In some classes of macroeconomic models with financial frictions, an adverse financial shock successfully explains a decrease in real activity but simultaneously induces a stock price boom. The latter theoretical result is not consistent with data from actual financial crises. This study aims to provide a theoretical explanation for both prolonged recessions and stock price declines. I develop a simple macroeconomic model featuring a banking sector, financial frictions, and R&D-based endogenous growth. Both the analytical and numerical investigations show that endogenous R&D investment and a shock hindering banks’ financial intermediary function can be key to generating both a prolonged recession and a drop in firms’ stock prices.

This study develops a new dynamic general equilibrium model to explore the role of people’s love of novelty as a cultural preference in innovation and innovation-based growth. The model considers (a) an infinitely lived representative consumer who has standard love-of-variety preferences for differentiated products and additional love-of-novelty preferences for new products and (b) technological progress driven by two costly and time-consuming innovation activities, new product development and existing product development. We demonstrate that consumers’ love of novelty is a source of innovation-based growth, wherein economies with a moderate love of novelty can achieve innovation and long-run growth through endogenous cycles between periods in which new product development is active and those in which existing product development is active. However, if love of novelty preference is too weak or too strong, the economy is caught in an underdevelopment trap with less innovation and no long-run growth. We also provide some suggestive empirical evidence that supports our theoretical predictions.

We revisit the Friedman rule in a labor search model and extend Heer (2003), Cooley and Quadrini (2004), and Wang and Xie (2013) to one that allows for endogenous growth. We show that, even without a liquidity effect or a CIA constraint on firms’ wage payment, our model offers a different channel for moderate money growth to increase welfare. Intuitively, in a one-sector endogenous growth economy, the technology is of constant returns with respect to capital. When the labor market is frictional, a moderate increase in money growth induces an expansion in vacancy and employment. Labor and capital are complements in production. With an increase in employment, when the technology is neoclassical, the decreasing return in capital leads to a lower marginal product of labor. However, in an endogenous growth framework wherein the technology exhibits socially constant returns in capital, the marginal product of labor is constant. Due to a constant marginal product of labor, modest inflation raises employment, enlarges economic growth, and increases welfare. Moreover, the optimal long-run inflation rate departs from the Friedman rule, even when the Hosios rule holds. Finally, we find that our model with sustainable growth fits the data better than that without sustainable growth.

I develop a dynamic model of consumption variety in status goods by introducing a realistic aspect that is new in the existing literature—that a good will not carry status appeal unless it is advertised. As advertisements will divert resources from new product research, growth in new products will be reduced. However, status-good advertisements also enhance distinctiveness of a good and increase a firm’s profit. This will motivate more researches. With the two effects offsetting each other, the original market bias in a standard product-development model—insufficient research due to a general knowledge spillover—cannot be overcome. While introducing advertising into models of this kind does not reverse the original welfare implication of suboptimal growth, this makes available a new and better intervention option—taxing advertisements. This tax is superior to consumption tax, the conventional solution to inefficient status competition, as consumption tax is found to be ineffective in the present model. It is also superior to research subsidies, the conventional solution to suboptimal growth, as subsidies must be financed and is not a self-sufficient policy.

Bénabou [(2002) Econometrica 70, 481–517.] demonstrated how progressive redistribution mitigates unequal opportunity for education to promote growth. We ask how effective that policy is when it affects the average quality of education. So, we add a learning externality in his model of human capital accumulation. It captures how knowledge diffusion through global channels—such as a national educational curriculum—influences children’s learning outcomes and, hence, growth. Whether inequality is a curse or a blessing for economic growth depends on how efficiently an economy designs these channels and to what extent they influence children’s education. The greater this efficiency, the lower is the optimal progressiveness of income redistribution for maximizing the long-run output growth rate. Interestingly, if poorly designed global channels exert greater influence in education, the optimal progressivity may increase. Our quantitative analysis reveals new implications for redistributive policies, including a surprisingly low optimal progressivity (approximately 6–7%) for the calibrated US economy.

