Understanding the causes of the Industrial Revolution, namely the process of transition from a Malthusian equilibrium to modern economic growth, has been the subject of passionate debate. This paper contributes to insights into the process of industrialization and the demographic transition that followed. We present a model that proposes a mechanism behind the claim that landed elites had strong incentives to block education reforms. By applying the theory of interest groups to landownership, landowners could delay education. However, they could not prevent its introduction indefinitely since gains for the landed elites derived from education would at some moment surpass the costs associated with them. We also sustain that improvements in agricultural productivity prior to the Industrial Revolution may have induced a positive impact on the landowners’ decision to educate the population, which led to an earlier introduction of education reforms. The conclusions fit the patterns of the late boom of industrialization and demographic transition and help explain why some countries (e.g., Britain and The Netherlands) had accelerated education reforms and a faster process of industrialization than most continental countries. A theoretical model is presented, and numerical simulations are exhibited to illustrate our claims.

This paper focuses on the question of what monetary and fiscal policy can do and should do in a “fiscal dominance” world. I first highlight that both “amplification” and “fiscal cushion” effects are always at work jointly in determining the evolution of inflation. I find the threshold of maturity of government bonds beyond which more aggressive monetary policy dampens inflation volatility is three quarters. In addition, I conduct welfare analysis to quantitatively evaluate the costs and benefits brought by long-term debt. My results show that the threshold of government debt maturity above which an aggressive monetary policy improves welfare is eight quarters. More importantly, I characterize optimal monetary and fiscal policy using simple and implementable rules. My results indicate an optimal monetary and fiscal combination calls for an aggressive response in both rules. Finally, I find that optimized simple monetary-fiscal rule is significantly welfare inferior to the Ramsey optimal policy.

We analyze the simplest possible model of endogenous growth to account for the role of financial development. In our setting, financial development affects productivity and determines the amount of resources subtracted to capital investment. We show that under very general assumptions, the relation between economic growth and financial depth is nonmonotonic, and eventually bell-shaped. We empirically assess our results in a framework that allows to distinguish between long-run and short-run effects. We establish a cointegrating relation and derive the long-run elasticities of per capita gross domestic product (GDP) with respect to employment, the physical capital stock, and financial depth–relying on linear as well as nonlinear models for the finance-growth nexus. We employ the results of the first step estimation to specify an error–correction model and find that there is strong evidence for a nonlinear relationship between financial depth and per capita GDP, consistently with what was predicted by our theoretical model.

We analyze in some detail the full predeposit game in a simple, tractable, yet very rich, banking environment. How does run-risk affect the optimal deposit contract? If there is a run equilibrium in the postdeposit game, then the optimal contract in the predeposit game tolerates small-probability runs. However, this does not mean that small changes in run-risk are ignored. In some cases, the optimal contract becomes—as one would expect—strictly more conservative as the run-probability increases (until it switches to the best run-proof contract), and the equilibrium allocation is not a mere randomization over the equilibrium allocations from the postdeposit game. In other cases, the allocation is a mere randomization over the equilibria from the postdeposit game. In the first cases (the more intuitive cases), the incentive constraint does not bind. In the second cases, the incentive constraint does bind.

Benhabib et al. [(2001) Journal of Economic Theory 96, 40–69] argue that there exists a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, positive shocks to households’ preferences and wage markup, and a negative shock to monetary policy do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that sunspot shocks have a limited effect on Japan’s output fluctuations and rather contribute to stabilizing the economy after the global financial crisis.

Unlike most existing studies on the endogenous institutions, literature on theoretical growth has traditionally considered institutions as exogenous. In this paper, a learn-by-doing-based growth model is adopted and integrated with endogenous institutions to study how economic agents’ incentives engage in institutional improvements or exploit institutional imperfections. From maximization of identical agent utility, the economic growth model includes capital, labor, technology, and institutions. The study is to analyze the effect of institutions on the stability of equilibrium, balanced economic growth path, and convergence rate in the process of economic growth. It is concluded that, firstly, improving institutions is a decisive factor for China’s high economic growth rate for the past years; secondly, improving institutions can increase the capital stock per unit of effective labor in steady state; thirdly, imperfect institutions can explain income difference among countries; and finally, technology plays a key role only under the conditions adapting to institutions.

