We study the implications of changes in the mix of taxes, public spending, and public finance in the Eurozone. In so doing, we build a general equilibrium OLG model that naturally incorporates all the main categories of public spending and taxes. We focus on the medium- and long-run implications of permanent reforms in the actual policy mix. When we depart from 2008, the best way out of the recession would be an increase in public spending on education and health and in turn cuts in distorting taxes including social security contributions. When we depart from the year 2017, which features a higher inherited public debt, public debt consolidation becomes the superior reform to the extent that the focus is on the medium and long run.

The literature on international business cycles has employed dynamic factor models (DFMs) to disentangle global from group-specific and national factors in countries’ macroeconomic aggregates. Therefore, the countries have simply been classified ex ante as belonging to the same region or the same level of development. This paper estimates a DFM for a sample of 106 countries and three variables (output, consumption, investment) over the period 1960–2014, in which the countries are classified according to the outcome of a cluster analysis. By comparing the results with those obtained by the previous grouping approaches, we show substantial deviations in the importance of global and group-specific factors. Remarkably, when the groups are defined properly, the “global business cycle” accounts for only a very small fraction of macroeconomic fluctuations, most evidently in the industrialized world. The group-specific factors, on the other hand, play a much greater role for national business cycles than previously thought—also in the pre-globalization period.

This paper studies the government spending multiplier in the presence of the cost channel of the nominal interest rate. I find that the spending multiplier of normal times declines markedly when this channel is introduced. The rise in government spending leads to a rise in the nominal interest rate and, with the cost channel, to a rise in the marginal cost and inflation. In turn, this leads to a bigger rise in the nominal interest rate and the expected real interest rate, hence a lower multiplier, than in a model that abstracts from the cost channel. On the other hand, in a liquidity trap, the cost channel makes the spending multiplier larger. Therefore, by ignoring the cost channel, the spending multiplier is overestimated in normal times and underestimated during liquidity trap episodes. Since liquidity traps are rare, however, the spending multiplier is mostly lower than in previous estimates.

The expectational stability (E-stability) property of rational expectations equilibria (REE) in linear macroeconomic dynamic stochastic general equilibrium (DSGE) models is known to be sensitive to the information available to decision makers as well as the structure of the economic environment considered. Models featuring news shocks as a source of macroeconomic fluctuations depart from traditional assumptions regarding both the structure of the economy and the information set of agents. This paper investigates whether E-stability of REE is affected by either the inclusion of news shocks by themselves or the complementary structural changes. The main results find that the E-stability property of REE is robust to the inclusion (or exclusion) of news shocks and that well-known news-shock DSGE models permit REE which are simultaneously E-stable and capable of producing qualitatively realistic expectationally driven business cycles.

Many recent digital innovations (like video games) augment the value of leisure time, which is not captured by Gross Domestic Product. Therefore, the productivity impact of such innovations may be understated. I develop the theoretical foundations for measuring the value of leisure when it is produced using the household’s leisure time and recreational durable goods. I apply this framework to estimate the value of US leisure from 1948 to 2016. While the value of leisure is large, it has become less important over time. I find that productivity growth of leisure time has slowed in the digital era. Household stocks of digital goods are small, so have relatively little impact on leisure value. I conclude that mismeasurement due to household digital goods is not a first-order cause of the recent productivity slowdown.

We estimate the effects of government spending shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound (ELB). Using a panel VAR model for 17 advanced countries, we find that both the government consumption and investment multipliers are significantly higher, and exceed unity, when interest rates are persistently low. Distinguishing between construction- and equipment-related government investments, we find that only the former raises output by significantly more when the ELB binds. This result can be explained by existing New Keynesian models featuring time-to-build constraints on government investment.

This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet. We construct a general equilibrium model where agents have rational expectations, and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet affects equilibrium asset prices and economic activity. We prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is self-financing and leads to a Pareto efficient outcome.

We assess the long-run growth effects of automation in the overlapping generations framework. Although automation implies constant returns to capital and, thus, an AK production side of the economy, positive long-run growth does not emerge. The reason is that automation suppresses wage income, which is the only source of investment in the overlapping generations model. Our result stands in sharp contrast to the representative agent setting with automation, where sustained long-run growth is possible even without technological progress. Our analysis therefore provides a cautionary tale that the underlying modeling structure of saving/investment decisions matters for the derived economic impact of automation. In addition, we show that a robot tax has the potential to raise per capita output and welfare at the steady state. However, it cannot induce a takeoff toward positive long-run growth.

This paper shows that the ability of the credible wage bargaining model to match the observed unemployment volatility hinges on an unrealistic assumption about disagreement payoffs to the firm. Relaxing this assumption can lead to the substantial wage flexibility. As a consequence, the model is unable to capture the observed unemployment volatility.

Fixed search costs, that is, costs that do not vary with search duration, can amplify the cyclical volatility of the labor market. To assess the size of fixed costs, we analyze the relation between search costs and search duration using German establishment data. An instrumental variable estimation shows no relation between search duration and search costs. We conclude that search costs are mainly fixed costs. Furthermore, we show that a search and matching model, calibrated for Germany with fixed costs close to 75%, can generate labor market volatility that is consistent with the data.