This note extends the findings of Benhabib and Rusticchini [Journal of Economic Dynamics and Control 18, 807–813 (1994)], who provide a class of dynamic stochastic general equilibrium (DSGE) models whose solution is characterized by a constant savings rate. We show that this class of models may be interpreted as a standard–representative agent DSGE model with costly adjustment of capital.

Zhang [Tariff and Equilibrium Indeterminacy, available at http://mpra.ub.uni-muenchen.de/13099/ (2009)] shows that endogenous tariffs (or energy taxes) and endogenous labor income taxes are equivalent in generating local indeterminacy. Using methods developed by Stockman [Journal of Economic Theory 145 (2010), 1060–1085], we extend Zhang's analysis to prove that endogenous tariffs and endogenous labor income taxes are also equivalent in generating global indeterminacy (chaotic equilibria) under a balanced-budget rule. More precisely, we show that the existence of Euler equation branching in an arbitrarily small neighborhood of a steady state can imply topological chaos in the sense of Devaney. In addition, Euler equation branching occurs regardless of the local uniqueness of the equilibrium around the steady state.

Inflation is often associated with a loss for the poor in the medium and long term. We study the short-run redistributive effects of unanticipated inflation in a dynamic optimizing sticky price model of the business cycle. Agents are heterogeneous with regard to their age and their productivity. We emphasize three channels of the effect of inflation on income distribution: (1) factor prices, (2) “bracket creep,” and (3) sticky pensions. Unanticipated inflation that is caused by monetary expansion is found to reduce income inequality. In particular, an increase of the money growth rate by one standard deviation results in a 1% drop of the Gini coefficient of disposable income if extra tax revenues are transferred lump-sum to the households.

We clarify the different effects of elementary and higher education on human capital accumulation and inequality. The productivity of elementary education plays a significant role in the widening of inequality regardless of the existence of multiple steady states. When the productivity of elementary education is low, the poor cannot afford higher education in the long run because the demand for education by the rich makes the price of education too high for the poor. However, the effect of its productivity on the attainable education level is ambiguous. A rise in the productivity of higher education always increases the education level.

This paper provides a unified approach to characterizing the relation between factor substitution and economic growth in different one-sector growth models (namely, the Solow, Ramsey, and Diamond models). Our main finding is that if better factor substitution raises savings in the steady state, then a higher per capita income results. There are two channels by which factor substitution affects savings: the positive efficiency effect via income and the ambiguous distribution effect via factor income shares. If the efficiency effect dominates, then a higher elasticity of substitution leads to a higher level of per capita steady-state income. In transition, factor substitution affects the rate of convergence both directly and through the equilibrium profit share. The former arises from diminishing marginal productivity of capital whereas the latter reflects its relative scarcity. Depending on the interaction of these effects, the net outcomes are characterized.

We study the dynamics of risk premia in a model with external habit formation and highlight the significance of “recession predictability”. Although under the specification of Campbell and Cochrane, [Journal of Political Economy 107, 205–251 (1999)] the equity risk premium is countercyclical because increases in risk aversion are reinforced by rising recession risks, this need not be the case more generally. We show analytically that in endowment economies procyclical recession expectations can outweigh countercyclical changes in risk aversion, generating counterfactual risk-premium behavior. However, allowing shocks or habits to be sufficiently persistent, or explicitly accounting for the impact of habits on consumption, suffices to generate countercyclical recession risks and risk premia.

Using a macroeconomic model with asset prices, we analyze how optimal monetary policy and macroeconomic dynamics and performance are affected by a central bank's desire to be robust against model misspecifications. We show that a higher central bank preference for robustness implies a more aggressive reaction of the nominal interest rate to the expected future inflation rate and inflation shocks. The dynamic stability of the equilibrium is not modified for a sufficiently high preference for robustness. However, the speed of dynamic convergence is lower under robust control compared to a benchmark case without it and implies supplementary economic costs. Finally, an increase in the preference for robustness comes at the cost of higher macroeconomic and financial volatility in the presence of inflation shocks. It has no effect on the reaction of inflation, output gap, and asset price gap to shocks affecting goods and financial markets.

This paper studies the nature of long-run behavior in a two-sector model of optimal growth. Under some restrictions on the parameters of the model, we provide an explicit solution of the optimal policy function generated by the optimal growth model. Fixing the discount factor, we indicate how long-run optimal dynamics changes as a key technological parameter (labor output ratio) changes. For a particular configuration of parameter values, we also provide an explicit solution of the unique absolutely continuous invariant ergodic distribution generated by the optimal policy function.

