In a model where banks face a capital sufficiency requirement, we demonstrate that news about a fall in the expected return on a portfolio of international long bonds held by a bank leads to an immediate and persistent fall in economic activity. Even if the news never materializes, economic activity falls below steady state for several periods, followed by a recovery. The portfolio adjustment induced by the capital sufficiency requirements leads to a rise in loan rates and tighter credit conditions, which trigger the fall in activity. We contribute to the news-shock literature by showing that imperfect signals about future financial returns can create business cycles without relying on the usual suspects—shocks to technology, preferences, or fiscal policy—and to the emerging economy business cycle literature in that disturbances in world financial markets can cause domestic business cycles without shocks to the world interest rate or to country spreads.

This paper explores the growth effects of both consumption- and wealth-induced social comparisons in a unified small open endogenous growth model. We analytically show that in an open economy not only do these two distinct status-seeking motives have very different growth effects, but these growth effects are also quite different from the conventional wisdom based on a closed economy. Status-seeking behavior need not favor economic growth. The asset portfolios of households and the imperfection of the international asset market both play an important role and jointly govern the growth effects of social status seeking. We also perform a quantitative experiment, showing that our analytical findings are robust and empirically plausible. Our analysis provides novel implications for social comparisons and new insights into the literature.

We apply a structural dynamic factor model to a large quarterly data set covering 38 countries between 2002 and 2011 to analyze China's role in global inflation dynamics. We identify Chinese supply and demand shocks and examine their contributions to global price dynamics and the transmission mechanism. Our main findings are as follows: (i) Chinese supply and demand shocks affect prices in other countries significantly. Demand shocks matter slightly more than supply shocks. Producer prices tend to be more strongly affected than consumer prices by Chinese shocks. The overall share of international inflation explained by Chinese shocks is notable (about 6 percent on the average over all countries but not more than 13 percent in each region). (ii) Direct channels (via import and export prices) and indirect channels (via greater exposure to foreign competition and commodity prices) both matter. (iii) Differences in trade and in commodity exposure help explain cross-country differences in price responses.

This paper finds strong evidence of a positive relationship between currency risk premia and real exchange rate swings, significant at the 1% if not 0.1% level, for three US$ exchange rate samples. The risk premia are measured using survey data on traders' exchange rate forecasts. This circumvents the need for an auxiliary hypothesis of rationality and enables more direct focus on risk behavior. The analysis is conducted using the I(2) cointegrated VAR, which allows for time-varying trends in the variables. Evidence of persistent changes is found for interest rates, prices, and nominal and real exchange rates. Interest rate shocks appear to drive the system, whereas expectations are correcting only in the longer run.

We examine the quantitative significance of financial frictions that reduce firms' access to credit in explaining asymmetric business cycles characterized by disproportionately severe downturns. Using rate spread data to calibrate the severity of these frictions, we successfully match several key features of U.S. data. Specifically, although output and consumption are relatively symmetric (with output being slightly more asymmetric), investment and hours worked display significant asymmetry over the business cycle. We also demonstrate that our financial frictions are capable of significantly amplifying adverse shocks during severe downturns. Although the data suggest that these frictions are only active occasionally, our results indicate that they are still a significant source of macroeconomic volatility over the business cycle.

Macroeconomic models of the economy with rigid wage structures tend to predict unrealistically volatile labor hours and countercyclical productivity. This study extends the Cho–Cooley model by incorporating labor market frictions and efficient bargaining as an alternative contracting scheme in which contracts are forward-looking and specify labor hours and wage rates. By accounting for search frictions and realistic contractual schemes, the extended model overcomes two counterfactual predictions: (1) excess volatility of employment and output and (2) countercyclical productivity. However, the extended model fails to produce the Beveridge curve.

