Rationally inattentive macroeconomic wedges

This paper argues that the solution to a dynamic optimization problem of consumption and labor under finite information-processing capacity can simultaneously explain the intertemporal and intratemporal labor wedges. It presents a partial equilibrium model where a representative risk adverse consumer chooses information about wealth with limited attention. The paper compares ex-post realizations of models with finite and infinite capacity. The model produces macroeconomic wedges and measures of elasticity consistent with the literature. These findings suggest that aconsumption-labor model with information-processing constraints can explain the difference between predicted and observed consumption and employment behavior.     

What went wrong with the Hungarian consumption function? An econometric investigation of the time series aggregate consumption function for Hungary for 1960–1989

The paper focuses on the time series aggregate consumption function for the Hungarian economy. The empirical econometric analysis presented produces several new results. First, it shows that the income and consumption variables used in this type of model by previous studies are I(2) variables. Consequently, error correction models formulated in terms of their first differences are mis-specified. Second, it provides a strong empirical evidence supporting the view that consumption (and thus saving) was (real) interest rate elastic during the period under investigation, having impact both on the long run and on the short relationships between income and consumption. Third, it provides empirical evidence on choosing the proper income variable in the consumption function. The model selection results clearly supports the model with unadjusted total real money income variable. Fourth, it shows that for the period 1960–1986 a correctly specified and stable error correction model can be established. Finally, the analysis shows that when used for the period beyond 1986, this model suffers from a structural break.     

Corporate tax,financial leverage,and portfolio risk

We examine the theoretical implications of corporate income tax for a risky portfolio in a aggregate-endowment economy. In this model, corporate income tax affects the portfolio risk associated with the rebalancing motive during market clearance. An asset is defined as a portfolio of stocks and bonds whose portfolio weights are similar to financial leverage. Corporate tax can decrease after-tax consumption from dividends (increase leverage) and increase the tax shield that increases dividends (decrease leverage). Changes in dividends are responsible for the correlation between expected dividend growth and consumption growth and, thus, affect stock pricing and returns. Overall, the model is characterized by tax-induced portfolio risk associated with financial leverage.     

Bad news in the Great Depression,the Great Recession,and other U.S. recessions: A comparative study

In economic recessions consumption usually drops in tandem with other aggregate quantities as output or employment. Following the permanent income hypothesis, these drops can be rationalized by the idea that consumers have pessimistic views about their long-run income. Using a standard signal-extraction model, we show that this pessimism can be due either to a persistent fall of aggregate productivity before and during the recession (signaling a future decline of income), or to other negative information unrelated to contemporaneous fundamentals, which we label “bad news”. We classify U.S. recessions (from 1919 to 2015) according to a (bad) news index reflecting this negative information. We find that both the Great Depression and the Great Recession score highest in this index. The index is such that we can rule out that this is due merely to the length or the depth of these recessions. Instead, these two recessions are similar in that both were aggravated by a wave of pessimism about future income which cannot be related to contemporaneous fundamentals.     

Taxes, Federal Grants, Local Public Spending, and Growth

In a dynamic model with both private and local public capital accumulation, this paper examines how federal and local income taxes, local consumption tax, and federal matching grants for local public consumption and local public investment affect the long-run equilibrium (equilibria) of private consumption, private capital accumulation, local public consumption, and local public capital stock.     

The heterogeneous impact of taxation on economic development: New insights from a panel cointegration approach

In this paper, we study the role of taxation on long-run income performance. In the theoretical part of the study, we develop a stylized model based on Barro (1990), in which income taxation has two contradictory roles in the standard Solow (1956) setup: on the one hand, taxation appropriates resources that would otherwise be used for physical capital accumulation, and on the other, it is the source of government spending, which is used to support private production. In the empirical part of the study, the impact of consumption tax, personal income tax, corporate profit tax and property tax on income is estimated using the common correlated effects (CCE) panel cointegration approach, which allows for cross-sectional dependencies and provides both panel- and country-specific results. The panel findings for 30 OECD countries for the period of 1995–2016 indicate that only consumption tax has a statistically significant negative effect on long-run income. However, because the type and sign of the tax coefficients are heterogeneous for the country-specific results, we conclude that taxation has heterogeneous effects on income.     

Does financial integration affect real exchange rate volatility and cross-country equity market returns correlation?

