We aim at establishing whether the institutional adoption of inflation targeting has changed the conduct of monetary policy. To do so, we test the hypothesis of inflation targeting translating into a stronger response to inflation in a Taylor rule with three alternative econometric models: a structural break model, a time-varying parameter model with stochastic volatility, and a Markov-switching VAR model. We conclude that inflation targeting has not led to a stronger response to inflation in the reaction function of the monetary authority. This result suggests that inflation targeting being meant to anchor inflation expectations through enhanced credibility and accountability, it may enable a central bank to stabilize inflation without pursuing aggressive action toward inflation variations.

This paper explores the introduction of collective risk-reallocation elements into defined-contribution pension contracts. We consider status-contingent, age-contingent, and asset-contingent arrangements to reallocate risk among participants. Eliminating asset market risk for the retired raises their welfare, whereas it lowers the welfare of the workers, despite the fact that they benefit later from the same arrangement. Overall welfare falls. The welfare effects are largest when personal and pension portfolios are optimally chosen. Allowing for intragenerational heterogeneity, the highest-skilled retirees benefit most, whereas the highest-skilled workers lose most. Our main results are qualitatively robust to a number of model variations and extensions.

We propose a unified identification scheme to identify monetary shocks and track their propagation through the economy. We combine three approaches dealing with the consequences of monetary shocks. First, we adjust a state space version of the P-star type model employing money overhang as the driving force of inflation. Second, we identify the contemporaneous impact of monetary policy shocks by applying a sign restriction identification scheme to the reduced form given by the state space signal equations. Third, to ensure that our results are not distorted by the measurement error exhibited by the official monetary data, we employ the Divisia M4 monetary aggregate provided by the Center for Financial Stability. Our approach overcomes one of the major difficulties of previous models by using a data-driven identification of equilibrium velocity. Thus, we are able to show that a P-star model can fit U.S. data and money did indeed matter in the United States.

The ideas production function is at the heart of endogenous growth theory. Using data for Europe, its offshoots, and the Asian Tiger economies over the period from 1870 to 2010, this paper provides direct estimates of an ideas production function that explicitly distinguishes between the first- and second-generation endogenous growth models while allowing for human capital and international knowledge spillovers through various channels. The estimates show strong intertemporal and cross-country knowledge spillovers, provide robust support for Schumpeterian growth theory, and suggest that human capital and some channels of international knowledge spillover are influential for ideas production.

In a knowledge-based growth model where skilled workers are used in innovation and production, skill-biased technological change may lower average R&D productivity via an innovation possibilities frontier effect that eliminates scale effects. We show that skill-biased technological change increases the skill premium even if the elasticity of substitution between skilled and unskilled workers is less than two. Trade between developed countries promotes skill-biased technological change, thus raising wage inequality. Trade between developed and developing countries has differing effects: it induces relatively skill-replacing technological change and lowers wage inequality in the developed country but has the opposite effects in the developing country. Finally, we show that trade can stimulate or hurt economic growth.

We study the sensitivity of the inflation–growth trade-off in monetary growth models to the introduction of search frictions in the labor market. We consider three types of endogenous growth models: (1) the AK model, (2) the Lucas supply-side model, and (3) the two-sector model of Jones and Manuelli. We show that the effects depend on the specification of the cash-in-advance constraint and the magnitude of the semi-interest elasticity of the income velocity. For the AK model, economic growth increases with higher inflation. For the other two models, growth declines for the case of the standard cash-in-advance constraint on consumption, whereas it either increases or decreases if money is introduced, as in the cash–credit good economy of Dotsey and Ireland, depending on the semi-interest elasticity of the income velocity. The welfare effects of inflation are shown to be economically significant in the presence of search unemployment.

The performance of unit root tests on simulated series is compared, using the business-cycle model of Chang et al. [Journal of Money, Credit and Banking 39(6), 1357–1373 (2007)] as a data-generating process. Overall, Monte Carlo simulations show that the efficient unit root tests of Ng and Perron (NP) [Econometrica 69(6), 1519–1554 (2001)] are more powerful than the standard unit root tests. These efficient tests are frequently able (i) to reject the unit-root hypothesis on simulated series, using the best specification of the business-cycle model found by Chang et al., in which hours worked are stationary with adjustment costs, and (ii) to reduce the gap between the theoretical impulse response functions and those estimated with a Structural VAR model. The results of Monte Carlo simulations show that the hump-shaped behavior of data can explain the divergence between unit root tests.

This paper evaluates the optimality of a temporary worker permit policy from the point of view of the host country by using a two-country dynamic general equilibrium model, calibrated with data from the United States and Mexico. In the model, the decision to migrate and the corresponding decision to return are endogenous and take place within families that are heterogeneous in terms of human capital. After finding a migrant's optimal migration duration and the resulting shrinkage in the wage gap and change in interest rates, the paper derives the restriction on migrants' stay that maximizes natives' utility. It also derives the migrant length of stay that would pass a majority vote. When migration duration is restricted, the fraction of the native population made better off is maximized with a permit length of four years.

This paper develops a new methodology for estimating both the automatic and discretionary components of fiscal policy in one reaction function using the differences between real-time and ex post data. Discretionary policy should respond to information available to the policy maker at the time (real-time data), whereas automatic fiscal policy should respond to the true state of the economy at the time (proxied by the final data). We find that the intended discretionary response of fiscal policy to the cycle is counter-cyclical. Our estimates suggest that the automatic stabilizers are at the lower end of the range found in the related literature. This new methodology reduces the risk present in the conventional CAB approach that part of the discretionary actions may be wrongly attributed to automatic stabilizers. In that sense, automatic stabilizers are typically not as strong as usually claimed. This could be of particular use in countries where insufficient data exist to estimate structural budget sensitivities directly.