This paper studies cycles of nationalization and privatization in resource-rich economies. It starts with a synthesis of available evidence on the drivers and consequences of privatization and nationalization. Then it develops a dynamic model of the choice between private and national regimes for the ownership of natural resources. The choice is driven by a basic equality-efficiency trade-off: national ownership results in more redistribution of income and more equality but undermines incentives for effort. We discuss how the resolution of the trade-off depends on external variables—such as the commodity price—and domestic ones—such as the tax system. The model thus identifies the determinants of the observed cycles of privatization and nationalization and is consistent with key stylized facts.

We use laboratory experiments with human subjects to test the relevance of different inflation-targeting regimes. In particular and within the standard New Keynesian model, we evaluate to what extent communication of the inflation target is relevant to the success of inflation targeting. We find that if the central bank cares only about inflation stabilization, announcing the inflation target does not make a difference in terms of macroeconomic performance compared with a standard active monetary policy. However, if the central bank also cares about the stabilization of economic activity, communicating the target helps to reduce the volatility of inflation, interest rate, and output gap, although their average levels are not affected. This finding is consistent with the theoretical literature and provides a rationale for the adoption of a flexible inflation-targeting regime.

I examine the optimal inflation target in a dynamic stochastic New Keynesian model featuring an occasionally binding zero lower bound on nominal interest rate (ZLB). To this end, I first calibrate the shock needed to generate the risk of hitting the ZLB that matches the U.S. data, based on a fully nonlinear method. I then resolve the model with different inflation targets and find that the optimal target is 3.4%. In addition, the optimal inflation target is a nonlinear function of the risk of hitting the ZLB and inflation indexation. It is always greater than 2% if the risk is greater than 2.5% or if the inflation indexation is higher than 0.5. Finally, the linear–quadratic approach overestimates the true optimal inflation target. In particular, based on the benchmark calibration, it generates an optimal target of 5.5%, compared with 3.4% found by the fully nonlinear method.

We document the strong evidence of time variation in the volatility of Euro Area business cycles since 1970. Then we provide the quantitative sources of these changes using a medium-scale DSGE model allowing time variation in structural disturbance variances. We show that (1) the size of different types of shock oscillates, in a synchronized manner, between two regimes over time, with the high-volatility regime prevailing predominantly in the 1970s, sporadically in the 1980s and 1990s, and during the Great Recession; (2) their relative importance remains, however, unchanged across regimes, where neutral technology shocks and marginal efficiency of investment shocks are the dominant sources of business cycle fluctuations; and 3) these investment shocks, which affect the transformation of savings into productive capital, can be interpreted as an indicator of credit conditions.

We assess the macroeconomic effects of a sovereign restructuring in a small economy belonging to a monetary union by simulating a dynamic general equilibrium model. We compare the macroeconomic outcome of restructuring with scenarios where the debt reduction is achieved via fiscal adjustment. In line with the empirical evidence, we assume that the sovereign debt is held by domestic agents and by agents in the rest of the monetary union; after the restructuring the sovereign borrowing rate increases and the increase is fully transmitted to the domestic households' borrowing rate; and the government cannot discriminate between domestic and foreign agents when restructuring. We also assume that the small economy does not exit from the monetary union after the restructuring and that the restructuring does not have systemic effects on the rest of the union. Our results suggest that the restructuring can imply persistent and large reduction of output, especially if the share of public debt held domestically is large, the private foreign debt is high, and the spread paid by the government and the households does increases.

We formulate an overlapping-generations model with household heterogeneity and productive and nonproductive government programs to study the macroeconomic and intergenerational welfare effects of risk premium shocks and government debt reductions. We demonstrate that in a small open economy with a high level of debt, a small increase in the risk premium of the interest rate leads to a substantial contraction in output and negative welfare effects. We then quantify the effects of reducing the debt-to-gross-domestic-product ratio using a wide range of fiscal austerity measures. Our results indicate trade-offs between short-run contractions and long-run expansions in aggregate output. In the short run, spending-based austerity reforms are worse than tax-based reforms in terms of lost income. However, in the long run, spending-based reforms produce higher output than tax-based reforms. In addition, welfare effects vary significantly across generations, skill groups, and working sectors. The current old and middle-aged generations experience welfare losses, whereas future generations are beneficiaries of the reforms.