The saving–investment correlation puzzle is still a puzzle

A number of simulation studies claim to have solved the Feldstein–Horioka puzzle by demonstrating that a high time-series correlation between saving and investment naturally arises from business cycle shocks. This paper uses panel data of saving and investment controlled for business cycle shocks to empirically test the significance of cyclical shocks — productivity, fiscal and the terms of trade shocks — in explaining a high saving–investment correlation. The estimation results reveal that conventional aggregate shocks only partially explain the high saving–investment correlation. Moreover, country differences in the size of the GNP and the non-traded sector do not significantly affect the saving–investment correlation. The saving–investment correlation puzzle remains a puzzle after all.     

Tinbergen in De Economist

Jan Tinbergen's scientific writings cover six main areas of research. His articles in De Economist represent these areas; in some cases the contributions to De Economist were of a pioneering nature (business cycles, economic models, economic integration); in others De Economist was the first or even single outlet for Tinbergen's work. This article provides an overview of these contributions. The wide scope of Tinbergen's areas of research goes together with a unity in approach, the characteristics of which are: policy relevance, quantification and measurement, balance in analysis and presentation, and learning from experience. Tinbergen's articles in De Economist bear witness to this approach which at the time also met with scepticism and resistance as this overview shows. According to Houthakker, Tinbergen's main contribution may be that, amidst the pleas of interest groups and the slogans of the laity, an attempt is made that the voice of the professional economic researcher be heard. Tinbergen's work still sets an agenda for both economic research and policy making.     

What do interest rates reveal about the functioning of real business cycle models?

This paper begins by documenting the extent to which the predictions of standard Real Business Cycle (RBC) models are incompatible with observed movements in real interest rates. The main finding of the paper is that extending the baseline model to include habit persistence in consumption and adjustment costs to capital significantly improves the model's empirical performance. In our evaluation of the model's performance, we take special care of estimating and testing predictions of the model using both moments drawn directly from the data and moments calculated after identifying shocks to the stochastic trend.     

A monetary business cycle model with unemployment

To reproduce key features of the post-war U.S. data, most monetary business cycle models must assume there are high price markups and that agents have high labour supply elasticities despite the existence of contradictory microeconomic evidence. This paper eliminates the need for these assumptions by introducing imperfectly observed effort into a limited participation model. The estimated model is better able to capture the sluggish price response to a monetary policy shock than the standard model, and is consistent with evidence regarding the qualitative responses of the U.S. economy to technology shocks, fiscal policy shocks and monetary policy shocks.     

Growth and welfare effects of business cycles in economies with idiosyncratic human capital risk

This paper uses a tractable macroeconomic model with idiosyncratic human capital risk and incomplete markets to analyze the growth and welfare effects of business cycles. The analysis is based on the assumption that the elimination of business cycles eliminates the variation in idiosyncratic risk. The paper shows that a reduction in the variation in idiosyncratic risk decreases the ratio of physical to human capital and increases the total investment return and welfare. If the degree of risk aversion is less than or equal to one, then economic growth is enhanced. This paper also provides a quantitative assessment of the macroeconomic effects of business cycles based on a calibrated version of the model. Even for relatively small degrees of risk aversion (around one) the model implies that the elimination of business cycles has substantial effects on investment in physical and human capital, economic growth, and welfare.     

Volatility in the knowledge economy

Summary. We seek to explain the economic volatility of the last 6 years, in particular the rapid expansion and contraction of the knowledge sectors. Our hypothesis is that these sectors amplify the business cycle due to their increasing returns to scale, growing faster than others in an upswing and contracting faster in a downswing. To test this hypothesis we postulate a general equilibrium model with two sectors: one with increasing returns that are external to the firm and endogenously determined - the knowledge sector - and the other with constant returns to scale. We introduce a new measure of volatility of output, a real beta, and derive a resolving equation, from which we prove that the increasing return sectors exhibit more volatility then other sectors. We validate the main results on US macro economic data of real GDP by industry (2-3 digits SIC codes) of the 1977-2001 period, and provide policy conclusions.Received: 18 March 2002, Revised: 16 February 2004, JEL Classification Numbers: D5, D58, E10, L50, L52, O38, O51.Correspondence to: Graciela Chichilnisky     

Conditional mean functions of non-linear models of US output

We compare a number of models of post War US output growth in terms of the degree and pattern of non-linearity they impart to the conditional mean, where we condition on either the previous period's growth rate, or the previous two periods' growth rates. The conditional means are estimated non-parametrically using a nearest-neighbour technique on data simulated from the models. In this way, we condense the complex, dynamic, responses that may be present in to graphical displays of the implied conditional mean. First version received: Feb. 1999/Final version received: June 2001     

Environmental tax policy in a model of growth cycles

Summary. The purpose of this paper is to consider environmental taxation which would control emissions of firms in a model of growth cycles. In the model presented below, the economy may experience two phases of growth and environmental quality: “the no-innovation growth regime” and “the innovation-led growth regime”. Aggregate capital and environmental quality remain constant in the no-innovation growth regime, while they perpetually increase in the innovation-led growth regime. The paper shows that the tax plays a key role in determining whether the economy stably converges to one of the two regimes or fluctuates permanently between them. It also shows that there is a critical level of the tax and that the economy obtains higher growth rates of capital and environmental quality by raising (or reducing) the tax if the initial tax is below (or above) the critical level. Received: April 2, 2001; revised version: March 21, 2002 RID="*" ID="*" This research reported here was conducted within the research project “Project on Intergenerational Equity” at Institute of Economic Research, Hitotsubashi University. I am deeply grateful to an anonymous referee for his or her insightful comments, which greatly improved the paper. I also thank Hiroshi Honda, Yasuo Maeda, Yuji Nakayama, and participants in workshops at Hitotsubashi University, Kyoto University, Nagoya University, Osaka University, University of Tsukuba, Yokohama National University, and University of Tokyo for their valuable comments and suggestions. Any remaining errors are mine.     

Business cycles in Italy: A statistical investigation

This paper conducts a statistical analysis of post-war economic fluctuations in Italy. It is argued that business cycles in this country qualitatively conform to the general character of the phenomenon, a result which confirms existing evidence. A temporal stability analysis of stylized facts shows that some statistically significant changes in the empirical regularities occurred after 1973, but they did not alter the main qualitative features of the business cycle. The evidence thus supports interpretative models of the Italian business cycle which incorporate a stable propagation mechanism.     

Schumpeter's circular flow,learning by doing and cyclical growth

A two-sector growth model with endogenous technical change is presented. Concerning technical change, we assume that it is reflected by increases in the stock of human capital which are acquired through learning by doing. As a result, it turns out that transitory or, using the Hopf bifurcation theorem, persistent oscillations of the economic variables may be the outcome. Thus we are able to show that learning mechanisms alone may be sufficient to destroy the circular flow as described by Schumpeter.