Inflation aversion and macroeconomic policy in a perfect foresight monetary model

This paper reexamines monetary non-superneutrality and the optimality of the optimum quantity of money in the money-in-utility Sidrauski model with endogenous fluctuations of the time preference by introducing inflation aversion. It is shown that the long-run superneutrality of the standard Sidrauski model does not hold, and Friedman's optimum quantity of money is not optimal.     

Factor Substitution, Income Distribution and Growth in a Generalized Neoclassical Model

Abstract. We analyze a generalized neoclassical growth model that combines a normalized CES production function and possible asymmetries of savings out of factor incomes. This generalized model helps to shed new light on a recent debate concerning the impact of factor substitution and income distribution on economic growth. We show that this impact relies on both an efficiency and a distribution effect, where the latter is caused by the distributional consequences of an increase in the elasticity of substitution. While the efficiency effect is always positive, the sign of the distribution effect depends on the particular savings hypothesis. If the savings rate out of capital income is substantial so that a certain threshold value is surpassed, the efficiency effect dominates and higher factor substitution accelerates the accumulation of capital and works as a major engine of growth.     

Optimal military spending in the US: A time series analysis

This paper extends previous work on the optimal size of government spending by including nested functional decompositions of military spending into consumption and investment. Post World War II US data are then used to estimate nested non-linear growth models using semi-parametric methods. As expected, investments in military and non-military expenditure are both found to be productive expenditures with respect to the private production. Moreover there is little evidence to suggest that current military spending is having a negative impact on economic growth in the US, while civilian consumption only tends to have only a weak impact. This does not imply that society will necessarily benefit from a reallocation of more spending to the military sector, nor that it is the best way to achieve economic growth.     

Forecast content and content horizons for some important macroeconomic time series

Abstract.  The information content of statistical forecasts of approximately stationary quantities tends to decline as the forecast horizon increases, and there exists a maximum horizon beyond which forecasts cannot provide discernibly more information about the variable than is present in the unconditional mean (the content horizon ). The pattern of decay of forecast content (or skill) with increasing horizon is well known for many types of meteorological forecasts; by contrast, little generally accepted information about these patterns or content horizons is available for economic variables. In this paper we estimate content horizons for a variety of macroeconomic quantities; more generally, we characterize the pattern of decay of forecast content as we project farther into the future. We find a wide variety of results for the different macroeconomic quantities, with models for some quantities providing useful content several years into the future, for other quantities providing negligible content beyond one or two months or quarters.     

SECTOR‐SPECIFIC EXTERNALITIES AND STATUS PREFERENCES IN THE UZAWA‐LUCAS MODEL*

This paper shows that introducing preferences for social status based on human capital holdings modifies the finding of Gómez (2004 ) that sector‐specific externalities associated with human capital in the goods sector do not violate the optimality of the competitive economy in the Uzawa–Lucas model. The effect of an increase in the degree of sector‐specific externalities is qualitatively the same as that of an increase in the strength of the desire for status. Hence, paradoxically, a greater degree of sector‐specific externalities makes human capital accumulation more excessive from the social point of view.     

Debt, deficits and finite horizons: The stochastic case

We introduce aggregate uncertainty and complete markets into Blanchard's (1985) perpetual youth model. We derive a simple expression for the pricing kernel that can be used to close a variety of equilibrium models in which the set of agents changes over time.     

Preference shifts and the change of consumption composition

While most of the literature explaining the change in consumption composition has focused on the role of relative prices and non-homothetic preferences, this paper examines the importance of preference shifts. I introduce dynamics in preferences and find that they play a relevant role and that their exclusion worsens model performance at least as much as the exclusion of allowing non-homothetic preferences.     

Will the consumption externalities' effects in the Ramsey model please stand up?

According to the prior literature, in a Ramsey model, consumption externalities have no impact on steady state behavior, once labor supply is exogenous. In contrast, this paper argues that — in the presence of technical change — consumption externalities always affect steady state behavior, via their impact on the elasticity of marginal utility of consumption.     

Non linear and asymmetric linkages between real growth in the Euro area and global financial market conditions: New evidence

This paper deals with transition mechanisms through which financial market conditions affect real economic growth in the Euro area. The informational content of financial variables for predicting real economic growth is assessed, allowing for asymmetric responses to shocks. A nonlinear framework is developed based on a smooth transition model for which the effects of shocks can vary across business cycles when financial indicators modify both the endogenous and state variables. Global financial variables are shown to significantly affect real growth in the Euro area, particularly during periods of recession. Changes in stock market index and yield slope have asymmetric effects on real growth. In recessionary periods, the slope of the US yield curve does not have a significant impact on growth in the Euro area.     

Intergenerational mobility and macroeconomic history dependence

A large literature on ‘endogenous inequality’ has argued that persistent differences in macroeconomic performance across countries can be explained by historical inequality, owing to indivisibilities in occupational choice and borrowing constraints. These models are characterized by homogenous agents, a continuum of steady states (SSs) and lack of mobility in every SS. We show that introducing (even a little) heterogeneity in order to generate SS mobility shrinks the SS set dramatically. Mobile SSs are generically locally unique and finite in number. Sufficient conditions for global uniqueness and convergence of competitive equilibrium dynamics are provided.     

