Intangible capital in a real business cycle model

Recent empirical studies have shown that intangible capital plays an important role in explaining productivity gains that have occurred during the last two decades. By introducing intangible capital in an otherwise standard theoretical real business cycle model, this paper aims to provide a theoretical foundation of the empirical findings. Our results indicate that investment in intangible capital is pro-cyclical. Both transitory as well as permanent productivity shocks increase investment in intangible capital. However, in case of a permanent technology shock we learn that firms allocate more labor and physical capital to the creation of intangible capital which increases future profits at the cost of current profit. We also find that investment in intangible capital plays an important role in producing endogenous movements in productivity.     

Long-run relationships between labor and capital: Indirect evidence on the elasticity of substitution

This paper proposes an indirect method for making empirical inference on the elasticity of substitution between capital and labor. The idea is that estimates of the elasticity may be retrievable from theory derived behavioral equations, by conducting comparative statics with respect to this parameter. This approach is readily applicable to more realistic models than those which are commonly used to derive estimates of the substitution elasticity. It is demonstrated that the conventional approach does not yield sensible estimates on quarterly Finnish manufacturing data. By applying the indirect method, a long-run empirical relationship is found that is consistent with an elasticity of substitution below one.     

Human capital and the intertemporal substitution for leisure: empirical evidence for Spain

Portuguese Economic Journal - In this paper we provide the first estimate of the intertemporal substitution for leisure in Spain, accounting for the impact of human capital accumulation. This would...     

Inflation and output dynamics in a model with labor market search and capital accumulation

In a sticky-price model with labor market search and habit persistence, Walsh (2005) shows that inertia in the interest rate policy helps to reconcile the inflation and output persistence with empirical observations for the US economy. We show that this finding is sensitive with regard to the introduction of capital formation. While we are able to replicate the findings for the inflation inertia in a model with capital adjustment costs and variable capacity utilization, the output response to an interest shock is found to be too large and no longer hump-shaped in this case. In addition we find that the response of output to a technology shock can only be reconciled with empirical findings if either the adjustment of the utilization rate is very costly or there is only a modest amount of nominal rigidity in the economy.     

Policy effects of the elasticity of substitution across labor types in life cycle models

This paper investigates how the production function elasticity of substitution across different labor types impacts the results of policy analysis in multiperiod lived agent overlapping generations models. We critique and investigate the popular structure that simply assumes that workers with different age, experience or education are perfectly substitutable in production. This structure is inconsistent with empirical evidence of production complementarities. We couch our findings in the context of two types of policy reforms: a social security reform and a tax reform. These reforms were chosen in part not only because of the large interest in them, but also because of their differing effects on life cycle decisions. We find that ignoring production complementarity may influence the conclusions of policy analysis.     

A real business cycle model with tradable and non-tradable goods for the Spanish economy

Over the last years, the business cycles of the Spanish economy have been analyzed from different points of view. Under the paradigm of the real business cycles, the standard model has been extended in several dimensions. However, none of them have taken into account the fact that in this economy the presence of non-tradable goods is one of the largest in the world. When this feature is properly taken into account, the modeled real business cycle small open economy, calibrated for Spanish data, is able to explain several distinct stylized facts for this economy. In particular, it explains the larger than standard volatility of private consumption, and the different cyclical properties of inflation for non-tradable and tradable goods. Furthermore, the theoretical model is able to adequately explain some other cyclical properties of Spanish macroeconomic variables, both at the aggregate and sectoral levels.     

Planning capital-labor substitution and intertemporal equilibrium with a non-linear multi-sector growth model

A non-linear multi-sector model, postulating sectoral production functions and price-responsive demand functions linked around an input-output matrix in a general equilibrium framework, is used to simulate capital-labor substitution on a growth path characterized by intertemporal equilibrium. It demonstrates how the ‘temporary equilibrium’ or ‘sequential temporary equilibrium’ form of models that allow substitution can be extended into an intertemporally indecomposable equilibrium model without abandoning interaction between prices and quantities in the determination of technology and demand. The model is applied to the analysis of the impact of changes in real-wage growth on the characteristics of the equilibrium growth path of the Turkish economy with special attention given to the employment problem.     

Debt overhang in a business cycle model

We study the macroeconomic implications of the debt overhang distortion on firms׳ investment and labor decisions. We show that the distortion arises when the levels of investment and labor are non-contractible and chosen after the signing of the debt contract. The financial friction manifests itself as investment and labor wedges that move counter-cyclically, increasing during recessions when the risk of default is high. Their dynamics amplify and propagate the effects of shocks to productivity, government spending, volatility, and funding costs. Both the size and the persistence of these effects are quantitatively important.     

Shirking in a monetary business cycle model

Abstract .  This paper investigates whether a limited participation model with imperfectly observed effort can reproduce the economy's responses to a monetary policy shock without appealing to high labour supply elasticities or high markups. The results demonstrate that the presence of imperfectly observed effort, in combination with the limited participation assumption, allows the model to account for the presence of involuntary unemployment, nominal wage rigidity, and the observed responses to monetary policy shocks.     

