We test the long-run neutrality of money proposition for the United States paying attention to the integration and cointegration properties of the variables. We use quarterly data (over the period from 1967:1 to 2014:1) and the new Center for Financial Stability Divisia monetary aggregates. We make a comparison among the narrower monetary aggregates, M1, M2M, MZM, M2, and ALL, and the broad monetary aggregates, M4+, M4-, and M3, and show that there is no statistically significant evidence against long-run monetary neutrality, consistent with both monetarist and Keynesian macroeconomic theory.

Inspired by recent literature that approaches the dissemination of knowledge from a social interaction perspective, the article explores the dynamics of a prototypical optimal control growth problem structured upon the following features: (i) the model economy is populated by a large number of rational agents; (ii) each agent allocates time, optimally, among production and social interaction; (iii) knowledge spreads through the contact with others; (iv) the propagation of ideas follows two steps—in a first stage, interaction promotes the acquisition of theoretical knowledge and, in a second stage, it works as a catalyst for the successful implementation of the theory to practical productive uses; (v) interaction contributes not only to the diffusion of a given state of technical knowledge—it fosters, as well, the growth of ideas and techniques. The model allows for the endogenous determination of optimal trajectories concerning the allocation of time and the intensity of interaction; moreover, a long-term endogenous growth rate for the economy is derived, with optimal growth being essentially driven by the state of techniques and by the forces that shape the human interaction process.

I develop an assignment model to quantify, in a unified framework, the causal effects of supply and demand forces on the evolution of the college wage premium in the US economy. Specifically, I quantify the relative contributions of four different forces: (i) a within-sector non-neutral technological change, (ii) the creation of new high-skill services/sectors, (iii) polarizing product demand shifts, and (iv) shifts in the relative supply of skilled labor. The model considers endogenous human capital accumulation. I find that positive supply shifts completely explain the fall of the skill premium during the period 1970–1980. Demand forces play a major role in the post-1980 period, when the skill premium rises. Among the demand forces, the results show an increasing contribution of polarizing product demand shifts over the decades. On the other hand, the effect of the within-sector non-neutral technological change is more important in the earlier decades of the post-1980 period.

Real-time supervision of shifts in inflation expectations is an important issue for monetary policy makers, especially in the presence of economic uncertainty. In this paper, we elaborate tools for on-line monitoring of such shifts by extracting valuable information from noisy daily financial market data. For this purpose, first, we suggest a new risk adjustment for observable proxies of medium and long run inflation expectations assuming that the latter are well-anchored. Second, we propose an econometric methodology for sequential monitoring of level changes in the associated proxies at daily frequency. Our empirical evidence shows that the on-line surveillance of risk adjusted US forward breakeven inflation rates by means of the cumulative sum (CUSUM) detector appears to be helpful to extract timely signals on potential shifts. In particular, the obtained signals indicate important turning points in market-based measures of inflation expectations, which also tend to materialize in lower frequency experts' surveys.

We consider a firm with assets-in-place and a growth option. There is a funding gap for the expansion investment, which is covered by entering into an equity-for-guarantee swap or fee-for-guarantee swap. We explicitly derive all contingent claim prices with the pricing and timing of the growth option taking business cycle and debt maturity into account. For short-term loan, we produce an explanation why Chinese government suggests that guarantee fee rate should be approximately the fraction 50% of the interest rate of bank loans with the same maturity, but for long-term debt, we show this fraction is too small.

Can increasing market power cause a decrease in the aggregate savings? We answer this question by using a heterogeneous agents model that features both idiosyncratic labor and capital income risk. Under complete markets, the saving rate does not depend on the degree of market power, but when markets are incomplete, higher markups substantially reduce the aggregate saving rate. This is due to endogenous changes in the distribution of income and wealth. A calibration of the model using the observed changes in market power in the United States since the 1970s closely matches the decline in the US saving rate. Furthermore, when market power increases, the model generates distributional changes that are consistent with the data.

This paper analyzes optimal capital and labor income taxation for households differentiated by labor skill, income, and wealth, under a balanced government budget, over the business cycle. A model incorporating capital–skill complementarity in production and differential access to labor and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We find that optimal taxes for middle-income households are more volatile than the remaining taxes. Moreover, the government re-allocates the total tax burden in bad times so that the share of total tax revenue paid by middle-income households rises. This share also rises for low-income households but by significantly less, whereas the tax share for skilled households falls.