A higher labor tax rate increases the equilibrium real interest rate and reduces the equilibrium wage in a heterogeneous-agent model with endogenous savings and indivisible labor supply decisions. I show that these general equilibrium (GE) adjustments, in particular of the real interest rate, reinforce the negative employment impact of higher labor taxes. However, the representative-agent version of the model, which generates similar aggregate employment responses to labor tax changes, implies that GE feedback is neutral. The cross-country panel data reveal that the negative association between labor tax rates and the extensive margin labor supply is significantly and robustly weaker in small open economies where the interest rate is less tightly linked to domestic circumstances. This empirical evidence supports the transmission mechanism of labor tax changes for employment in the heterogeneous-agent model.

Why is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank’s interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound.

How does patent policy affect innovation when patent licensing is crucial for firms? To address this question, the present study incorporates voluntary patent licensing between an innovator and followers, as discussed in the literature of industrial organization, into a dynamic general equilibrium model. Unlike previous studies, both the licensing fee and the number of licensees are endogenously determined by the innovator’s maximization and the free-entry condition. Using this model, we show that strong patent protection does not always enhance innovation, economic growth, and welfare. Furthermore, the extended analysis provides the policy implication that the effect of patent policy depends on how difficult further innovation is without patent licensing of the current leading technology.

In this paper we estimate a New-Keynesian dynamic stochastic general equilibrium (NK DSGE) model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko develop a DSGE model, in which firms follow four different types of price setting schemes: sticky prices, sticky information, rule-of-thumb, or flexible prices. We enrich Coibion and Gorodnichenko framework by incorporating heterogeneity in nominal wage setting behavior among households. We solve this DSGE model and estimate it using Bayesian techniques for the US economy from 1955 to 2008. The estimation results show the relevance of heterogeneity in wage setting among households. More importantly, we identify qualitative and quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and wage inflation, which a standard NK model with only Calvo-type wage rigidity fails to achieve. We also show that modeling wage-rigidity heterogeneity—as opposed to standard Calvo wages—amplifies the macroeconomic output fluctuations resulting from a technology shock while it mitigates the output fluctuations following a monetary tightening.

This study estimates the response of macroeconomic variables to stock market fluctuations in Japan and the United States. It emphasizes the economy's reaction to stock market bubbles and crashes. To do this, I propose a new way to identify bubbles and crashes by testing price-to-fundamental ratios using the newly developed trend-filtering approach. Regardless of the measures used, both countries' macroeconomy tends to respond positively to the positive shock of stock price. Asymmetric effects of the stock market are observed. Japan's macroeconomic variables, especially investment and industrial production, are more sensitive to market crashes, while those of the United States are more sensitive to stock bubbles. Finally, I provide evidence that market sentiment can affect the economy either directly or indirectly through the stock market.

In this paper, we adopt a Ramsey optimal approach to identify the combination of income taxes, public expenditure, and inflation designed to achieve a fiscal consolidation. In contrast with empirical contributions that emphasize the benefits of expenditure-based consolidations, the optimal policy calls for increases in taxes and inflation. Strong monetary accommodation is quite beneficial relative to a situation where the Central Bank is only concerned with inflation stability and the inflation target is defined as a ceiling, as in the Eurozone.

We highlight a state variable misspecification with one accepted method to implement stochastic volatility (SV) in DSGE models when transforming the nonlinear state-innovation dynamics to its linear representation. Although the technique is more efficient numerically, we show that it is not exact but only serves as an approximation when the magnitude of SV is small. Not accounting for this approximation error may induce substantial spurious volatility in macroeconomic series, which could lead to incorrect inference about the performance of the model. We also show that, by simply lagging and expanding the state vector, one can obtain the correct state-space specification. Finally, we validate our augmented implementation approach against an established alternative through numerical simulation.

