast, if the agents can form adaptive expectations, based on an evolving individual mental model, their behavior becomes much more interesting in terms of its regularity and its ability to improve performance (which is a clear manifestation of learning). Our results indicate that assumptions on bounded rationality and on adaptive expectations are perfectly compatible with sound and realistic economic behavior, which, in some cases, can even converge to the optimal solution. This framework may therefore be used to develop macroeconomic models with adaptive dynamics.

In this paper we study the transmission of capital depreciation shocks. The existing literature in the real business cycle tradition has concluded that these shocks are irrelevant to business cycle fluctuations. We show that they are potentially important drivers of aggregate fluctuations in a new Keynesian model. Nominal rigidities and some persistence in the shock process are the key ingredients that generate co-movement across real variables.

Building on Kilian and Park's (2009) structural VAR analysis of the effects of oil demand and supply shocks on the U.S. stock market, this paper focuses on the differences and commonalities of stock price responses in oil exporting and importing economies in 1974–2011. Structural oil price shocks add to our understanding of the 2008 stock market crash. I find that unexpected reductions in world oil supply do not affect stock returns in any of six OECD countries. Although an increase in global aggregate demand consistently raises oil prices and cumulative real stock returns, the effect is more persistent for oil exporters. Other, e.g., precautionary oil demand shocks have a detrimental impact on stock markets in oil-importing countries, a statistically insignificant effect for Canada, and a significantly positive effect for Norway. Oil price shocks account for a larger share of the variation in aggregate international stock returns than in national stock returns.

Past empirical studies have repeatedly found that plant age matters for aggregate employment dynamics. This paper develops a model of plant life cycle to capture this empirical regularity. In the model, plants differ by vintage and by idiosyncratic productivity. The idiosyncratic productivity is not directly observable, but can be learned over time. This setup gives rise to a learning effect and a creative-destruction effect, under which labor flows from plants with low idiosyncratic productivity to those with high idiosyncratic productivity and from old vintages to new vintages. When calibrated to the U.S. manufacturing job flow series, our model of plant life cycle delivers the observed link between plant age and aggregate employment dynamics.

The emerging consensus in monetary policy and business cycle analysis is that money aggregates are not useful as an intermediate target for monetary policy or as an information variable. The uselessness of money as an intermediate target is driven, at least in part, by empirical research that suggests that money demand is unstable. In addition, the informational quality of money has been called into question by empirical research that fails to identify a relationship between money growth and inflation, nominal income growth, and the output gap. Nevertheless, this research is potentially flawed by the use of simple sum money aggregates, which are not consistent with economic, aggregation, or index number theory. This paper therefore reexamines previous empirical evidence on money demand and the role of money as an information variable, using Divisia monetary aggregates. These aggregates have the advantage of being derived from microtheoretic foundations, as well as being consistent with aggregation and index number theory. The results of the reevaluation suggest that previous empirical work might be driven by mismeasurement.

If private sector agents update their beliefs with a learning algorithm other than recursive least squares, expectational stability or learnability of rational expectations equilibria (REE) is not guaranteed. Monetary policy under commitment, with a determinate and E-stable REE, may not imply robust learning stability of such equilibria if the RLS speed of convergence is slow. In this paper, we propose a refinement of E-stability conditions that allows us to select equilibria more robust to specification of the learning algorithm within the RLS/SG/GSG class. E-stable equilibria characterized by faster speed of convergence under RLS learning are learnable with SG or generalized SG algorithms as well.

We propose a novel mechanism giving rise to poverty traps and multiple equilibria in economic performance. It is a potentially important source of persistent underdevelopment across countries and regions. At the core of this mechanism, bridging social capital and social trust feed back on each other, interdependently affecting individuals' earnings and subjective well-being. High trust and abundant bridging social capital reinforce each other, leading to a “high” equilibrium where both these variables take persistently high values, and earnings and well-being are high as well, whereas low trust and lack of bridging social capital create a vicious circle, leading to a “low trust trap” where all these variables are persistently low. The workings of our theoretical model are in agreement with a wide range of findings from the contemporary literature in sociology and social psychology.

We study a two-country model with changes in the technological growth rate. Such changes are attributed to transitory and persistent shocks in the growth rate of technology. Cases are considered in which agents in two countries do not have enough information to distinguish between the two types of shocks; gradually, however, the persistence of the shock is recognized through the learning process. Utilizing a set of parameters obtained from U.S. and European productivity growth rates, it is then shown that (i) when persistent shocks affect the two countries identically, there is no consumption-correlation puzzle, and the international comovement puzzle becomes imperceptible; and (ii) even when persistent shocks affect the two countries differently, imperfect information plays an important role in explaining both the consumption-correlation puzzle and the international comovement puzzle (provided transitory shocks are strongly internationally correlated and are relatively larger than persistent shocks).

This paper studies the determinacy of equilibrium in a new Keynesian model with deep habits under different interest rate rules. The main finding is that an interest rate rule satisfying the Taylor principle is no longer a sufficient condition to guarantee determinacy. Including interest rate smoothing and a response to output deviations from steady state significantly enlarges the regions of determinacy. However, under all the simple interest rate rules considered, determinacy is not guaranteed for a very high degree of deep habits. Deep habits give rise to countercyclical markups, which is in line with empirical evidence and makes them an appealing feature in the study of demand shocks. The countercyclicality of markups also leads to multiple equilibria because of self-fulfilling expectations for a high degree of deep habit formation.

