This paper investigates the desirability of constitutional constraints on capital taxation in an environment without government debt and where benevolent governments have limited commitment. In our setup, governments can choose proportional capital and labor income taxes subject to the constitutional constraint but cannot commit to an actual path of taxes. First, we explore a form of constitutional constraint: a constant cap on capital tax rates. In our quantitative exercise, we show that a three percent cap on capital taxes provides the highest welfare at the worst sustainable equilibrium. However, such a cap decreases welfare at the best sustainable equilibrium (both because it constrains feasibility and because it tightens the incentive compatibility constraint). Second, we identify a form of constitutional constraint that can improve all sustainable equilibria. That constraint features a cap on capital taxes that increases with the level of capital.

This study investigates the rates of technological progress, total output growth, and per capita output growth when population growth is negative using a semiendogenous research and development (R&D) growth model. The analysis shows that within a finite time horizon, the employment share of the final goods sector reaches unity and that of the R&D sector reaches zero; accordingly, the rate of technological progress tends toward zero. In this case, the growth rate of per capita output asymptotically approaches a positive value.

Wage dispersion is a critical factor in determining the impact of a minimum wage and severance payments on job creation and destruction in a general equilibrium model with search frictions. When wage dispersion is low, the minimum wage and severance payments behave as substitutes. However, as dispersion in wages increases, these policies become complements. The model is estimated using data from Chile and used to perform quantitative welfare analysis.

We present a model capable of explaining 200 years of declining fertility, 200 years of rising educational achievement, and a significant baby boom for the United States and twenty other industrialized market countries. We highlight the importance of secularly declining young adult mortality risk for producing secularly declining fertility and a sudden decline in housing costs after the end of the Second World War, but ending by 1970. In addition, we introduce a new puzzle for the profession: Given the magnitude of the Baby Boom, roughly equal to fertility in 1900 for many of these countries, why did schooling of the Baby Boom cohorts not fall to the 1900 level of their predecessors? In fact, not only did it not fall, but the schooling levels of these cohorts are higher than for previous cohorts. Using a quantitative model, we are able to identify the magnitude of the reduction in costs of education necessary to explain this paradoxical increase in schooling. We produce a novel data set on historical education expenditures with over 1,500 observations. We find empirical support for these cost reductions.

Economic and social impacts of aging trends will be of the utmost importance in the near future. We embed a stylized pay-as-you-go (PAYG) pension system into a DSGE model with overlapping generations to assess the macroeconomic effects of aging in a small Euro Area economy. The simulations suggest large negative impacts on GDP and private consumption. In addition, external imbalances may widen significantly under the PAYG system. All results are conditional on the policy options addressing debt sustainability–the impacts tend to be very large if the government finances the aging with higher social security premia instead of lower replacement ratios. Sensitivity analysis reveals that GDP and private consumption impacts are less robust than those on external imbalances. Results also imply that supranational policy coordination may be crucial if the objective is to preserve economic and financial stability in the Euro Area.

A key result in macroeconomics is the “time inconsistency of short-run optimal plans.” It is argued that inflationary bias results if central bankers do not precommit to a monetary policy rule. The macro literature, however, does not address the way in which board members arrive at the “optimal choice of inflation rate.” That is a matter of a micro subfield called social choice. If we consider that on any board, members have different priors about the states of nature for the economy, but they all receive the same signal before deciding, then they will have different posterior probabilities for the states, even if they have many data, if one state has a low probability of occurring, such as an unlikely catastrophic-risk event. Thus, it is not clear what the optimal plan is. Therefore, discretion rather than rules may be the optimal plan in social choice settings.

This paper documents a positive correlation between the genetic distance to the world technological frontier (United Kingdom, United States) and the year of the onset of the fertility transition across countries. This result is robust to controlling for a large set of geographical, climatic, historical, and institutional variables. Two main mechanisms could explain this reduced-form relationship. First, genetic distance to the world technological frontier can affect the onset of the fertility transition through its impact on the timing and intensity of technology adoption. Second, genetic distance to the technological frontier can capture other cultural differences and the process of diffusion of cultural norms that are related to fertility but not through technology adoption. We find suggestive evidence supporting both mechanisms.

This paper adds to the large body of literature on the effects of technology shocks empirically and theoretically. Using a structural vector error correction model, we first provide evidence that not only hours but also investment decline temporarily following a technology improvement. This result is robust to important data and identification issues addressed in the literature. We then show that the negative response of inputs is consistent with an estimated monetary model in which the presence of strategic complementarity in price setting, in addition to nominal rigidities, lowers the sensitivity of prices to marginal costs, and monetary policy does not fully accommodate the shock.

A few years ago we sat down with Neil Wallace and had two lengthy, free-ranging conversations about his career and, generally speaking, his views on economics. What follows is a distillation of these conversations.

Many algorithms that provide approximate solutions for dynamic stochastic general equilibrium (DSGE) models employ the QZ factorization because it allows a flexible formulation of the model and exempts the researcher from identifying equations that give raise to infinite eigenvalues. We show, by means of an example, that the policy functions obtained by this approach may differ from both the solution of a properly reduced system and the solution obtained from solving the system of nonlinear equations that arises from applying the implicit function theorem to the model's equilibrium conditions. As a consequence, simulation results may depend on the specific algorithm used and on the numerical values of parameters that are theoretically irrelevant. The sources of this inaccuracy are ill-conditioned matrices as they emerge, e.g., in models with strong habits. Researchers should be aware of those strange effects, and we propose several ways to handle them.

We study production functions with capital and labor as arguments that exhibit positive, yet diminishing marginal products and constant returns to scale. We show that such functions satisfy the Inada conditions if (i) both inputs are essential and (ii) an unbounded quantity of either input leads to unbounded output. This allows for an alternative characterization of the neoclassical production function that altogether dispenses with the Inada conditions. Although this proposition generalizes to the case of n > 2 factors of production, its converse does not hold: 2n Inada conditions do not imply that each factor is essential.