Mineral wealth and human capital accumulation: a nonparametric approach

This article uses a nonparametric approach to investigate the nexus between mineral wealth and human capital accumulation across countries. Higher mineral wealth is associated with elevated levels of human capital in a cross-section of countries. Matching the overall level of economic development and political instability and violence, weakens but does not reverse this conclusion. These results are economically significant. Moving up from the bottom to the top quartile for subsoil wealth per capita decreases illiteracy by ≈ 12% among young and adult females. Conversely, moving down from the top to the bottom quartile for subsoil wealth per capita decreases the average years of primary and total education by ≈ 1.5 years for females. Results are consistent with Hirschman's conjecture that enclave economies have weaker production linkages but stronger government revenue linkages than other activities. Most importantly, this article argues that caution should be exercised when discouraging countries from exploiting their mineral wealth, especially for countries where human capital is scarce.

I know, [there is] no safe depositary of the ultimate powers of society, but the people themselves; and if we think them not enlightened enough to exercise their control with wholesome discretion, the remedy is not to take it from them, but to inform their discretion by education. This is the true corrective of abuses of constitutional power.     

Present bias and the inefficiency of the centralized economy: The role of the elasticity of intertemporal substitution

We analyze an endogenous growth model considering agents with an isoelastic utility. Preferences are characterized by a utility affected by a negative externality, and a level of impatience which decays with the time distance from the present. Agents who cannot commit the actions of their future selves, play a game against them. The stationary equilibrium of this game defines a balanced growth path with a slower growth when played by subsequent central planners than when played by decision makers in the market economy. First, we prove that the fast growing market economy implies higher welfare if the negative externality is small, while the centralized economy is welfare improving above a given threshold for the externality (obtained for a specific family of non-constant discount functions). Secondly, we observe that this threshold increases with the elasticity of intertemporal substitution in consumption. Therefore, the greater this elasticity the more likely it is that the externality lies below this threshold, where policy interventions would not be adequate. Finally, as one would expect, the range of values of the externality for which the market equilibrium provides higher welfare widens the more different from constant discounting time preferences are, due either to a wider range of variation for the instantaneous discount rates or because these decay more slowly.     

Strange attractors in a multisector business cycle model

Three coupled oscillating sectors in a multisector Kaldor-type business cycle model can give rise to the occurrence of chaotic motion. If the sectors are linked by investment demand interdependencies, this coupling can be interpreted as a perturbation of a motion on a three-dimensional torus. A theorem by Newhouse, Ruelle and Takens implies that such a perturbation may possess a strange attractor with the consequence that the flow of the perturbed system may become irregular or chaotic. A numerical investigation reveals that parameter values can be found which indeed lead to chaotic trajectories in this cycle model.     

Bank structure, capital accumulation and growth: a simple macroeconomic model

Summary. This paper analyzes the equilibrium growth paths of two economies that are identical in all respects, except for the organization of their financial systems: in particular, one has a competitive banking system and the other has a monopolistic banking system. In addition, the sources of inefficiencies, as a result of monopoly banking, and their relationship to the existence of credit rationing are explored. Monopoly in banking tends to depress the equilibrium law of motion for the capital stock for either of two reasons. When credit rationing exists, monopoly banks ration credit more heavily than competitive banks. When credit is not rationed, the existence of monopoly banking leads to excessive monitoring of credit financed investment. Both of these have adverse consequences for capital accumulation. In addition, monopoly banking is more likely to lead to credit rationing than is competitive banking. Finally, the scope for development trap phenomena to arise is considered under both a competitive and a monopolistic banking system. Received: September 20, 1999; revised version: December 3, 1999     

The business cycle and the equity risk premium in real time

Building on the stochastic discount factor model, we estimated a multivariate exponential GARCH-in-mean model to analyze the link between the business cycle and the equity risk premium in the United States. In order to measure the business cycle, we used revised and real-time monthly data on industrial production for the period from 1965 to 2008. The main result of our empirical analysis is that estimates of the equity risk premium based on real-time macroeconomic data may significantly differ from estimates of the equity risk premium based on revised macroeconomic data.     

Debt and capital accumulation in a two-sector model with non-traded goods

The paper examines optimal debt and capital accumulation for an open economy which faces an imperfect international capital market. The major finding is that the optimal pattern of debt and capital accumulation is affected by relative factor intensities. Factor intensities determine whether substitution or complementary relationships exist between debt and capital. The relationship between the country's net wealth and its two components financial and productive are also determined by factor intensities.     

The role of capital accumulation in the industrialization of a labor surplus economy: A formulation of the Fei–Ranis model

The process of the reallocation of labor from agriculture to industry, outlined by Fei and Ranis, is examined by formulating a disequilibrium adjustment model of a dual economy. The main result of the analysis shows that capital accumulation and technological progress in industry can play a role in extracting labor from agriculture, dependent on whether or not the price elasticity of the demand for food is zero. This result is interpreted as whether capital accumulation and technological progress in industry contribute to the creation of a growing agricultural surplus, which Jorgenson advocated as the condition for economic development.     

On capital accumulation paths in a neoclassical stochastic growth model

Summary. Boldrin and Montrucchio [2] showed that any twice continuously differentiable function could be obtained as the optimal policy function for some value of the discount parameter in a deterministic neoclassical growth model. I extend their result to the stochastic growth model with non-degenerate shocks to preferences or technology. This indicates that one can obtain complex dynamics endogenously in a wide variety of economic models, both under certainty and uncertainty. Further, this result motivates the analysis of convergence of adaptive learning mechanisms to rational expectations in economic models with (potentially) complicated dynamics. Received: June 21, 1996; revised version: October 31, 1996