By considering a simple endogenous growth model, we propose a new theoretical channel through which the presence of asset bubbles can promote economic growth. In the model economy, long-lived value-maximizing firms continuously improve the quality of their specific products through in-house research and development (R&D), while simultaneously new firms enter into the market. The key feature is endogenous market structure: The number of firms is endogenously determined, which leads to variation in firm size measured in terms of the scale of production at the level of an individual firm. The presence of asset bubbles unambiguously gives rise to larger firms. This allows in-house R&D expenditure to be spread over the greater numbers of goods that the firms produce, which can increase incentives to undertake in-house R&D.

This study examines the effects of borrowing for public services that increase households' utility (i.e., utility-generating government services) in an AK endogenous growth model. We assume that the government has a target debt ratio. The European Union and the United Kingdom adopt such debt policy rules. We find that application of a debt policy rule into utility-generating government spending causes indeterminacy of the transition path. We point out that the level of the target debt ratio, the tax rate, and the household utility parameters are important determinants of indeterminacy when considering utility-generating government services.

We adopt mechanism design to study the effects of inflation on output, trade, and capital accumulation. Our theory captures multiple channels for individuals to respond to inflation: search intensity, market participation, and substitution between money and a higher return asset. We characterize constrained efficient allocations and show inflation has nonmonotonic effects on the frequency of trades (extensive margin) and the total quantity traded (intensive margin). The model features monetary superneutrality for low inflation rates, nonlinearities in trading frequencies, and substitution of money for capital for higher inflation rates. While these effects are difficult to capture in previous models, we show how they are intimately related by all being features of an optimal trading mechanism.

The financial woes that initiated the financial crisis of 2007/08 have, at least in part, been traced to excessive bank risk-taking. What induced this behavior? One explanation is the persistently low short-term interest rates during the mid-2000s. We exploit an extensive panel of matched Austrian banks and firms during 2000–2008 to investigate the effects of the European Central Bank's (ECB) policy of persistently low interest rates during 2003q3–2005q3. Our analysis suggests that this policy likely caused Austrian banks to hold risker loan portfolios than they would have in its absence.

An estimated Markov-switching DSGE modeling framework that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent credibility of Hong Kong's linked exchange rate system. The baseline model distinguishes two regimes with respect to the time-series properties of the risk premium. Regime-dependent impulse responses to macroeconomic shocks reveal substantial differences in spreads. To test the sensitivity of the results, a number of robustness checks are performed. The findings contribute to efforts at modeling exchange rate regime credibility as a nonlinear process with two distinct regimes.

This paper provides conditions under which an algorithm for the computation and simulation of Bewley–Huggett–Aiyagari models, based on state-space discretization, will converge to all true solutions. These conditions are shown to be satisfied in two standard examples: the Aiyagari model and its extension to endogenous labor. Bewley–Huggett– Aiyagari models are general equilibrium models with incomplete markets and idiosyncratic, but no aggregate, shocks. The algorithm itself is based on discretization, while the theory importantly allows for making simulations using the approximate computational solution of the value function problem rather than the true model solution. The numerical results of applying the algorithm to both models are provided and investigated in terms of replication, revealing that the Aiyagari model overestimates the degree of precautionary savings in the high-risk-and-high-risk-aversion case. The results also show that both models almost certainly have a unique general equilibrium. Theoretically, the existence of equilibria was known, but uniqueness remained an open question.

In models with a representative infinitely lived household, tax smoothing implies that the steady state of government debt should follow a random walk. This is unlikely to be the case in overlapping generations (OLG) economies, where the equilibrium interest rate may differ from the policy maker's rate of time preference. It may therefore be optimal to reduce debt today to reduce distortionary taxation in the future. In addition, the level of the capital stock in these economies is likely to be suboptimally low, and reducing government debt will crowd in additional capital. Using a version of the Blanchard-Yaari model of perpetual youth, with both public and private capital, we show that it is optimal in steady state for the government to hold assets. However, we also show how and why this level of government assets can fall short of both the level of debt that achieves the optimal capital stock and the level that eliminates income taxes. Finally, we compute the optimal adjustment path to this steady state.

This study presents a method for constructing a sequence of approximate solutions of increasing accuracy to general equilibrium models on nonlocal domains. The method is based on a technique originated from dynamical systems theory. The approximate solutions are constructed employing the Contraction Mapping Theorem and the fact that the solutions to general equilibrium models converge to a steady state. Under certain nonlocal conditions, the convergence of the approximate solutions to the true solution is proved. We also show that the proposed approach can be treated as a rigorous proof of convergence for the extended path algorithm in a class of nonlinear rational expectation models.