We develop a framework for measuring and analyzing medium-run departures from balanced growth, and apply it to developments in the euro area. A time-varying factor-augmenting production function (mimicking directed technical change) with below-unitary substitution elasticity is shown to account for the observed dynamics of factor incomes shares, TFP growth, and its components. Based on careful data accounting, we also identify a rising markup and the importance of financial-market regulations in the 1970s. The balanced growth path emerges as a special (and testable) case of our framework, as do existing strands of medium-run debates.

We investigate the cost of business-cycle uncertainty (lack of firm knowledge about the prevailing state of the economy) in a setup where the economy switches between booms and recessions at random intervals. Calibrating an exchange economy model to match the properties of the postwar U.S. data, we find that giving consumers additional information beyond that already contained in the endowment growth rates yields only moderate gains. In a second stage, we investigate the effect of nonperfect information processing in this setting. Surprisingly, we find that opting for slow learning might yield large utility gains, especially for consumers with a strong preference for early resolution of uncertainty.

This paper develops a model that endogenizes both directed technologies and demography. Potential innovators decide which technologies to develop after considering available factors of production, and individuals decide the quality and quantity of their children after considering available technologies. This interaction allows us to evaluate potentially divergent development paths. We find that unskilled labor–biased technological growth can induce higher fertility and lower education, exerting downward pressure on growth in per-person income. Despite this, for most plausible developing-country scenarios, unskilled intensive growth produces more per-person income than skill-intensive growth. This result is robust to a variety of growth modeling assumptions.

This paper shows, in an overlapping-generations economy à la Diamond [American Economic Review 55, 1126–1150 (1965)], that when savings in an unbacked asset (e.g., fiat money) bear some risk of becoming suddenly worthless, the market does not implement the best steady state attainable with that asset. Nonetheless, in the absence of absolutely riskless fiat money and excluding resorting to redistributive fiscal policies that would make it possible to attain the first-best steady state, this best monetary steady state can be implemented as a competitive equilibrium with the adequate policy of taxes on returns to capital, subsidies to returns to monetary savings, and lump-sum transfers. The policy is, at the steady state, balanced every period and nonredistributive.

Skill-biased technical change occupied empirical economists for much of the 1990s. The empirical literature firmly established a positive correlation between technology indicators and demand shifts. In the minds of many, that has established a causal relationship. This leap of faith, however, is at odds with Hicks's conventional wisdom that endogenous technological change will be biased toward using cheap and abundant resources. In addition, if the rate of technical change is considered to be endogenous, the assumption of an exogenous bias toward skilled labor should at least be questioned. Two hypotheses explaining endogenous skill bias in technical change have been suggested in the theoretical literature: the acceleration effect and the market size effect. In this paper these are studied in a single endogenous-growth model to derive the sufficient and necessary conditions for both hypotheses. After confronting these conditions with the evidence, the paper concludes that it strongly favors the acceleration hypothesis.

This paper applies a factor-augmented vector autoregressive model to U.S. data with the aim of analyzing monetary transmission via private sector balance sheets, credit risk spreads, and house prices and of exploring the role of monetary policy in the housing and credit boom prior to the global financial crisis. We find that monetary policy shocks have a persistent effect on house prices, real estate wealth, and private sector debt and a strong short-lived effect on risk spreads in money and mortgage markets. Moreover, the results suggest that monetary policy contributed considerably to the unsustainable precrisis developments in housing and credit markets. Although monetary policy shocks contributed discernibly at a late stage of the boom, feedback effects of other (macroeconomic and financial) shocks via lower policy rates kicked in earlier and appear to have been considerable.

We provide industry-level estimates of the elasticity of substitution (σ) between capital and labor in the United States. We also estimate rates of factor augmentation. Aggregate estimates are produced. Our empirical model comes from the first-order conditions associated with a constant–elasticity of substitution production function. Our data represent 35 industries at roughly the 2-digit SIC level, 1960–2005. We find that aggregate U.S. σ is likely less than 0.620. σ is likely less than unity for a large majority of individual industries. Evidence also suggests that aggregate σ is less than the value-added share-weighted average of industry σ's. Aggregate technical change appears to be net labor–augmenting. This also appears to be true for the large majority of individual industries, but several industries may be characterized by net capital augmentation. When industry-level elasticity estimates are mapped to model sectors, the manufacturing sector σ is lower than that of services; the investment sector σ is lower than that of consumption.

We analyze the importance of the frequency of decision making for macroeconomic dynamics, in the context of a simple, well-known business cycle model with balanced budget rules. We explain how the frequency of decision making (period length) and the measurement unit of time (calibration frequency) differ and examine how local stability is affected by changes in the period length. We find that as the period grows longer, indeterminacy occurs less often. This may have significant quantitative implications: for the model at hand, there is a wide range of economically relevant labor tax rates (from 30% to 38%) for which the continuous-time model gives indeterminacy, whereas the discrete-time model has determinate dynamics.

This note studies fiscal–monetary policy interactions in an endogenous growth model with multiple assets. The “growth-rate Laffer curve” clarifies an important tension between economic growth and government revenue and reveals that higher economic growth does not always finance a larger budget deficit. There are two Pareto-ranked balanced-growth equilibria, which can both be E-stable. Although fiscal policy can eliminate the expectational indeterminacy, it rules out the equilibrium with a higher growth rate and higher welfare. Near the lower bound of the nominal interest rate, an arbitrarily small budget deficit will select the low-growth equilibrium to be the unique E-stable equilibrium.

This paper presents a monetary stochastic general equilibrium model that allows the real cyclical movements of the economy to be explained as a consequence of exogenous monetary, public spending, and technology shocks. The model is calibrated and simulated, and its accuracy in replicating the cyclical movements in the real variables is compared with that of the standard real business cycle (RBC) model. We find that our model fits the observed data better than the existing RBC models, especially for the labor market.

In a very interesting endogenous growth model, Futagami, Iwaisako, and Ohdoi [Macroeconomic Dynamics 12 (2008), 445–462] study the long-run growth effect of borrowing for public investment. Their model exhibits (i) the multiplicity of balanced growth paths (BGPs) in the long run (two steady states) and (ii) a possible indeterminacy of the transition path to the high-growth BGP. The goal of this note is to show that their results depend on a sharp assumption, namely the definition of the public debt target as a ratio to private capital. If the target is defined in terms of public debt–to–GDP ratio, both results vanish: the model exhibits a unique BGP (no multiplicity) and the adjustment path to this unique equilibrium is determinate (no indeterminacy).

This study develops a Schumpeterian growth model to analyze the effects of different patent instruments on innovation. We first analyze patent breadth, which captures the traditional positive effect of patent rights on innovation. Then, we consider a profit-division rule between entrants and incumbents. Given the division of profit, increasing the share of profit assigned to incumbents reduces entrants' incentives for innovation. This aspect of blocking patents captures the recently proposed negative effect of patent rights on innovation. Finally, blocking patents generate a nonmonotonic effect on innovation when the step size of innovation is endogenous because of a novel escape-infringement effect. Calibrating the model to aggregate data, we find that a marginal increase in the blocking effect of patent protection is likely to enhance economic growth.