This study addresses two significant limitations in the literature on cross-country expenditure comparisons: (a) treatment of all countries, large and small, as single entities with no spatial differences inside the countries, and (b) use of Divisia price indices, rather than Rank 3 preference-based “exact price” indices, in the expenditure comparisons. This paper compares alternative preference consistent methods for estimating spatial price differences in a large heterogeneous country, namely India, that are benchmarked against the spatial prices generated by the Laspyeres and Tornqvist price indices. Unlike the use of conventional price indices, the use of demand-systems-based methods allows the incorporation of price-induced substitution effects between items. The paper illustrates the usefulness of the methodology by using the “exact” spatial price indices, in conjunction with the inequality-sensitive welfare measure due to Sen, to rank the Indian states and examine changes in ranking during one of the most significant periods in independent India. The results have methodological and empirical implications that extend far beyond India.

We investigate sources of economic fluctuations in Chile during 1998–2007 within the framework of a standard neoclassical growth model with time-varying frictions (wedges). We analyze the relative importance of efficiency, labor, investment, and government/trade wedges for business cycles in Chile. The purpose of this exercise is twofold: (i) focusing the policy discussion on the most important wedges in the economy and (ii) identifying which broad class of models would present fruitful avenues for further research. We find that different wedges have played different roles during our studied period, but that the efficiency, labor, and investment wedges have had the greatest impact. We also compare our results with existing studies on emerging and developed economies.

This paper proposes an unobserved-component approach to estimate expected returns on household assets and expected growth rates of excess consumption (consumption in excess of labor income) within a present-value model of consumption. The present-value model of consumption implies that the excess-consumption–assets ratio can be expressed as a function of the present discounted value of expected excess-consumption growth rate and expected asset returns. Because expected returns and expected excess-consumption growth rate are unobserved variables, we use an unobserved-component approach to extract them from the observed history of realized returns and excess-consumption growth rate. Our results suggest that both filtered returns and filtered excess-consumption growth rate are significant and better predictors of realized returns and realized excess-consumption growth rate than the one obtained by the lagged excess-consumption–assets ratio.

We introduce skill decay during unemployment into a New Keynesian model with hiring frictions and real-wage rigidity. Plausible values of quarterly skill decay and real-wage rigidity turn the long-run marginal cost–unemployment relationship positive in a “European” labor market with little hiring but not in a fluid “American” one. If the marginal cost–unemployment relationship is positive, determinacy requires a passive response to inflation in the central bank's interest feedback rule if the rule features only inflation. Targeting steady-state output or unemployment helps to restore determinacy.

Now that most countries have harmonized intellectual property right (IPR) legislation as a consequence of signing the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), the dispute about the optimal level of IPR protection has shifted toward IPR enforcement. This paper develops an endogenous growth framework with two open economies satisfying the classical North–South assumptions to study (a) the regions' incentives to enforce IPRs in a decentralized game, (b) the desired IPR enforcement of the two regions in negotiation rounds on global harmonization, and (c) the constrained efficient enforcement level. We show how the different solutions relate to each other and how the results depend on the research productivity in the North and the regions' relative market sizes. Although growth rates increase substantially when IPR enforcement is harmonized at the North's desired level, our numerical simulation suggests that the South may also benefit in terms of long-run welfare.

Currency fluctuations are an important determinant of labor market dynamics. Vice versa, relative labor costs affect real exchange rate dynamics. The optimal choice of exchange rate regimes cannot neglect this nexus. We assess such a choice using a two-country model with frictional labor markets. The monetary authority faces a tension between the classical insulating property of floating exchange rates and the destabilizing effects of currency fluctuations on (relative) job flows. Results show that the second motive is important: optimal monetary policy prescribes (some) response to the exchange rate. We also reexamine the conditions for optimal policy in a currency area whose members experience asymmetries in labor market institutions.

Habit formation is a fixture of contemporary new Keynesian models. The vast majority assume that agents form habits strictly over consumption of an aggregate good, leaving open the question of whether it might be preferable to have them form habits over differentiated products instead–an arrangement known as deep habits. I answer this question by estimating a model that nests both habit concepts as special cases. Estimates reveal that the data favor a specification in which consumption habits are stronger at the product level than at the aggregate level. A mix of significance tests and simulation results indicate that including deep habits greatly improves model fit, most notably with regard to inflation dynamics.