This paper develops a theory of human capital to investigate the role of early childhood health in explaining the large and persistent schooling gaps observed within and across countries. Quantitative analysis using the theory and data from 98 countries shows that early health inequalities within developingcountries strongly amplify later schooling gaps— counterfactually eliminating inequalities reduces schooling Ginis by an average of 18% in developing economies but has only mild effects in richer countries. Moreover, early health inequalities are found to be an important source of schooling variation across countries— universally equating early health to the average US level reduces the cross-country standard deviation of average schooling attainment by over 40%. Additional policy experiments reveal that the gains from early health interventions tend to be amplified by later educational investments in developing economies, while those targeting school-aged children may be limited if early health conditions are ignored.

We build a model that, according to the empirical evidence, gives rise to oscillations in wealth within a dynasty while keeping intergenerational persistence in education attainment. We propose a mechanism based on the interaction between wealth and effort as suggested by the Carnegie conjecture, according to which wealthier individuals devote less effort in their job occupations than poorer. Oscillations in wealth arise from changes in the occupation chosen by different generations of the same dynasty as a response to both inherited wealth and college premium. Our mechanism generates a rich social stratification with several classes in the long run due to the combination of different levels of education and occupation types. Furthermore, we generate a large mobility in wealth among classes even in the long run. Our model highlights the role played by the minimum cost on education investment, the borrowing constraints, and the complementarity between education and occupational effort.

This paper examines the financial stress interconnectedness among Greece, Ireland, Italy, Portugal, and Spain (GIIPS) economies and Germany. Based on market-level financial stress indices, we examine the stress transmission process as well as the causal network relationships in banking sector, bond, money, and stock markets. The period under investigation, 2001–2013, allows to test the effects of the 2007–2009 financial crisis as well as the subsequent European sovereign crisis. Using two alternative techniques for connectedness analysis, our evidence suggests that the peripheral economies of Italy and Spain play a highly significant role in the stress transmission in all markets, especially in the cases of banks and equity markets. Moreover, we visualize our results using network analysis. Contrary to common wisdom, Portugal, Ireland, and mainly Greece do not seem to have an important role in amplifying stress levels.

This paper extends the ongoing literature on the macroeconomic effects of money supply volatility. We use monthly data for the USA and a bivariate, Markov switching, structural vector error correction model that is modified to accommodate generalized autoregressive conditional heteroscedasticity-in-mean errors to isolate the effects of money growth volatility on output growth. The model allows us to study how monetary uncertainty affects economic growth across different macroeconomic regimes.

This paper proposes a financial accelerator framework to study the effects of heterogeneous and bounded rational expectations on macroeconomic dynamics. The paper examines the fluctuations effects departing from the rational expectations hypothesis in order to understand if there are significant implications on macroeconomic volatility and policy prescriptions. The findings suggest that macroeconomic stability and inflation dynamics depend on the chosen set of forecasting rules, as well as on the monetary policy adopted. The model shows that no monetary policy is able to quickly stabilize the system, as some fluctuations persist. Central banks face a trade-off between macro-volatility and speed of convergence to the steady state. This result offers some ground for fiscal policies aiming to prompt system stability. In addition, the analysis reveals a counterintuitive result confirming the “less-is-more” effect: increasing the decision-making and computational abilities of the agents may not lead the system to converge to the preferable steady state.

This paper revisits two classic results in standard overlapping generations models with a pay-as-you-go (PAYG) pension system. Firstly, a PAYG system crowds out private savings and reduces the overall capital stock. Secondly, in dynamically efficient economies, a PAYG system will reduce steady-state welfare. These classic results have been derived and exposed in models with no retirement decision. However, by allowing for endogenous retirement, and without taking recourse to any frictions, uncertainty, or myopia, it is shown that a PAYG system may be neutral and may even increase the capital–labor ratio. In particular, it is shown that the effect of the pension contribution rate on capital intensity depends on the elasticity of substitution between consumption and leisure. If the elasticity of substitution is between 0 and 1, an increase in the contribution rate will increase capital intensity. Moreover, it is shown that the result regarding welfare may also be overturned. An increase in the PAYG contribution rate may increase steady-state welfare.