When the financial positions of pension funds worsen, regulations prescribe that pension funds reduce the gap between their assets (invested contributions) and their liabilities (accumulated pension promises). This paper quantifies the business cycle effects and distributional implications of various types of restoration policies. We extend a canonical New-Keynesian model with a tractable demographic structure and, as a novelty, a flexible pension fund framework. Fund participants accumulate inflation-indexed or non-indexed benefits and funding adequacy is restored by revaluing previously accumulated pension wealth (Defined Contribution (DC)) or changing the pension fund contribution rate on labor income (Defined Benefit (DB)). Economies with DC pension funds respond similarly to adverse capital quality shocks as economies without pension funds. DB pension funds, however, distort labor supply decisions and exacerbate economic fluctuations. While DB pension funds achieve intergenerational risk-sharing, welfare analyses indicate that the negative effects of the induced distortions are sizeable.

This paper examines how strengthening patent protection affects welfare in a nonscale quality-ladder model, which was developed by Segerstrom [American Economic Review 88, 1290–1310] and generalized by Li [American Economic Review 93, 1009–1017]. In the Segerstrom–Li model, patent protection creates no distortion in static allocation among the production sectors. In order to examine the welfare effects of strengthening patent protection adequately, we incorporate a competitive outside good into the Segerstrom–Li model. In the general model, we derive the welfare-maximizing degree of patent protection analytically by utilizing a linear approximation of the transition path. The result shows that the welfare-maximizing degree of patent protection is weaker when the market share of the outside good is positive than when it is zero. In other words, disregarding the static distortion that patent protection creates leads to excessive patent protection.

We develop a classical macroeconomic model to examine the growth and distributional consequences of education. Contrary to the received wisdom, we show that human capital accumulation is not necessarily growth-inducing and inequality-reducing. Expansive education policies may foster growth and reduce earning inequalities between workers, but only by transferring income from workers to capitalists. Further, the overall effect of an increase in education depends on the actual characteristics of the educational system and on the nature of labor market relations. Although the primary aim of the paper is theoretical, we argue that the model identifies some causal mechanisms that can contribute to shed light on recent stylized facts on growth, distribution, and education for the USA.

This paper shows empirical evidence and theory consistent with the US government using debt optimally to adjust the federal budget to news about long-term growth. First, using historical forecasts from the Congressional Budget Office (CBO) since 1984, I find that government purchases and deficits are positively correlated with expectations about long-term productivity, real gross domestic product, and tax revenue growth, whereas tax receipts are negatively correlated. A structural vector autoregression estimated with US quarterly data in 1955–2015 identifies permanent and transitory productivity shocks and points to “trend” shocks as the source of these correlations. Second, I present an open economy real business-cycle model with stochastic productivity trend and optimal public purchases and taxes. Calibrating the model to the US economy, the Ramsey planners' allocation yields moments aligned with those observed in the data.

A monetary production model of financial firms is employed to investigate supply-side inside-money aggregation, augmented to include credit card transaction services. Inside money is a supply-side concept. Financial firms are conceived to produce monetary and credit card transaction services as outputs through financial intermediation. While credit cards provide transactions services, credit cards have never been included into measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on microeconomic aggregation theory, not accounting. We derive theory needed to measure the supply of the joint services of credit cards and inside money, needed to estimate the output supply function and to compute value added. The data needed for empirical implementation of our theory are available online from the Center for Financial Stability in New York City.

We propose a model in which money performs an essential role in the process of exchange, despite the presence of a multilateral clearing house that collects resources from and distributes them to anonymous agents. Money improves the functioning of the clearing house, simultaneously keeping the incentives to contribute and guaranteeing the fine-tuning of allocations.

We investigate how key monetary policy instruments and financial regulation affect the banking firm. We take the user-cost approach to the construction of prices for financial services and use quarterly data on the U.S. commercial banking sector, over the period from 1992 to 2016, obtained from the Federal Deposit Insurance Corporation. We use the symmetric generalized Barnett variable profit function to derive demands for and supplies of monetary and nonmonetary goods and provide evidence consistent with neoclassical microeconomic theory. We find that the compensated price elasticities of banking technology are small in magnitude. Yet a hypothetical policy experiment shows that even small changes in the holding costs of financial goods can result in significant changes in user costs and the quantities demanded and supplied.