Existing empirical studies show that financial integration affects the behavior of average excess returns, cross-country equity market returns (EMR) correlations and real exchange rate (RER) volatility. We employ a recently developed two-country model with recursive preferences, frictionless and complete markets and highly correlated long-run innovations to examine whether full financial integration (i.e. full risk-sharing) affects the US-Canada EMR correlation and the US RER volatility, consistently with existing empirical findings. First, full risk-sharing gives rise to a relatively high RER volatility. Second, it induces very strong positive cross-country EMR correlations. Both quantities are higher than those observed in the US-Canada asset pricing data, and increase as the risk-sharing incentive increases. In contrast, “international consumption quantities” are weakly sensitive to changes in the level of aversion to consumption and utility risk.     

Can indeterminacy resolve the cross-country correlation puzzle?

Are productivity shocks the only driving force of international business fluctuations? In this paper I argue that another source of uncertainty—changes in market expectations or ‘sunspots’ – is also important. One major shortcoming of existing IRBC models is the ‘cross-country correlation puzzle’: models tend to generate cross-country consumption correlations that are too high and output, investment and employment correlations that are too low when compared to the data. I show that with empirically supported level of increasing returns, an otherwise standard model possesses multiple, indeterminate convergent paths to the steady state, which allow for sunspots to influence the economy. The model displays time series properties that in many ways match the data better than the conventional model. It is especially successful in generating realistic consumption and output correlations.     

International dynamic risk sharing

In this paper we examine the implications of international risk sharing among a set of countries in the presence of market frictions which complicate the instantaneous adjustment to the first‐order conditions. We suggest approximating the consumption streams of countries belonging to the risk sharing coalition in terms of a disequilibrium dynamic model embodying forward‐looking adjustment. Econometric methods for estimating and testing the model are discussed. Empirical analysis of a set of core European countries suggests that once preference parameters are allowed to vary across countries, we are able to identify a group of nations that share risks against idiosyncratic permanent income shocks. The equilibrium position, however, is reached after a long adjustment period. Copyright © 2008 John Wiley & Sons, Ltd.     

Obstfeld and Rogoff׳s international macro puzzles: a quantitative assessment

Obstfeld and Rogoff (2001) propose that trade frictions lie behind key puzzles in international macroeconomics. We take a dynamic multicountry model of international trade, production, and investment to data from 19 countries to assess this proposition quantitatively. Using the framework developed in Eaton et al. (2016), we revisit the puzzles in a counterfactual world without trade frictions in manufactures. Removing these trade frictions goes a long way toward resolving a number of puzzles. The dependence of domestic investment on domestic saving falls by half or disappears entirely, mitigating the Feldstein and Horioka (1980) puzzle. Changes in nominal GDPs in U.S. dollars become less variable across countries and line up with changes in real GDPs as much as with real exchange rates, mitigating the exchange rate disconnect puzzle. Less dramatically, changes in consumption become more correlated across countries, mitigating the consumption correlations puzzle and changes in real exchange rates become less variable across countries, mitigating the relative purchasing power parity puzzle.     

Correlated income shocks and excess smoothness of consumption

In the literature, econometricians typically assume that household income is the sum of a random walk permanent component and a transitory component, with uncorrelated permanent and transitory shocks. Using data on realized individual incomes and individual expectations of future incomes from the Survey of Italian Households׳ Income and Wealth, I find that permanent and transitory shocks are negatively correlated. Relaxing the assumption of no correlation between the shocks, I explore the effects of correlated income shocks on the estimated consumption insurance against permanent and transitory shocks, and consumption smoothness using a life-cycle model with self-insurance calibrated to U.S. data. Negatively correlated income shocks result in smoother consumption, and upward-biased estimates of the insurance against transitory (and permanent when borrowing constraints are not tight) income shocks. While the life-cycle model with negatively correlated shocks fits well the sensitivity of consumption to current income shocks observed in U.S. data, it falls short of explaining the sensitivity of consumption to income shocks cumulated over a longer horizon.     

Linkages between income inequality,international remittances and economic growth in Pakistan

This paper explores the dynamic linkages between income inequality, international remittances and economic growth using time series data over the period of 1976–2006 in case of Pakistan. The cointegration analysis based on the bounds test confirms the existence of a long-run relationship between income inequality, international remittances and economic growth. Our results reveal that income inequality and international remittances enhance economic growth. The causality analysis based on innovative accounting approach shows bidirectional causal relationship between income inequality and economic growth and same is true for international remittances and income inequality. International remittances are cause of economic growth but not vice versa. Although we find support for Kuznets hypothesis but Pakistan is yet to benefit, in terms of reducing the gaps of income inequality, from the international flow of remittances and economic growth. The paper argues that, from a policy perspective, there is an urgent need for policy makers in Pakistan to reduce the widening gap of income inequality by focusing on income redistribution policies and to go beyond the traditional factors in balancing income inequality.     