We consider an overlapping-generations economy with two consumption goods. There are two sectors that produce a pure consumption good and a mixed good that can be either consumed or used as capital. We prove that the existence of Pareto-optimal expectations-driven fluctuations is compatible with standard sectoral technologies if the share of the pure consumption good is low enough. Following Reichlin's [Journal of Economic Theory 40 (1986), 89–102] influential conclusion, this result suggests that some fiscal policy rules can prevent business-cycle fluctuations in the economy by driving it to the optimal steady state as soon as they are announced.

In this paper, we look for long-run and short-run effects of fiscal deficits on economic growth in an endogenous growth model with productive public spending that may be financed by public deficit and debt. The model shows a multiplicity of long-run balanced growth paths (a high-growth and a low-growth steady state) and a possible indeterminacy of the transition path, which may be consistent with the empirical literature, which exhibits strong nonlinear responses of economic growth to fiscal deficits. Starting from the high-growth steady state, a positive impulse in the deficit ratio exerts an adverse effect on economic growth in the long run, after an initial rise. Starting from the low-growth steady state, the situation may be radically undetermined, and the effect of fiscal deficit impulses is subjected to “optimistic” or “pessimistic” views on public-debt sustainability.

This paper studies the distortionary impact of progressive dividend taxation on investment decisions under the premises of the “new” view. According to the new view, proportional dividend taxation does not distort firms' investment decisions. We find that progressive dividend taxation distorts investment decisions due to endogenous variations in the marginal tax rate caused by stochastic taxable income over the business cycle. The magnitude of this distortion critically depends upon the marginal tax rate and the progressivity of the tax system.

This paper examines the effect of the elasticity of technological substitution on the existence of equilibrium indeterminacy in two-sector economies. Following recent empirical evidence, the elasticity of substitution between capital and labor is below unity and we find that this requires a higher degree of productive externalities in order to still be able to produce indeterminate equilibria. However, empirically realistic rates of substitution do not rule out indeterminacy.

This note shows that Lemma 3 in the paper by Tiago N. Sequeira [R&D spillovers in an endogenous growth model with physical capital, human capital and varieties, Macroeconomic Dynamics (2011)] is insufficient to guarantee stability and provides an alternative sufficient condition for stability.

When the production function includes dynamic complementarities and a Cobb--Douglas form, dynamic complementarities are an endogenous propagation mechanism of shocks. The proposed model explains several stylized facts of aggregate variables of interest, including (i) hump-shaped impulse response functions, (ii) positively autocorrelated growth rates of aggregate variables, and (iii) correlation coefficients of forecastable movements in aggregate variables.

This article analyzes the consequences of environmental tax policy under public debt stabilization constraint. A public sector of pollution abatement is financed by a tax on pollutant emissions and/or by public debt. At the same time, households can also invest in private pollution abatement activities. We show that the economy may be characterized by an environmental-poverty trap if debt is too large or public abatement is not sufficiently efficient with respect to the private one. However, there exists a level of public abatement and debt at which a stable steady state is optimal.

This paper estimates time-varying forward-looking monetary policy reaction functions for the central banks of France, Germany, Italy, and the United Kingdom. We utilize the framework developed by Kim [Economics Letters 91 (2006) 21–26] and Kim and Nelson [Journal of Monetary Economics (2006) 1949–1966] to deal with the issue of endogeneity in a time varying–parameter model. Our results find substantial time variation in the conduct of monetary policy in these four countries, which cannot be adequately captured by the conventional fixed-coefficient approach. Our findings suggest that there was a significant decline in the Bank of France's and the Bank of Italy's response to the German interest rate in 1992, and it coincided with the breakdown of the exchange rate management system in Europe. Our results suggest that the Bank of England was slower than the Bundesbank to increase its response to expected inflation, as its response to inflation became more than one-for-one only in the early 1980s.

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 argue that a fixed exchange rate can be an optimal choice even if a policy maker could commit to the first-best monetary policy whenever the private sector's beliefs reflect incomplete information about the policy maker's dependability. This model implies that joining a currency area may be optimal for its impact not on the behavior of the policy maker, but on the beliefs of the private sector. Monetary policies are evaluated using a new Keynesian model of a small open economy solved under imperfect policy credibility. We quantify the minimum distance between announced policy and the private sector's beliefs that is necessary for a peg to perform better than an independent monetary policy when the policy maker can commit to the first-best policy.