We present a model of endogenous growth in which government consumption and production services are financed by distorting capital taxes. We generalize Barro's public finance model of growth in two ways. First, we study the properties, and the role in growth, of a wider menu of second-best optimal policies, namely, the capital tax rate and the portion of total tax revenues used to finance public production services versus public consumption services. Second, we investigate the possibility of the existence and uniqueness of a long-run equilibrium in which optimal policies do not change and the economy grows at a constant balanced growth path, as well as the possibility of dynamic determinacy of this long-run equilibrium.

The paper discusses a simple univariate nonlinear parametric time-series model for unemployment rates, focusing on the asymmetry observed in many OECD unemployment series. The model is based on a standard logistic smooth transition autoregressive model for the first difference of unemployment, but it also includes a lagged level term. This model allows for asymmetric behavior by permitting “local” nonstationarity in a globally stable model. Linearity tests are performed for a number of quarterly, seasonally unadjusted, unemployment series from OECD countries, and linearity is rejected for a number of them. For a number of series, nonlinearity found by testing can be modeled satisfactorily by use of our smooth transition autoregressive model. The properties of the estimated models, including persistence of the shocks according to them, are illustrated in various ways and discussed. Possible existence of moving equilibria in series not showing asymmetry is investigated and modeled with another smooth transition autoregressive model.

We use a log-normal framework to examine the effect of preferences on the market price for risk, that is, the Sharpe ratio. In our framework, the Sharpe ratio can be calculated directly from the elasticity of the stochastic discount factor with respect to consumption innovations as well as the volatility of consumption innovations. This can be understood as an analytical shortcut to the calculation of the Hansen–Jagannathan volatility bounds, and therefore provides a convenient tool for theorists searching for models capable of explaining asset-pricing facts. To illustrate the usefulness of our approach, we examine several popular preference specifications, such as CRRA, various types of habit formation, and the recursive preferences of Epstein–Zin–Weil. Furthermore, we show how the models with idiosyncratic consumption shocks can be studied.

This paper investigates conditions under which a long-run recursive model can be used to identify a structure. Economists frequently employ this type of empirical model. I define the class of long-run partially recursive structures. If an economic system is a member of this class, then certain long-run recursive empirical models will obtain some of the structural impulse response functions. This sufficient condition for a structure is first shown in a vector autoregression. A well-known example from the literature is used to illustrate this particular class of structures and to present some useful applications of the result. Then the result is shown in models of cointegrated time series. Necessary conditions for a long-run recursive model to identify structure are addressed in the conclusion.

We examine minimal sufficient state spaces for equilibria in a Lucas asset pricing model with heterogeneous agents and incomplete markets. It is clear that even if all fundamentals of the economy follow a first-order Markov process, equilibrium prices and allocations generally will depend not only on the current exogenous shock but also on the distribution of wealth among the heterogeneous agents. The main contribution of this paper is to give an example of an infinite-horizon economy with Markovian fundamentals, where the joint process of equilibrium asset holdings and exogenous shocks does not constitute a sufficient state space either.

Macrodynamic models of small open economies are inevitably characterized by “knife-edge conditions,” meaning that certain parameters are constrained for a viable equilibrium to exist. This paper examines the macrodynamic structure of such an economy and considers the role played by various standard knife-edge conditions. The dynamic model presented is sufficiently general so as to provide a unifying framework within which alternative models can be embedded. We identify three important models as special cases of this generic structure: (i) The traditional stationary Ramsey model, (ii) the endogenous growth model, and (iii) the nonscale growth model. We consider three margins along which knife-edge conditions are imposed. These include (i) preference parameters, (ii) production and employment characteristics, and (iii) openness of international financial markets. These restrictions are shown to play key roles in determining the equilibrium dynamics, and how the economy responds to various shocks. The existence of trade-offs between these knife-edge conditions is discussed.