Business cycles in a two-sector model of endogenous growth

Summary. This paper analyzes the impact of cyclical volatility on long-term economic growth: does growth increase or decrease with increased cyclical volatility? We construct a stochastic two-sector model of endogenous growth to analyze this question in detail. We will show that economic growth is higher in the presence of business cycles, since people devote more time to learning activities in an uncertain economic environment. Human capital is a hedge against future income uncertainty. Hence, the rate of economic growth will be higher in a stochastic environment. Based on a calibration of the model, we find that economic growth increases by 0.46%-point as a result of observed business cycle variability. When account is taken of the interaction between the model's general equilibrium and the cycle, welfare gains (measured in units of a permanent percentage increase in consumption) from eliminating business cycle volatility are approximately 1.87%. Received: January 25, 2000; revised version: November 3, 2000     

Entry, exit and business cycles in a general equilibrium model

This paper studies the role of entry and exit in the short run behavior of a general equilibrium model with industry dynamics. For tractability, and to preserve potential asymmetries in the impulse responses, I focus on the transition dynamics of the economy after shocks. Entry and exit are found to be insensitive to productivity shocks of reasonable magnitude. Moreover, the dynamics of GDP are insensitive to fluctuations in entry and exit rates, and any asymmetries are negligible. As an application of the model, the paper also asks whether firing costs may interact with entry and exit to affect transition dynamics after shocks, finding that they do not.     

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.     

Technology, demand and distribution: a cumulative growth model with an application to the Dutch productivity growth slowdown

This paper argues that the case for real wage growth restraint,and the consequent restoration of profitability, which the mainstreamconsensus regards as a necessary condition for sustained outputand productivity growth, is based on weak foundations, becauseit neglects the negative impact of wage moderation on productivitygrowth. Using a general Keynesian growth model, which integratesa (wage-led or profit-led) demand regime and a productivityregime (incorporating the productivity-growth enhancing effectsof higher demand and higher real wages), the conditions areidentified under which real wage restraint fails to raise outputand productivity growth. The model is applied empirically tothe Netherlands (1960–2000).     

Creditworthiness and thresholds in a credit market model with multiple equilibria

Summary. The paper studies creditworthiness in a model with endogenous credit cost and debt constraints. Such a model can give rise to multiple candidates for steady state equilibria. We use new analytical techniques such as dynamic programming (DP) with flexible grid size to find solutions and to locate thresholds that separate different domains of attraction. More specifically, we (1) compute present value borrowing constraints and thus creditworthiness, (2) locate thresholds where the dynamics separate to different domains of attraction, (3) show jumps in the decision variable, (4) distinguish between optimal and non-optimal steady states, (5) demonstrate how creditworthiness and thresholds change with change of the credit cost function of the debtor and (6) explore the impact of debt ceilings and consumption paths on creditworthiness.JEL Classification Numbers: C61, C63, D91, D92, E51, G12, G32.An earlier version of this paper has been prepared for the 1998 North American Winter Meeting of the Econometric Society, January 1998, Chicago. We want to thank Jess Benhabib, Buz Brock, Gustav Feichtinger, Franz Wirl, Michael Woodford, Wolf-Jürgen Beyn and Thorsten Pampel for helpful discussions and comments on various versions of the paper. We also want to thank participants in a workshop at the University of Technology, Vienna, the Macroeconomic Workshop at Columbia University, and the SCE conference, at Yale University, June 2001. We are also grateful for comments from a referee of the journal.     

Inequalities and fluctuations in a dynamic general equilibrium model

   Summary. In the present paper a tractable two-sector neo-classical growth model with heterogeneous agents is considered. The local dynamic properties of the equilibrium path are analyzed in relation with the underlying characteristics of the economy. In particular, the existence of fluctuations is related to the degree of heterogeneity in labor and in capital endowments. When applied to international trade theory, the analysis shows that free trade may distabilize a world economy that is originally stable under the regime of autarky. Received: December 28, 1998; revised version: October 29, 1999     

Steady states in the OLG model with seignorage and long-lived agents

This note provides a direct proof of the fact that in a particular version of the overlapping generations model with long-lived agents and fiat money, there can be at most two stationary states. A simple argument showing the Pareto superiority of the low inflation steady state is also given.     

