We systematically evaluate how to translate a Calvo wage duration into an implied Rotemberg wage adjustment cost parameter in medium-scale New Keynesian DSGE models by making use of the well-known equivalence of the two setups at first order. We consider a wide range of felicity functions and show that the assumed household insurance scheme and the presence of labor taxation greatly matter for this mapping, giving rise to differences of up to one order of magnitude. Our results account for the inclusion of wage indexing, habit formation in consumption, and the presence of fixed costs in production. We also investigate the conditional and unconditional welfare implications of the wage-setting schemes under efficient and distorted steady states.

In this paper, we study the relationship between changes in the world interest rate and within-country inequality during the 1985–2005 period in which the world interest rate sharply declined. In line with the predictions of the seminal model of Galor and Zeira [Income distribution and macroeconomics. Review of Economic Studies 60, 35–52], the analysis suggests that the decrease in the world interest rate is associated with a decrease in inequality in poor countries and an increase in inequality in rich ones.

In the economics literature, there are two dominant approaches for solving models with optimal experimentation (also called active learning). The first approach is based on the value function and the second on an approximation method. In principle the value function approach is the preferred method. However, it suffers from the curse of dimensionality and is only applicable to small problems with a limited number of policy variables. The approximation method allows for a computationally larger class of models, but may produce results that deviate from the optimal solution. Our simulations indicate that when the effects of learning are limited, the differences may be small. However, when there is sufficient scope for learning, the value function solution seems more aggressive in the use of the policy variable.

We document that the credit spread on consumer unsecured debt exhibits a persistent, hump-shaped response to an increase in the charge-off rate. This stylized fact poses a significant challenge for a standard model of consumer default in which lenders have rational expectations and, therefore, the credit spread continuously adjusts to reflect the true default incentives of each borrower. In an effort to explain this feature of the data, we construct a model of consumer default with countercyclical income risk in which lenders learn about default risk over time by observing the history of repayment decisions, as is the case in practice. In addition to matching credit spread dynamics, allowing lenders to learn about default risk substantially improves the model’s ability to generate realistic business cycle fluctuations in the consumer unsecured credit market and match the cross-sectional distribution of unsecured debt and dispersion of interest rates observed in the data.

In a canonical monetary policy model in which the central bank learns about underlying fundamentals by estimating the parameters of a Phillips curve, we show that the bank’s loss function is asymmetric such that parameter overestimates may be more or less costly than underestimates, creating a precautionary motive in estimation. This motive suggests the use of a more efficient variance-adjusted least-squares estimator for learning about fundamentals. Informed by this “precautionary learning” the central bank sets low inflation targets, and the economy can settle near a Ramsey equilibrium.

Benhabib et al. [(2001) Journal of Economic Theory 96, 40–69] argue that there exists a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, positive shocks to households’ preferences and wage markup, and a negative shock to monetary policy do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that sunspot shocks have a limited effect on Japan’s output fluctuations and rather contribute to stabilizing the economy after the global financial crisis.

We develop a classical macroeconomic model to examine the growth and distributional consequences of education. Contrary to the received wisdom, we show that human capital accumulation is not necessarily growth-inducing and inequality-reducing. Expansive education policies may foster growth and reduce earning inequalities between workers, but only by transferring income from workers to capitalists. Further, the overall effect of an increase in education depends on the actual characteristics of the educational system and on the nature of labor market relations. Although the primary aim of the paper is theoretical, we argue that the model identifies some causal mechanisms that can contribute to shed light on recent stylized facts on growth, distribution, and education for the USA.

We propose a model in which money performs an essential role in the process of exchange, despite the presence of a multilateral clearing house that collects resources from and distributes them to anonymous agents. Money improves the functioning of the clearing house, simultaneously keeping the incentives to contribute and guaranteeing the fine-tuning of allocations.

Anticipating a bailout in the event of a crisis distorts financial intermediaries’ incentives in multiple dimensions. Bailout payments can, for example, lead intermediaries to issue too much short-term debt while simultaneously underinvesting in liquid assets. To correct these distortions, policymakers may choose to regulate the composition of both the assets and liabilities of intermediaries. I examine these regulations in a version of the Diamond and Dybvig [(1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401–419] model with limited commitment. I demonstrate that, contrary to common wisdom, introducing a minimum liquidity requirement can increase intermediaries’ susceptibility to a run by their investors.

Occurrences of an old phenomenon, the expropriation of foreign-owned property, peaked in the 1970s when virtually every significant oil-producing developing country nationalized its oil. Nationalization was again on the rise in the 2000s. Using novel data, this paper quantitatively evaluates the effects of nationalization. First, the paper finds significant productivity losses associated with nationalization in a sample of oil-producing countries. Venezuela in particular experienced a striking decline in productivity. Second, the paper presents a new channel through which nationalization affects productivity: a long-term pre-announcement can shift the composition of the workforce with a huge decline in highly skilled foreign workers and result in higher extraction and lower exploration. Guided by a quantitative dynamic partial equilibrium framework disciplined by features of the Venezuelan data, this paper then evaluates the effects of nationalization. A comparison of the simulated and time series data shows that the model can explain about 80% of the productivity pattern over 1961–1980 in the Venezuelan oil industry. Counterfactual experiments suggest that the shift in the composition of the workforce is important in accounting for the productivity pattern. Furthermore, if nationalization had been sudden, long-run losses would have been lower.

Using a panel of 54 countries between 1980 and 2013, we find empirical support for the view that changes in the fiscal policy stance (year-on-year change in the cyclically adjusted primary balance) have a significant positive correlation with inflation volatility. An increase in the volatility of discretionary fiscal policies by one standard deviation raises inflation volatility by about 6%. Moreover, results using alternative inflation volatility proxies confirm that an expansionary fiscal stance increases price volatility. Another relevant outcome is that in a context of economic expansions (recessions) the harmful impact of fiscal activism on price volatility is soft (heightened), while the negative impact of fiscal activism on price stability is higher when fiscal policy is expansionary. Finally, fiscal activism fuels inflation volatility much more pronouncedly in emerging market economies vis-à-vis advanced economies.