This paper empirically and theoretically investigates the relationship between budget balances and external balances, the so-called twin deficit hypothesis. Using the US post-World War II data, I estimate a time-varying structural vector autoregressive model to evaluate the effects of structural breaks on this relationship. The empirical results reveal that the relationship is significantly time varying: (1) an increase in government spending and the consequent budget deficits tend to cause trade deficits in the Bretton Woods era; (2) in contrast, an increase in government spending tends to induce trade surpluses in the post-Bretton Woods era; and (3) with the exceptions of the 1980s and 2010s, government spending shocks cause trade deficits under a floating exchange regime. Using the open economy New Keynesian model with rule-of-thumb consumers, I find that a shift in exchange rate regimes helps in understanding empirical results (1) and (2). Moreover, slowly adjusted taxes inform our comprehension of exceptions in the 1980s, whereas zero lower bound aids our explanation of exceptions in the 2010s.

The Mexican economy experienced two large crises: in 1995 and in 2008. The dynamics and origins of the episodes are very different; nevertheless, is there a common underlying mechanism? First, by applying the Business Cycle Accounting method, we find that the efficiency wedge is the main driver of output during both episodes. We present an equivalence between the neoclassical growth model with distortions and a small open economy with imported intermediate goods inputs, in which relative price changes manifest themselves as changes on the efficiency wedge. This result proposes a solution for the theoretical puzzle regarding the relationship between terms of trade shocks and productivity. Finally, the model is able to reproduce both the intensities and velocities of the crises in Mexico.

The retirement of old workers increased during the COVID-19 pandemic, and health concerns are considered to be a critical factor. To understand the effect of pure health concerns during the pandemic, we analyze the impact of the aggregate health shock on retirement decisions using a life cycle model. The aggregate health shock changes the economy from the normal state to the pandemic state, where the probability of adverse idiosyncratic health shock increases, especially if agents are working. Simulation results suggest that the shock accelerates the retirement of agents aged over 60. The increase in retirement is significant even though the shock is expected to be temporary. Also, the effect hinges on the assumption that working poses a greater risk of receiving a negative health shock than retiring. Even accounting for the large income and wealth changes that US households experienced in 2020, a counterfactual experiment suggests that the aggregate health shock plays a prominent role in increasing retirement.

Based on a multisector general equilibrium framework, we show that the sectoral elasticity of substitution plays the key role in the evolution of asymmetric tails of macroeconomic fluctuations and the establishment of robustness against productivity shocks. A non-unitary elasticity of substitution renders a nonlinear Domar aggregation, where normal sectoral productivity shocks translate into non-normal aggregated shocks with variable expected output growth. We empirically estimate 100 sectoral elasticities of substitution, using the time-series linked input-output tables for Japan and find that the production economy is elastic overall, relative to a Cobb-Douglas economy with unitary elasticity. In addition to the previous assessment of an inelastic production economy for the USA, the contrasting tail asymmetry of the distribution of aggregated shocks between the USA and Japan is explained. Moreover, the robustness of an economy is assessed by expected output growth, the level of which is led by the sectoral elasticities of substitution under zero-mean productivity shocks.

We extract dynamic conditional factor premiums from the Fama-French factor model and find that most anomalies disappear after one accounts for time variation in these premiums. Vector autoregression evidence shows that mutual causation between dynamic conditional alphas and macroeconomic surprises serves as a core qualifying condition for fundamental factor selection. This economic insight is an incremental step toward drawing a distinction between rational risk and behavioral mispricing models. To the extent that dynamic conditional alphas can reveal the marginal investor’s fundamental news and expectations about the cross-section of average asset returns, our economic insight helps enrich macroeconomic asset return prediction.

This study develops a new dynamic general equilibrium model to explore the role of people’s love of novelty as a cultural preference in innovation and innovation-based growth. The model considers (a) an infinitely lived representative consumer who has standard love-of-variety preferences for differentiated products and additional love-of-novelty preferences for new products and (b) technological progress driven by two costly and time-consuming innovation activities, new product development and existing product development. We demonstrate that consumers’ love of novelty is a source of innovation-based growth, wherein economies with a moderate love of novelty can achieve innovation and long-run growth through endogenous cycles between periods in which new product development is active and those in which existing product development is active. However, if love of novelty preference is too weak or too strong, the economy is caught in an underdevelopment trap with less innovation and no long-run growth. We also provide some suggestive empirical evidence that supports our theoretical predictions.

We examine a theoretical model of liquidity with three assets—money, government bonds, and equity—that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.

This study develops a Malthusian model for the evolution of human society from hunting-gathering to agriculture and from agriculture to industrial production. Human society evolves across these stages as the population grows. However, under endogenous population growth, the population may stop growing at any stage. If it fails to reach the first threshold, the population remains as hunter-gatherers. If it reaches the first threshold, an agricultural society emerges. Then, if the population fails to reach the industrial threshold, it remains in an agricultural Malthusian trap without experiencing industrialization. Interestingly, high agricultural productivity triggers not only the Neolithic Revolution but also the subsequent industrialization. Using cross-country data to test this result, we employ an index of prehistoric biogeographic conditions that affect agricultural productivity as an instrument for the timing of transitions to agriculture and find that an earlier transition to agriculture has a positive effect on industrialization in the modern era.

In many countries, the structure of wages and the labor law legislation are completely different for public and private sector employees. In this paper, we develop a general equilibrium overlapping generations model to study the effect of such differences on household savings and labor supply. To conduct our analysis, first we use microdata from two Brazilian household surveys to document that civil servants save and work significantly less than their counterparts in the private sector. Second, we use matched employer–employee microdata from Brazil (RAIS) to document differences between the two sectors in terms of wage and unemployment risk. Then, we calibrate the model to be consistent with micro and macro evidence for Brazil. Our counterfactual exercises show that differences in wages characteristics and labor law legislation account for nearly 70% of the gap in savings between civil servants and private sector workers, and 57% of the gap in labor supply. In addition, we find that eliminating those differences can produce sizable increase on aggregate savings, employment, and welfare.

We develop a simple two-sector neoclassical growth model in which the upstream sector produces intermediate goods, and the downstream sector produces final goods with outputs from the upstream. While the downstream sector features perfect competition, firms in the upstream sector engage in Cournot competition and charge a markup. We show that the deregulation and the introduction of competition in the upstream goods sector not only increases the productivity in the sector but also has a substantial spillover effect on the productivity of the downstream sector and factor prices. We calibrate the model to the Chinese economy and use the calibrated model to quantitatively evaluate the extent to which the deregulation in the upstream market in China from 1998 to 2006 can account for the rapid economic growth and the high and rising returns to capital in China over the same period. Our quantitative experiments show that the deregulation in the upstream sector can account for a significant share of economic growth in China during the study period. In addition, our model delivers implications that are consistent with several other relevant observations in China during the same period.