Distributive cycles and endogenous technical change in a BoPC growth model

Our purpose in this paper is to expand Goodwin's (1967) distributive cycle model to an open economy framework in a way that incorporates the balance-of-payments constraint on growth. We do so by allowing technical change to be endogenous to the cyclical dynamics of the system and by adopting an independent investment function. We show that a Hopf-Bifurcation analysis establishes the possibility of persistent and bounded cyclical paths both for a 3D and a 4D extension of the model. Some numerical simulations are performed based on the analytical models developed. Motivational empirical evidence is also provided for Thirlwall's law using a sample of 16 OECD countries.     

Determinants of co-movement and of lead and lag behavior of business cycles in the Eurozone

In this paper we study business cycle correlations in the Eurozone and its determinants. Additionally, we also analyze the determinants of the lead and lag behavior of business cycles in the Eurozone. We explore the relevance, in the Eurozone context, using GDP and employment as the business cycle measures, of the determinants of business cycle synchronization identified in the literature, namely bilateral trade intensity, dissimilarity of labor market rigidity, dissimilarity in industrial structures, financial openness, and foreign direct investment relations. We estimate a simultaneous 4-equations model by Ordinary Least Squares (OLS) and three-stage least square to investigate empirically the above-mentioned determinants of business cycle correlation. Bilateral trade relations present a positive influence on business cycle correlations, while the dissimilarity of labor market rigidity presents a negative influence. The rest of the above-mentioned variables are non-significant. These results are robust to the use of the Hodrick–Prescott-filter and first differences as the de-trending methods, as well as the use of GDP as the business cycle measure, excluding the financial crisis years (2008 and 2009). Results for employment as the business cycle measure are in contrast with the previous ones, and found industrial dissimilarity to be the relevant variable to determine business cycles synchronization. In what concerns the determinants of the lead and lag behavior, results show that the member states of the Eurozone that usually lead the cycle are the ones that are wealthier, with strict employment legislation, more specialized in construction and finance sectors, and more prone to international capital movements. Differences in the determinants between contemporaneous business cycles and lead and lag behavior of business cycles are especially important for policy-makers in the Eurozone to know about, in particular if asymmetric shocks between countries are set in place.     

Nonlinear dynamism of innovation and business cycles

The aim of this paper is to describe the nonlinear dynamism of innovation and to clarify the role of innovation for economic development in terms of Kondratiev business cycles, especially the causal relation of the bubble economy and depressions with innovations. Any paradigm of technological innovation develops within a definite time span reaching maturity. This nonlinear nature clarifies many characteristic features of innovation. Schumpeters innovation theory on business cycles is examined through this dynamism. Trunk innovation is defined as that which plays a decisive role in building infrastructures and inducing subsequent innovations. Every innovation has its own technological development period just before the innovation diffusion. The emergence of new markets can be estimated by chasing the ongoing technologies.JEL Classification: E32, L16, O11, O14, O30Paper presented at the 9th Conference of the International J.A. Schumpeter Society, Gainesville, Florida, USA.Previous affiliation was Ryutsu Kagaku University, Faculty of Information Science, Kobe, Japan.     

Unique and multiple equilibria in a macroeconomic model with environmental quality: An analysis of local stability

This paper develops and analyzes an economic growth model which incorporates environmental quality into the production and utility functions. We solve our model for the balanced growth path and find that a unique low growth equilibrium is attained when environmental quality is given less weight in the utility function. Multiple equilibria exist if environment quality is given greater weight in the utility function. We also perform local stability analysis of our model. We conclude that an economy in which the environmental quality is given relatively less importance by the agents will be caught in low growth, high consumption poverty traps as is the case for many developing countries while other economies can potentially reach a relatively low consumption, high growth steady state if they place greater weight on environmental quality. Finally we look at how the gap between low and high growth equilibria shrinks when individuals place greater weight on environmental quality and how governmental policies can promote growth when societies give less weight to the environment.     