We document that the credit spread on consumer unsecured debt exhibits a persistent, hump-shaped response to an increase in the charge-off rate. This stylized fact poses a significant challenge for a standard model of consumer default in which lenders have rational expectations and, therefore, the credit spread continuously adjusts to reflect the true default incentives of each borrower. In an effort to explain this feature of the data, we construct a model of consumer default with countercyclical income risk in which lenders learn about default risk over time by observing the history of repayment decisions, as is the case in practice. In addition to matching credit spread dynamics, allowing lenders to learn about default risk substantially improves the model’s ability to generate realistic business cycle fluctuations in the consumer unsecured credit market and match the cross-sectional distribution of unsecured debt and dispersion of interest rates observed in the data.

Fiscal discipline is commonly evaluated on the basis of the debt–gross domestic product ratio, which exhibits a stock variable measured relative to a flow variable. This way of monitoring debt solvency is arguably not consistent with transversality conditions obtained from optimizing macroeconomic frameworks. In this paper, we consider a wealth-based sustainability index of government debt policy derived from a baseline endogenous growth model. We calculate the index from 1999 onward for countries in which the after-growth real interest rate is positive, consistently with the theoretical setup. Results are radically different from common wisdom. We show that the fiscal position is sustainable for both Germany and Italy, and strongly unsustainable for both Japan and France. Policy implications of our findings are discussed.

We show that path dependency in economic development can emerge in a model where social distance affects capital accumulation. This effect works through the impact of social interactions on individuals’ incentives to invest. Social distance evolves intergenerationally, as the process of social interactions with people from different backgrounds generates familiarity and experiences that are bequeathed to the next generation, thus shaping their perceptions and opinions about “outsiders.” A key result is the possibility of alienation among people who belong to different groups, if social distance is above a threshold. The initial conditions with respect to social distance and the capital stock can both be critical in determining the economy’s long-term prospects.

We consider a model-averaged forecast-based estimate of the output gap to measure economic slack in 10 industrialized economies. Our measure takes changes in the long-run growth rate into account and, by addressing model uncertainty using equal weights on different forecast-based estimates, is robust to different assumptions about the underlying structure of the economy. For all 10 countries in the sample, we find that the estimated output gap has much larger negative movements during recessions than positive movements in expansions, suggesting business cycle asymmetry is an intrinsic characteristic of industrialized economies. Furthermore, the estimated output gap is always strongly negatively correlated with future output growth and unemployment and positively correlated with capacity utilization. It also implies a convex Phillips Curve in many cases. The model-averaged output gap is reliable in real time in the sense of being subject to relatively small revisions.

This paper studies asymmetric dynamics of real GDP growth by estimating linear and nonlinear quantile persistence over different parts of the conditional distribution for six major developed economies. Several novel quantile-based hypotheses are motivated in this paper and tested for the steepness asymmetry of real GDP growth that hypothesizes that contractions are steeper than expansions. The empirical results show that quantile persistence is generally high at far lower tails, thus requiring much longer half-lives to reverting negative deviations to the mean of real GDP growth and hence leading to gradual economic recoveries. By contrast, less persistence in far upper tails tends to generate sharp and short economic downturns that adjust positive deviations towards the mean of real GDP growth so as to cause abrupt economic recessions. In particular, this asymmetry in quantile persistence strongly supports the steepness asymmetry conjecture, robust to the presence of structural breaks and potential nonlinearities in real GDP growth.

Country risk premia can substantially affect macroeconomic dynamics. We concentrate on one of their most important determinants—a country’s net foreign asset (NFA) position and—in contrast to the existing research—investigate its nonlinear link to risk premia. The importance of this particular nonlinearity is two-fold. First, it allows to identify the NFA level above which the elasticity becomes much (possibly dangerously) higher. Second, such a nonlinear relationship is a standard ingredient of dynamic stochastic general equilibrium (DSGE) models, but its proper calibration/estimation is missing. Our estimation shows that indeed the link is highly nonlinear and helps to identify the NFA position where the nonlinearity kicks in at approximately −70% to −75% of GDP. We also provide a proper calibration of the risk premium—NFA relationship which can be used in DSGE models and demonstrate that its slope matters significantly for economic dynamics in such a model.

