This paper analyzes the effects of an unanticipated increase in immigration in a macroeconomic model with search and matching frictions. It shows how an immigration shock can lead to a temporary increase in unemployment under a variety of conditions and that this is qualitatively consistent with the responses from a VAR estimated on postwar US data.

This paper analyzes the possibility of expectations-driven business cycles to emerge in a one-sector real business cycle model if the unique driving force is news about future income tax rates. We find that good news about labor income tax rates cannot generate expectations-driven business cycles, whereas good news about capital income tax rates can. We show that a one-sector real business cycle model enriched with (i) variable capital utilization and (ii) investment adjustment costs and driven solely by news shocks about capital income tax rates is able to generate qualitatively and quantitatively realistic business cycle fluctuations. In contrast to numerous studies in the news-driven business cycle literature, our model maintains separable preferences.

The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labor market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

Two essential imperfections determine the degree of the financial sector development in an economy: lending frictions, which constrain the ability to extend loans to borrowers; and, trading frictions, which constrain the trading of these loans in secondary markets. I develop a dynamic general equilibrium model where long-term investment is the engine of growth to study macroeconomic consequences of financial development. In the model, long-term loans are extended to entrepreneurs in a primary market and then traded in a secondary market among financiers. In competitive equilibria, reductions in either lending or trading frictions enlarge the financial sector. Although financial deepening through low-cost lending is always welfare improving, financial deepening stimulated by low-cost trading could be detrimental to the society. I illustrate that a model qualitatively consistent with the U.S. financial development episode of the last 30 years should exhibit disproportionately large reductions in trading frictions relative to lending frictions.

There are suggestions that increased uncertainty makes fiscal policy temporarily less effective. In this paper, I examine the relationship between business uncertainty and fiscal policy effectiveness in Germany. I use measures of business uncertainty that are derived from the firm-level data of the Ifo Business Climate Survey and interact them with the parameters of a structural vector autoregression to produce state-dependent spending multipliers. The impact of increased uncertainty on the spending multiplier is generally small and often statistically not significant in the short run. By contrast, I obtain a significant positive impact on the long-run multiplier. These baseline results are supported by a variety of robustness checks and specifications.

We analyze the impact of increasing longevity on technological progress within an overlapping generations research and development (R&D)-based growth framework and test the model's implication on Organization for Economic Co-operation and Development (OECD) data from 1960 to 2011. The central hypothesis is that—by raising the incentives of households to invest in physical capital and in R&D—decreasing mortality positively affects technological progress and productivity growth. The empirical results confirm the theoretical prediction. This implies that the demographic changes we observed in industrialized economies over the last decades were not detrimental to economic prosperity, at least as far as technological progress and productivity growth are concerned.

This paper considers parental time investment in early childhood as an education input and investigates its relationships with other inputs in their contribution to human capital. I develop a 12-period overlapping generations model where human capital formation is a multistage process. The model is calibrated to the US economy so that the generated data matches patterns in parental education spending and child care time. The estimation results show that time input is complementary to education expenditure. I apply the model by implementing three early education policies. The first two involve more government spending and the third is paid parental leave. The policy experiments show that adopting paid parental leave is the most costly means of increasing human capital. An education subsidy is more effective than a direct increase in government spending at promoting human capital; however, its impact on earnings inequality and persistence is smaller.

This paper presents a Ramsey-like dynamic small open economy with endogenous labor migration. In the model, the domestic economy is free to borrow or lend as much as it wants at the given world interest rate, and individuals are supposed to be free to move from a country to another in response to the emergence of a wage differential between countries. Our analysis can be ideally split in two parts. Initially, we propose a baseline model in which only natives are allowed to save and invest in capital assets and traded bonds, whereas immigrants are credit constrained. Next, we provide an extension in which all individuals, including immigrants, have full access to international financial markets. We find that the steady state is always local indeterminate, and that the adjustment dynamics of the competitive equilibrium is dependent upon the initial level of the immigration ratio.

I revisit the popular concern over a nonlinearity or threshold in the relationship between public debt and growth employing long time series data from up to 27 countries. My empirical approach recognizes that standard time series arguments for long-run equilibrium relations between integrated variables (cointegration) break down in nonlinear specifications such as those predominantly applied in the existing debt–growth literature. Adopting the novel cosummability approach, my analysis overcomes these difficulties to find no evidence for a systematic long-run relationship between debt and growth in the bivariate and economic theory-based multivariate specifications popular in this literature.