Labor market institutions and aggregate fluctuations in a search and matching model

This paper explores the influence of labor market institutions on aggregate fluctuations. It uses a dynamic, stochastic, general equilibrium model characterized by search and matching frictions in the labor market and nominal rigidities in the goods market. It finds that firing costs and unemployment benefits can have substantial effects on aggregate fluctuations. Increasing firing costs decreases the volatility of output, employment, and job flows due to the reduction in the mass of jobs sensitive to disturbances and lower incentives for firms to hire and fire workers. Hence, firms adjust to shocks mainly through prices, causing inflation to become more volatile. Raising unemployment benefits has the reverse effect on aggregate fluctuations.     

Economic migration and business cycles in a small open economy with matching frictions

With the free movement of labour in Europe, economic migration has become an important determinant of labour supply. Cyclical migration exceeds one percent of the population in many countries and affects (un)employment and wage setting. The main contribution of this paper is that it models migration as an endogenous decision in a search-and-matching framework, where labour market institutions play an important role. It shows that, contrary to typical beliefs, migration can amplify business cycles. After a positive shock to the economy, immigration increases the labour force and initially unemployment. The latter reduces a worker's outside option in wage negotiations, resulting in a lower wage increase than when there is no migration. With cheaper labour firms post more job vacancies, which increases the probability that unemployed workers find jobs and attracts new workers to immigrate. Attenuated response of wages and the stronger response of employment to shocks result in a flatter Phillips curve.     

Stability and limit cycles in one-dimensional dynamic optimisations of competitive agents with a market externality

This paper considers low dimensional (more precisely, one state variable) dynamic optimisation problems of competitive agents. These individual decisions lead to a dynamic externality for the evolution of the system. However, the impact of an individual and competitive agent is negligible and thus each agent considers this evolution as exogenous data. This leads, assuming rational expectations (perfect foresight due to the deterministic set up), to motions in the three dimensional space of state, costate and externality. Considering the fact that such externalities are widespread, e.g., R&D in the literature on new growth theory, pollution in environmental economics, etc., the incorporation of such externalities due to competitive markets is important, yet this incorporation may alter the stability of the system. Indeed, complex policies such as stable limit cycles are sustainable in such a low-dimensional economy, even for a separable and strictly concave model.     

Sensitivity analysis for applied general equilibrium models in the presence of multiple Walrasian equilibria

Summary. Pagan and Shannon's (1985) widely used approach employs local linearizations of a system of non-linear equations to obtain asymptotic distributions for the endogenous parameters (such as prices) from distributions over the exogenous parameters (such as estimates of taste, technology, or policy variables, for example). However, this approach ignores both the possibility of multiple equilibria as well as the problem (related to that of multiplicity) that critical points might be contained in the confidence interval of an exogenous parameter. We generalize Pagan and Shannon's approach to account for multiple equilibria by assuming that the choice of equilibrium is described by a random selection. We develop an asymptotic theory regarding equilibrium prices, which establishes that their probability density function is multimodal and that it converges to a weighted sum of normal density functions. An important insight is that if a model allows multiple equilibria, say , but multiplicity is ignored, then the computed solution for the i-th equilibrium generally no longer coincides with the expected value of that i-th equilibrium. The error can be large and correspond to several standard deviations of the mean's estimate. Received: December 7, 1999; revised version: December 4, 2000     

A note on asymmetric and mixed strategy equilibria in the search-theoretic model of fiat money

Summary. The simple search-theoretic model of fiat money has three symmetric Nash equilibria: all agents accept money with probability 1; all agents accept money with probability 0; and all agents accept money with probability y in (0,1). Here I construct an asymmetric pure strategy equilibrium, payoff-equivalent to the symmetric mixed strategy equilibrium, where a fraction N in (0,1) of agents always accept money and 1-N never accept money. Counter to what has been conjectured previously, I find N > y. I also introduce evolutionary dynamics, and show that the economy converges to monetary exchange iff the initial proportion of agents accepting money exceeds N. Received: September 10, 1997; revised version: April 24, 1998     