THE EFFECT OF KNOWLEDGE ACCESSIBILITY ON INTERNATIONAL INCOME INEQUALITY

Using a structural model of new economic geography, we estimate the effect of accessibility to foreign knowledge on international income distribution. Whereas previous literature has mainly focused on the importance of geographical accessibility to foreign markets, this paper emphasizes the role of accessibility to foreign knowledge in determining international income inequality. Using cross-country data of income per worker, bilateral trade flows, and number of flight passengers, we find evidence that the accessibility to foreign knowledge raises per capita income significantly.     

How does the sensitivity of consumption to income vary over time? International evidence

This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960–2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome-based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income.     

Limited participation in international business cycle models: A formal evaluation

In this paper, we argue that limited asset market participation (LAMP) plays an important role in explaining international business cycles. We show that when LAMP is introduced into an otherwise standard model of international business cycles, the performance of the model improves significantly, especially in matching cross-country correlations. To perform formal evaluation of the models we develop a novel statistical procedure that adapts the statistical framework of Vuong (1989) to DSGE models. Using this methodology, we show that the improvements brought out by LAMP are statistically significant, leading a model with LAMP to outperform a representative agent model. Furthermore, when LAMP is introduced, a model with complete markets is found to do as well as a model with no trade in financial assets – a well-known favorite in the literature. Our results remain robust to the inclusion of investment specific technology shocks.     

我国农村居民消费与收入关系实证分析

近年来,由于城市居民消费水平已经达到了一定的高度,增长相对放缓,而农村居民收入增长缓慢,导致消费持续低迷,这已经成为制约我国进一步扩大内需保证国民经济持续、快速、协调、健康发展的重要因素。利用1990年至2007年消费收入数据建立模型,从而得到上期收入、上期消费以及本期收入对本期消费的影响,并对近几年农村消费增长率的变化进行原因分析,同时提出刺激消费增加收入的可行性建议。     

Income risk, macroeconomic and demographic change, and economic inequality in Japan

Using an OLG model with heterogeneous households, we investigate the relationship among income risk, macroeconomic and demographic changes, and economic inequality between 1980 and 2000 in Japan. By decomposing the primary factors in earnings and consumption inequality into macroeconomic variables and the demographic variable, we find that our model replicates the evolution of economic inequality in Japan. By performing counterfactual simulations, we demonstrate that two factors—changes in time-varying macroeconomic factors and the unexpected decline in the total factor productivity growth rate—played important roles in the increase in earnings and consumption inequality in the 1990s.     

Life‐Cycle Consumption and Children: Evidence from a Structural Estimation

I estimate by maximum likelihood a dynamic model of optimal intertemporal allocation of consumption in the presence of children using high‐quality Danish longitudinal data. The number and age of all children can affect the marginal utility of consumption while income uncertainty, credit constraints and postretirement motives also influence household behaviour. While I estimate that children have a surprisingly small effect on the marginal utility of non‐durable consumption, data simulated from the estimated model replicates similar correlations between log consumption growth and changing household composition as found in the Danish data and typically found in UK and US data. To reconcile the results with existing studies, I illustrate how ignoring precautionary motives increases the estimated importance of children. The results indicate that precautionary motives might play a larger role than children in explaining the observed consumption age profile.     

The Reverberating Effects of Job Rotation: A Theoretical Exploration of Nonrotaters' Fairness Perceptions

Human resource researchers have long regarded job rotation as a valuable form of job-based experiential learning. However, given the dearth of prior conceptual work in the collection of rotation research and the sparse attention given to rotation's collateral effects, we pursue two objectives in this article. First, to guide future research we develop a general model of the fairness perceptions and responses related to job rotation decisions. In this effort, we apply organizational justice concepts within a social information-processing framework. Second, we advance specific propositions to address the reverberating effects of job rotation on nonrotating employees. Specific recommendations for future research and implications for practice are also discussed.     

The asymmetric behavior of household consumption under the business cycle

In this study, we examine whether and to what extent the pattern of household consumption is asymmetrically sensitive to economic changes. We use a threshold model with error correction to characterize household consumption under the business cycle. Using data from the 1979–2014 Survey of Family Income and Expenditure in Taiwan, we find that household consumption has pro-cyclical characteristics during the business cycle. More importantly, household consumption responds asymmetrically to economic fluctuations such that changes in consumption tend to be larger during expansions than during downturns. Furthermore, the nature of this asymmetry differs across household income quantiles.