In dynamic general equilibrium models, private output is increased by government spending for goods and services, but decreased by government spending for employment. This paper presents the first evidence for the latter effect by studying the pre-WWII British wartime economy. Britain participated in numerous wars, increasing military employment greatly. British tax-smoothing policy and rare wartime governmental interventions reduce the difficulty of studying the effects of wartime government spending. This paper finds wartime decreases in industrial production, which can be explained by wartime government spending for military employment.

This paper develops a model to assess the quantitative effects of entry costs and financial frictions on cross-country income and total factor productivity (TFP) differences, with a primary focus on the interaction between entry costs and financial frictions. The model is calibrated to match the establishment-level statistics for the U.S. economy, assuming a perfect financial market. The simulations based on the calibrated model show that entry costs and financial frictions together account for 55% and 46% of the cross-country variation in output and TFP in the data. Moreover, a substantial portion of the variation is accounted for by the interaction between entry costs and financial frictions. The main mechanism is that financial frictions amplify the effect of entry costs.

Recent medical research shows that health is highly influential on learning and the ability to think laterally; however, past economic studies have failed to empirically examine the influence of health on learning, schooling, and ideas production, the main drivers of growth in endogenous growth models. This paper constructs a measure of health-adjusted educational attainment among the working age population based on their health status during the time they obtained their education. Using annual data for 21 OECD countries over the past two centuries, it is shown that health has been highly influential on the quantity and quality of schooling, innovation, and growth.

We suggest that voters' lack of recognition of complex economic links may give rise to economic policies that eventually lead to a crisis. We consider a two-sector economy in which a majoritarian political process determines governmental regulation in one sector: a minimum nominal wage. If voters recognize general equilibrium feedbacks, workers favoring market-clearing wages will form a majority across sectors. If voters take into account only direct effects in the regulated sector, not only workers that enjoy minimum wages but also workers in the other sector are willing to vote for wage rises in each period. The reason is that they expect higher real wages for themselves, too. The political process leads to constantly rising unemployment and tax rates. The resulting crisis may trigger new insights into economic relationships on the part of the voters and may reverse bad times.

Challenges raised by aging (increasing longevity) have prompted policy debates featuring policy proposals justified by reference to some notion of intergenerational equity. However, very different policies ranging from presavings to indexation of retirement ages have been justified in this way. We develop an overlapping-generations model in continuous time that encompasses different generations with different mortality rates and thus longevity. Allowing for trend increases in both longevity and productivity, we address the normative issue of intergenerational equity under a utilitarian criterion when future generations are better off in terms of both material and nonmaterial well-being. Increases in productivity and longevity are shown to have very different implications for intergenerational distribution. Further, the socially optimal retirement age, dependency ratio, and intergenerational burden sharing in the case of a trend increase in longevity are shown to depend on how individuals' utility for time/leisure is affected by age and longevity.

We propose a simple incomplete-markets small-open-economy model that is amenable to analytical dissection of its policy-relevant mechanisms. In contrast to its complete-markets limit, the equilibrium real exchange rate is irreducible from the incomplete-markets equilibrium. Market incompleteness exacerbates the domestic-inflation and output-gap monetary-policy trade-off in two ways: its steepness and its resulting endogenous cost-push to the trade-off. The latter depends on an equilibrium combination of structural shocks and on agents' beliefs of future events. Thus, in comparison to its complete-markets and closed-economy limits, standard Taylor-type rules are less capable of inducing determinate rational expectations equilibrium in our environment. Despite the larger policy trade-off under incomplete markets, simple policies that also respond to exchange-rate growth are able to manage expectations that drive the endogenous cost-push term. However, policies that respond directly to expectations may turn out to exacerbate the cost-push trade-off further, and thus, to be more likely to fuel self-fulfilling multiple or unstable equilibria.

This study examines the influence of foreign direct investment (FDI), overseas development aid (ODA), and remittances on the enrollment of girls and boys in 103 countries over the years 1970–2011. The results suggest that remittances have a contemporaneous robust significant influence on enrollment, with the positive effect being slightly higher for girls than for boys. FDI and ODA have an influence on the enrollment of girls and boys only after a significant time lag. The results also suggest that the impact of remittances on enrollment is increased through income and a well-developed financial sector; FDI through better institutions and a well-developed financial sector; and ODA through better government policy.

We model agents' endogenous updating of information sets over time under changing macroeconomic conditions. Building on sticky information models, the degree of inattentiveness is endogenized by allowing agents to choose between a costly full-information predictor and a costless sticky-information predictor. This is modeled as a choice between discrete alternatives under rational inattention. Recursive simulation shows that the dynamic equilibrium paths of aggregate variables are highly persistent and match the moments of U.S. data better than a model with fixed sticky information or with sticky prices, especially with regard to higher moments and the degree of persistence. Predictors are chosen in line with the predictions from rational inattention models, as the aggregate degree of attentiveness increases with rising variance of the forecast variable. Moreover, the model can generate hump-shaped impulse responses of inflation to a monetary policy shock if the degree of inattentiveness is sufficiently high.

In a dynamic stochastic general equilibrium model with monopolistic competition and flexible prices, we assume that producers must estimate their demand elasticities, which leads to heterogeneous expectations because of idiosyncratic shocks. I argue that these expectations shape firms' perceptions of relative prices, market shares, and individual demand elasticities, thereby distorting their price-setting and production. This model concludes that discarding the conventional assumption of known and exogenous demand elasticity generates business cycle fluctuations indistinguishable from those produced by traditional productivity shocks.