This paper derives the optimal unemployment insurance (UI) transfer scheme, UI benefits, and UI contribution fees: When a worker has to earn his or her UI eligibility through work, the UI benefits do not last forever, and the UI agency has imperfect monitoring power on the strategic behavior of the worker. We show that the consideration of the UI eligibility rule generates the effective entitlement effect, which serves as an additional incentive device and alters the nature of the optimal UI transfer scheme established in literature. In contrast with previous studies, we find that when the effective entitlement effect is large, it completely removes the moral hazards in job searches, job acceptances, and job quits. As a result, the optimal UI benefits and contribution fees become constant. Calibrated to the data in the United States, the model reproduces some key features of the existing UI system.

We estimate asymmetries in innovations to Solow residuals for 11 Organization for Economic Co-operation and Development (OECD) countries using stochastic frontier analysis. Likelihood ratio statistics and variance ratios imply that all countries with net energy imports have significant negative asymmetries, whereas other countries do not. We construct a simple theoretical model in which the measured Solow residual combines effects from technology, factor utilization, and the terms of trade. For oil importers, the model implies an asymmetric response of measured total factor productivity to oil price increases and decreases. When we condition Solow residuals separately on positive and negative oil price changes to allow asymmetric responses, evidence for remaining negative asymmetric innovations to the Solow residuals vanishes for all countries except Switzerland. Switzerland's relatively dominant financial sector suggests that their asymmetries could be due to a financial crisis, a hypothesis that we test and fail to reject.

I use a two-country dynamic stochastic general equilibrium (DSGE) model with a nonzero steady-state inflation to study monetary policy in transition economies. In particular, my analysis focuses on whether inflation targeting is based on a consumer price index (CPI) or its producer counterpart, producer price index (PPI). This issue is specifically relevant for transition economies as they might be subject to Balassa–Samuelson effects arising from trading in international markets. Under these circumstances, domestic inflation is possibly higher than imported inflation, hence targeting PPI inflation may prove more effective in influencing domestic macroeconomic variables than targeting CPI inflation. Using a Bayesian methodology, I find that the central banks of three Eastern European countries (namely, the Czech Republic, Hungary, and Poland) are likely to target PPI inflation rather than CPI inflation. This result is in line with the theoretical predictions in the literature, and is robust across several Taylor-type rules.

This paper analyzes the dynamical properties of monetary models with regime switching. We start with the analysis of the evolution of inflation when policy is guided by a simple monetary rule where coefficients switch with the policy regime. We rule out the possibility of a Hopf bifurcation and demonstrate the possibility of a period-doubling bifurcation. As a result, a small change in the parameters (e.g., a more active policy response) can lead to a drastic change in the path of inflation. We show that the New Keynesian model with a current-looking Taylor rule is not prone to bifurcations. A New Keynesian model with a hybrid rule, however, exhibits the same pattern of period-doubling bifurcations as the analysis with a simple monetary rule.

This study introduces financial intermediaries into the Schumpeterian growth model developed by Aghion et al. (2005, Quarterly Journal of Economics, Vol. 120, pp. 173–222). They collect deposits from households, provide funds for entrepreneurial projects, and monitor the entrepreneurs. I consider an economy with moral hazard problems: entrepreneurs can hide the result of a successful innovation and thereby avoid repaying financial intermediaries if the latter do not monitor entrepreneurial performance. I analyze the effects of financial intermediaries' activities on technological progress and economic growth in such an economy. I show that financial intermediaries need to monitor entrepreneurs in an economy where the legal protection of creditors is not strong enough. Such monitoring can resolve the moral hazard problem; however, it does not always promote technological innovation, because it could increase the cost of entrepreneurial innovation and thus reduce the amount invested for innovation. I also examine how monitoring by financial intermediaries affects the welfare of individuals through the stringency of financial markets.

We analyze the implications of trend growth for optimal monetary policy in the presence of search and matching unemployment. We show that trend growth interacts importantly with the inefficiencies stemming from the labor market. Higher trend growth exacerbates the inefficiencies of the labor market and therefore calls for larger deviations from price stability. Our analysis implies that lower trend growth reduces not only the level but also the optimal volatility of the nominal interest rate.