Knowledge creation has been a pivotal ingredient of endogenous growth theory to understand differences in standards of living across countries. Yet, the identification of key drivers explaining cross-country differences in knowledge creation still remains a topic of central interest in this research field. In this paper, I provide a framework to hypothesize and empirically test the persistent effects of novelty-seeking traits on cross-country differences in scientific knowledge creation. The results suggest a positive and statistically significant relationship between both outcomes that is consistent with the hypothesis that the prevalence of novelty-seeking traits in society facilitates scientific knowledge creation through beneficial human behaviors related to risk-taking and explorative behavior. The empirical findings remain qualitatively unaffected when controlling for additional historical, biogeographical, and socioeconomic factors that appear as additional important determinants in the creation of scientific knowledge in society.

In a standard overlapping generations model, we show how the health effects of pollution impact the balanced-growth path (BGP) and the transition dynamics of the economy. The key driver is the differential between physical and human capital accumulation. The differential occurs because pollution alters the incentives to save and to invest in education via reductions in longevity and alters the effectiveness of education expenditures via impaired cognitive learning. Two predictions of the model are noteworthy. The first prediction is the existence of two stable BGPs with a separating saddle path. One BGP is desirable featuring high economic growth and low pollution, whereas the other should be avoided because it is associated with low economic growth and high pollution. The second prediction is that economic and environmental cycles may emerge, implying inequality between generations. These theoretical results are supported by empirical evidence and imply a role for government to steer the economy toward the desirable BGP and eliminate the cycles.

This paper presents a multi-country version of the Ramsey growth model with cross-country technological interdependence. The results rationalize several stylized facts about growth and convergence. First, individual countries tend to converge toward country-specific balanced growth paths rather than steady-state equilibria. Second, an economy that accounts for a smaller share of the world technology distribution harnesses the “advantages of backwardness” to catch up at a faster speed. Third, countries grow at different rates during the phase of transitional dynamics. However, technological interdependence creates a force toward cross-country convergence in the growth rate and stability of world income distribution in the long run. Finally, cross-country differences in structural characteristics and initial conditions lead to divergences in the level of income per capita.

We devise an endogenous growth model in which agents’ utility depends not only on current consumption but also on the pleasure of anticipated future consumption. We consider the case in which agents derive satisfaction from their own anticipatory feelings—inward-looking or internal anticipation—and the case in which agents derive utility from anticipation of other people’s future consumption—outward-looking or external anticipation. We characterize the effects of introducing a forward-looking consumption reference on the dynamics of the economy. Whereas the inward-looking economy features transitional dynamics, the outward-looking economy does not. The distortions caused by the externality in the economy with external habits can be corrected by subsidizing income at a time-varying rate or by means of a tax on consumption at a decreasing rate. We contrast the equilibrium dynamics of our specification to the more standard specification of the habit formation consumption reference point. Numerical simulations supplement the theoretical analysis.

This paper uses a continuous-time overlapping-generations model with endogenous growth and pollution accumulation over time to study the link between longevity and global warming. It is seen that increasing longevity accelerates climate change in a business-as-usual scenario without climate policy. If a binding emission target is set exogenously and implemented via a cap-and-trade system, the price of emission permits is increasing in longevity. Longevity has no effect on the optimal solution of the climate problem if perfect intergenerational transfers are feasible. If these transfers are absent, the impact of longevity is ambiguous.

This paper examines how innovation-led growth affects optimal monetary policy. We consider the Ramsey policy in a New Keynesian model where R&D leads to an expanding variety of intermediate goods and compare the results with those obtained when the expansion occurs exogenously. Positive trend inflation is found to be optimal under both assumptions, but much higher with profit-seeking innovation. Optimal monetary policy must be counter-cyclical in response to both technology and public spending shocks, yet the intensity of the reaction crucially depends on the presence of an R&D sector. However, the small amount of short-run deviations of prices from the non-zero trend inflation observed in response to shocks suggests inflation targeting as a robust policy recommendation.