The puzzling bias of equity portfolios toward domestic assets (equity home bias) remains substantial. This paper proposes a dynamic stochastic general equilibrium model and demonstrates that shocks to consumption tastes (taste shocks) are an effective explanation for the equity home bias puzzle. In the model, home assets provide insurance for home agents to hedge against domestic taste fluctuations, whereas such insurance cannot be offered by foreign assets. The empirical evidence shows that, in explaining equity home bias, hedging against consumption taste risks is more relevant than hedging against labor income risks or real exchange rate risks.

In this paper, we examine the convergence hypothesis using a long memory framework that allows for structural breaks and does not rely on a benchmark country. We find that even though the long memory framework of analysis is much richer than the simple I(1)/I(0) alternative, a simple absolute divergence and rapid convergence dichotomy produced by the latter is sufficient to capture the behavior of the gaps in per capita GDP levels and growth rates results respectively. This is in contrast to the findings of Dufrénot, Mignon, and Naccache [The Slow Convergence of Per Capita Income between the Developing Countries: Growth Resistance and Sometimes Growth Tragedy. Discussion paper, University of Nottingham (2009)], who found strong evidence of long memory for output gaps. The speed of convergence as captured by the estimated long memory parameter d, is explained by differences in physical and human capital as well as fiscal discipline characteristics of economic policies pursued by different countries.

This paper examines the behavior of the finance premium after technology and monetary shocks in a dynamic stochastic general equilibrium (DSGE) model where borrowers use a fraction of their production (output) as collateral. We show that this simple framework is capable of producing a countercyclical finance premium, while matching the well-documented stylized facts of macro dynamics. A key feature is the endogenous derivation of the default probability from break-even conditions, which results in the loan rate being set as a countercyclical finance premium over the cost of borrowing from the central bank. The latter is shown to provide an accelerator effect through which shocks can amplify the loan spread and the dynamic response of macro variables.

Using a two-sector endogenous growth model, the speed of convergence is determined primarily by the gap in rates of return between physical and human capital. In closed economies, for a typical situation of having relatively less physical capital than in a steady state, the return on physical capital will be significantly high, whereas the return on human capital will be relatively low. This gap in rates of return is quite large when the economy is not at its steady state. In open economies, where human capital is nontradable, the gap in rates of return is small, as is the gap between the international interest rate (which is less than the closed economies return on physical capital) and the return on human capital. Convergence in open economies will be relatively slow, and convergence in closed economies will be relatively fast, and therefore there is little gain from financial liberalization.

We study optimal taxation when jobs are found through a social network. The network determines employment, which workers may influence by engaging in social activities. The network parameters play an important role in determining the economy's employment level and the optimal income tax. The optimal labor income tax depends on both the traditional intensive margin of labor supply and a new extensive margin that depends on the structure of the social network. Social activities that promote social connections are instrumental to acquiring job information; taxation thus discourages both social activities and labor supply, reducing employment. Labor taxes vary positively with labor supply and negatively with employment. When networking is absent, taxes are higher and the economy's employment rate is lower. The optimal capital tax rate is zero, independent of labor market frictions. Social networking reduces job search frictions and is welfare-enhancing.

This paper investigates the potential sources of the mixed evidence found in the empirical literature studying asymmetries in the response of output to monetary policy shocks of different magnitudes. Further, it argues that such mixed evidence is a consequence of the exogenous imposition of the threshold that classifies monetary shocks as small or large. To address this issue, I propose an unobserved-components model of output, augmented by a monetary policy variable, which allows the threshold to be endogenously estimated. The results show strong statistical evidence that the effect of monetary policy on output varies disproportionately with the size of the monetary shock once the threshold is estimated. Meanwhile, the estimates of the model are consistent with a key implication of menu-cost models: smaller monetary shocks trigger a larger response on output.

This paper uses a New Keynesian model with banks and deposits to study the macroeconomic effects of policies that pay interest on reserves. Although their effects on output and inflation are small, these policies require major adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish in the short run. In the long run, however, the additional freedom the monetary authority acquires by paying interest on reserves is best described as affecting the real quantity of reserves: policy actions that change prices must still change the nominal quantity of reserves proportionally.

We construct a multiple-shock, discrete-time version of the Mortensen–Pissarides labor market search model to investigate the basic model's well-known tendency to underpredict the volatility of key labor market variables. In addition to the standard labor productivity shock, we introduce shocks to matching efficiency and job separation. We estimate the multiple-shock model and then simulate its properties. Although it generates significantly more volatility while preserving the Beveridge curve relationship, the multiple-shock model generates counterfactual implications for the cyclicality of job separations. Using a business cycle accounting approach, next we show that the model requires significantly procyclical and volatile matching efficiency and counterfactually procyclical job separations to render the observed data without error. We conjecture that the basic Mortensen–Pissarides model lacks mechanisms to generate sufficiently strong labor market reallocation over the business cycle, and suggest nontrivial labor force participation and job-to-job transitions as promising avenues of research.

This paper estimates the dynamics of the personal-bankruptcy rate over the business cycle by exploiting large cross-state variation. We find that bankruptcy rates are significantly above trend during a recession and rise as a recession persists. After a recession ends, there is a hangover in which bankruptcy rates begin to fall but remain above trend for several more quarters. Recovery periods see a strong bounce-back effect, with bankruptcy rates significantly below trend for several quarters. Despite the significant increases in bankruptcies during recessions, the largest contributor to rising bankruptcies during these periods has tended to be the longstanding upward trend.