Housing and relative risk aversion

This paper derives closed-form and numerical solutions for relative risk aversion in a standard consumption-based model enriched with housing. The presence of housing enables the household to hedge against unexpected shocks and may decrease relative risk aversion. In addition, housing may generate state-dependent, time-varying risk aversion.     

Seasonal fractional components in macroeconomic time series

Seasonal fractional models are shown in this article to be alternative credible ways of modelling the seasonal component in macroeconomic time series. A testing procedure that allows one to test different orders of integration at zero and at each of the seasonal frequencies is described. This procedure is then applied to the Italian consumption and income series, the results being very sensitive to the way of modelling the I(0) disturbances.     

Informal self-employment and macroeconomic fluctuations

Informal self-employment is a major source of employment in developing countries. Its cyclical behavior is important to our understanding of the functioning of LDC labor markets, but turns out to be surprisingly complex. We develop a flexible model with two sectors: a formal salaried (tradable) sector that may be affected by wage rigidities, and an informal (non tradable) self-employment sector faced with liquidity constraints to entry. This labor market is then embedded in a standard small economy macro model. We show that different types of shocks interact with different institutional contexts to produce distinct patterns of comovement between key variables of the model: relative salaried/self-employed incomes, relative salaried/self-employed sector sizes and the real exchange rate. Model predictions are then tested empirically for Argentina, Brazil, Colombia and Mexico. We confirm episodes where the expansion of informal self-employment is consistent with the traditional segmentation views of informality. However, we also identify episodes where informal self-employment behaves “pro-cyclically”; here, informality is driven by relative demand or productivity shocks to the non tradable sector.     

On Ramseyʼs conjecture

Studying a one-sector economy populated by finitely many heterogeneous households that are subject to no-borrowing constraints, we confirm a conjecture by Frank P. Ramsey according to which, in the long run, society would be divided into the set of patient households who own the entire capital stock and impatient ones without any physical wealth. More specifically, we prove (i) that there exists a unique steady state equilibrium that is globally asymptotically stable and (ii) that along every equilibrium the most patient household owns the entire capital of the economy after some finite time. Furthermore, we prove that despite the presence of the no-borrowing constraints all equilibria are efficient. Our results are derived for the continuous-time formulation of the model that was originally used by Ramsey, and they stand in stark contrast to results that – over the last three decades – have been found in the discrete-time version of the model.     

Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences

The effects of consumption and production externalities on economic performance under time non-separable preferences are examined both theoretically and numerically. We show that a consumption externality alone has long-run distortionary effects if and only if labor is supplied elastically. With fixed labor supply, it has only transitional distortionary effects. Production externalities always generate long-run distortions, irrespective of labor supply. The optimal tax structure to correct for the distortions is characterized. We compare the implications of this model with those obtained when the consumption externality is contemporaneous. While some of the long-run effects are robust, there are also important qualitative and quantitative differences, particularly along transitional paths.     

SENIORITY WAGES AND ECONOMIC GROWTH*

Economies that lack well‐developed markets for mobilizing household savings may, in some instances, grow faster than those that are financially more developed, provided that their labour markets are also characterized by seniority rather than spot wages. This occurs because of a Kaldorian redistribution effect in a model where households have finite‐horizons and where older workers, as an endogenous feature, have higher saving rates.     

Keeping up with the Joneses, consumer ethnocentrism, and optimal taxation

This paper sets up a two-good (domestically- and internationally-produced goods) model of a small open economy with consumption externalities and uses it to examine the optimal taxation. Since keeping up with the Joneses leads an individual consumption's to impose a negative externality on the consumption of others, a consumption tax and tariff are thereby socially desirable to correct this distortion. Due to the fact that the government has to account for additional distortion caused by consumer ethnocentrism and that keeping up with the Joneses in the consumption of domestic goods tends to reinforce the influence of ethnocentrism on the purchase of domestic products, the consumption of imported goods is subject to a higher tariff rate because of the cross-market externality. Of interest, if consumption only involves an own-market externality, there is no cyclical consequence for the optimal taxes. However, if consumption involves both own- and cross-market externalities, the optimal tariff is state-contingent and, more specifically, is countercyclical.     

Wealth inequality, preference heterogeneity and macroeconomic volatility in two-sector economies

We explore the link between wealth inequality, preference heterogeneity and macroeconomic volatility in a two-sector neoclassical growth model. First we prove that, if agents have homogeneous preferences, when the absolute risk tolerance is a strictly convex (concave) function, sufficiently high (low) levels of wealth inequality may lead to endogenous fluctuations in the neighborhood of the steady state. Second, we consider the effects of preference heterogeneity when agents are homogeneous with respect to their wealth. We show that when the utility function belongs to the HARA class, sufficiently high levels of preference heterogeneity may lead to endogenous fluctuations in the neighborhood of the steady state if the elasticity of intertemporal substitution in consumption is greater than one.