Generic inefficiency of equilibria in the general equilibrium model with incomplete asset markets and infinite time

Summary. We consider a Lucas asset-pricing model with heterogeneous agents, exogenous labor income, and a finite number of exogenous shocks. Although agents are infinitely lived, endowments and dividends are time-invariant functions of the exogenous shock alone and are thus restricted to lie in a finite-dimensional space; genericity analysis can be conducted on sets of zero Lebesgue measure. When financial markets are incomplete, that is, there are fewer financial securities than shocks, we show that generically in individual endowments all competitive equilibria are Pareto inefficient. Received: November 22, 1999; revised version: March 4, 2002 RID="*" ID="*" We are grateful to an anonymous referee for very insightful comments on earlier drafts.     

Friedman and Schwartz (1982) revisited: Assessing annual and phase-average models of money demand in the United Kingdom

Several studies have developed empirical models of U.K. mondy demand using the century of annual and phase-average data in Friedman and Schwartz (1982). The current paper evaluates key models from those studies, employing tests of constancy and encompassing. The evidence strongly favors an annual model from Ericsson, Hendry, and Prestwich (1998a), whereas models based on the phase-average data fare poorly.The first author is a staff economist in the Division of International Finace, Board of Governors of the Federal Reserve System, Washington, DC 20551 USA. The second author is Leverhulme Personal Research Professor of Economics at Nuffield College, Oxford OX1 1NF. The third author was a research assistan in the Division of International Finance at the Federal Reserve Board when this paper was initially drafted. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. The first author gratefully acknowledges the generous hospitality of Norges Bank, where he revised some of the material herein. The second author gratefully acknowledges financial support from the U.K. Economic and Social Research Council under grant R000234954. We wish to thank Clifford Attfield, David Demery, and Nigel Duck for compiling the data in Attfield, Demery, and Duck (1995); and Neva Kerbeshian, Helmut Lütkepohl, Jaime Marquez, and two anonymous referees for helpful comments. All numerical results were obtained using PcGive Professional Version 9.0: see Doornik and Hendry (1996). The data may be obtained from the Internet at http://wotan.wiwi.hu-berlin.de/oeknometrie/engl/data.html     

Extracting business cycles with three filters: A comparative study and application in the case of China

This paper aims to evaluate the performances of the wavelet, Hodrick–Prescott (HP), and Baxter–King (BK) filters in extracting cyclical information and to use an appropriate method to analyze China's business cycles. First, we use a second-order autoregression (AR (2)) and random walk, based on Monte Carlo simulation experiments, to generate the data-generating processes (DGPs) with different frequency characteristics. Second, the HP, BK, and wavelet filters are applied to extract the cyclical components of the respective DGPs. Third, the filtering abilities of the three methods are statistically compared. The results show the following: (1) Under the condition that the DGP is low frequency (long cycle) and trend dominated, the filtering performance of the three methods will remain unsatisfactory. (2) If the DGP is high frequency (short cycle), all three methods can serve as effective methods regardless of whether they are trend dominated or cycle dominated. However, it can be seen that the BK and wavelet filters present better performance than the HP filter. (3) In other cases, better filtering performances can be observed in the wavelet. Finally, the three methods are applied to estimate China's business cycles. In conclusion, this paper argues that the wavelet can effectively replace HP and BK filters to extract cyclical components.     

Balanced cycles in an OLG model with a continuum of finitely-lived individuals

This paper studies the intertemporal equilibrium of a barter economy populated with a continuum of finitely-lived overlapping generations. Assuming isoelastic preferences and zero endowments at the beginning and the end of the individuals’ life-span, it proves the existence of an Hopf bifurcation and provides sufficient conditions on parameters for its occurrenceThe authors would like to thank an anonymous referee, Alain Venditti and Francesco Ricci for helpful comments and suggestions