Even for the standard skill-biased technological change (SBTC) literature, the generic rise in the skill premium in the face of the relative increase in skilled workers since the 1980s seems a little puzzling. We develop a general equilibrium SBTC growth model that allows the dominance of either the price channel or the market-size channel mechanism through which network spillovers affect the technological-knowledge bias and, thus, the paths of intra-country wage inequality. The proposed mechanisms can accommodate facts not explained by the earlier literature.

This paper establishes some stylized facts of the long-run relationship between growth and labor shares using historical data for the USA (1898–2010), the United Kingdom (1856–2010), and France (1896–2010). Performing individual country time–frequency analysis, we demonstrate the existence of long-term cycles in labor share of 30–50 years explaining a major part of the variance in the data. Further, the impact of labor share on growth changes sign with the frequency considered from negative at high frequencies to positive at low frequencies. Finally, the positive coefficient associated with the labor share at low frequencies increases over time.

We build a two-country New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties and welfare implications of different fiscal policy scenarios. Our main findings are that a government spending rule which targets the net exports gap rather than the domestic output gap produces more stable dynamics and that consolidating government budget constraints across countries with symmetric tax rate movements provides greater stabilization. A key role is played by the trade elasticity which determines the impact of the terms of trade on net exports. In fact, when goods are complements, the stabilization properties of coordinating fiscal policies are no longer supported. These findings point out to possible policy prescriptions for the Euro Area: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of Fiscal Union or both.

In a canonical monetary policy model in which the central bank learns about underlying fundamentals by estimating the parameters of a Phillips curve, we show that the bank’s loss function is asymmetric such that parameter overestimates may be more or less costly than underestimates, creating a precautionary motive in estimation. This motive suggests the use of a more efficient variance-adjusted least-squares estimator for learning about fundamentals. Informed by this “precautionary learning” the central bank sets low inflation targets, and the economy can settle near a Ramsey equilibrium.

This paper evaluates the effectiveness of short-time work (STW) extensions—e.g., relaxing eligibility criteria or implementing new schemes—in OECD countries during the Great Recession. First, we find that the dampening effect of STW on the unemployment rate diminishes at higher take-up rates. Second, only countries with pre-existing STW schemes were able to fully exploit the benefits of STW. Third, the effects of STW were strongest when GDP growth was deeply negative at the beginning of the recession. In summary, our results indicate that STW is most effective when used as a fast-responding automatic stabilizer.

In this paper, we apply two novel methodological approaches, Tucker three-way principal component analysis and locally weighted principal component analysis, to construct financial conditions index for Eurozone countries. The aim is to point out how real and financial macroeconomic variables affect the credit channel and which variables are more relevant in each occasion, highlighting structural differences within the Eurozone. The results suggest that the Eurozone is involved into a low easing pattern, which is difficult to reverse and affects considerably the financial conditions, surrounding the hypothesis that this pattern has been worsened by structural differences between the European Monetary Union (EMU) countries. Empirical evidence shows that European Central Bank (ECB) policy has managed to cool financial tensions and has made financial conditions homogeneous, but it has not been able to restore them at a precrisis level.

Most emerging economies have been affected to some degree by the Fed’s quantitative easing (QE) policies. This paper assesses the impact of these measures in terms of key macroeconomic variables for four inflation-targeting small open economies in Latin America. We identify a QE policy shock in a structural vector autoregressive with block exogeneity and a mixture of zero and sign restrictions. Overall, we find that these QE policies have significant effects on financial variables such as the exchange rate, and these effects are larger with respect to those in output and prices. Furthermore, the effects vary across countries, and these are more significant in Chile and Mexico than in Peru and Colombia.

The convergence hypothesis, which is developed in the context of growth economics, asserts that the income differences across countries are transitory, and developing countries will eventually attain the level of income of developed ones. On the other hand, convergence clubs hypothesis claim that the convergence can only be realized across groups of countries that share some common characteristics. In this study, we propose a new method to find convergence clubs that combines a pairwise method of testing convergence with maximum clique and maximal clique algorithms. Unlike many of those already developed in the literature, this new method aims to find convergence clubs endogenously without depending on a-priori classifications. In a Monte Carlo simulation study, the success of the method in finding convergence clubs is compared with a similar algorithm. Simulation results indicated that the proposed method perform better than the compared algorithm in most cases. In addition to the Monte Carlo, a new empirical evidence on the existence of convergence clubs is presented in the context of real data applications.