This paper investigates the effects of monetary policy on long-run economic growth via different cash-in-advance (CIA) constraints on R&D in a Schumpeterian growth model with vertical and horizontal innovations. The relationship between inflation and growth is contingent on the relative extents of CIA constraints and diminishing returns to two types of innovation. This model can generate a mixed (monotonic or non-monotonic) relationship between inflation and growth, given that the relative strength of monetary effects on growth between different CIA constraints and that of R&D-labor-reallocation effects between different diminishing returns vary with the nominal interest rate. In the empirically relevant case where horizontal R&D is subject to larger diminishing returns than vertical R&D, inflation and growth can exhibit an inverted-U relationship when the CIA constraint on horizontal R&D is sufficiently larger than that on vertical R&D. Finally, we calibrate the model to the US economy and find that the growth-maximizing rate of inflation is around 2.4%, which is consistent with the recent empirical estimates.

We study an impact of the financial intermediation on economic growth. We assume the simple model of the economic growth in the form of an autonomous dynamical system with a financial sector represented by banks and real sector represented by households and firms. We assume that financial intermediation services are described by financial intermediation technology which is a function depending on the share of labor employed by banks. Investments realized by firms depend not only on savings accumulated by banks but also on financial intermediation technology. We obtain a three-dimensional dynamical system and analyze the existence of a saddle equilibrium in the growth process associated with financial intermediation. Using mathematical methods of dynamical systems, we analyze growth paths, and we study the stationary states of the system and their stability. We found that equilibrium is reached only by trajectories located on two submanifolds. The resulting analysis provides an insight into the saddle solution with a stable incoming separatrix lying on one of the invariant manifolds.

Environmental economics models are often too complex to be communicated in an illustrative manner. For this reason, this paper develops the Basic Climate Economic (BCE) model that features core elements of macroeconomic and climate economic modelling, while allowing for an illustrative examination of the development path. The BCE model incorporates fossil stock depletion, pollution stock accumulation, endogenous growth, and climate-induced capital depreciation. We first use graphical analysis to show the effects of climate change and climate policy on economic development. Intuition for the different model mechanisms, the functional forms, and the effects of different climate policies is provided. We then show the model equations in mathematical terms to derive closed-form solutions and to run model simulations relating to the graphical part. Finally, we compare our setup to other models of climate economics.

I analyze the impact of intellectual property and product market competition regulations on innovation and long-run growth in an endogenous growth model with two R&D performing sectors. I show that strengthening intellectual property rights and competition in a sector increases its R&D investments. However, these policies adversely affect R&D investments in the other sector because of increased factor competition between the sectors. As a result, the overall impact of such policies on economic growth is ambiguous. I perform a numerical exercise in an attempt to resolve this ambiguity. This exercise suggests that strengthening intellectual property rights increases economic growth, but higher competition has a very limited effect on growth.

We study the interaction between endogenous growth and Ricardian trade working solely through comparative advantage. The model is built on several facts about research and development and trade. Trade and growth affect each other in ways previously unexplored. The model can explain and reconcile in a single framework several phenomena usually analyzed separately. Because of a possible dynamic inefficiency, trade may raise or lower the growth rate of each trading partner. Trade leads to “effective technology transfer,” with the growth rate looking as if a country adopts its partner’s technology even though it does not. Economic growth can endogenously change the trading regime from incomplete to complete specialization (the Ricardian corner and interior, respectively), which can explain why trade helps some countries catch up but leaves others behind. Trade may raise or lower social welfare. The model specifies the conditions under which each possible outcome occurs. We examine a few of the model’s many testable implications and find them in agreement with the data.

This paper examines the relationship between environmental policy and growth when green preferences are endogenously determined by education and pollution. We consider an environmental policy in which the government implements a tax on pollution and recycles the revenue to fund pollution abatement activities and/or an education subsidy (influencing green behaviors). When the sensitivity of agents' environmental preferences to pollution and human capital is high, the economy can converge to a balanced growth path equilibrium with damped oscillations. We show that this environmental policy can both remove the oscillations, associated with intergenerational inequalities, and enhance the long-term growth rate. However, this solution requires that the revenue from the tax rate must be allocated to education and direct environmental protection simultaneously. We demonstrate that this type of mixed-instrument environment policy is an effective way to address environmental and economic issues in both the short and the long run.

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.