We generalize the normalized constant elasticity of substitution (CES) production function by allowing the elasticity of substitution to vary isoelastically with (i) the relative factor share, (ii) the marginal rate of substitution, (iii) the capital–labor ratio, (iv) the capital share, (v) the capital’s rate of return, or (vi) the capital–output ratio. Ensuing isoelastic elasticity of substitution (IEES) functions have intuitively and analytically desirable properties, for example, self-duality. Empirically, for the post-war US economy we robustly reject the CES specification in favor of the IEES alternative. Assuming the IEES production structure we find that the capital–labor elasticity of substitution has remained around 0.8–0.9 from 1948 to the 1980s, followed by a period of secular decline.

The conventional dependency ratio based on cohort-invariant cutoff points could overstate the true burden of population aging. Using optimal cohort-varying years of schooling and retirement age in a life-cycle model, we propose a modified definition of dependency ratio. We compare the proposed economic-demographic dependency ratio (EDDR) with the conventional definition and find that the conventional dependency ratio of the USA is projected to increase by 0.105 from 2010 to 2060, which is an over-projection of 86% when compared with the projected increase of 0.015 in the EDDR over the same period. Sensitivity analysis suggests that our finding is quite robust to reasonable changes in parameter values (except for one parameter), and the magnitude of over-projection ranges mainly from 0.079 to 0.102 (i.e., 75% to 97%). We follow the well-established Lee–Carter model to forecast stochastic mortality and employ the method of expanding duration to decompose the sources of over-projection.

This paper examines the financial stress interconnectedness among Greece, Ireland, Italy, Portugal, and Spain (GIIPS) economies and Germany. Based on market-level financial stress indices, we examine the stress transmission process as well as the causal network relationships in banking sector, bond, money, and stock markets. The period under investigation, 2001–2013, allows to test the effects of the 2007–2009 financial crisis as well as the subsequent European sovereign crisis. Using two alternative techniques for connectedness analysis, our evidence suggests that the peripheral economies of Italy and Spain play a highly significant role in the stress transmission in all markets, especially in the cases of banks and equity markets. Moreover, we visualize our results using network analysis. Contrary to common wisdom, Portugal, Ireland, and mainly Greece do not seem to have an important role in amplifying stress levels.

This paper revisits two classic results in standard overlapping generations models with a pay-as-you-go (PAYG) pension system. Firstly, a PAYG system crowds out private savings and reduces the overall capital stock. Secondly, in dynamically efficient economies, a PAYG system will reduce steady-state welfare. These classic results have been derived and exposed in models with no retirement decision. However, by allowing for endogenous retirement, and without taking recourse to any frictions, uncertainty, or myopia, it is shown that a PAYG system may be neutral and may even increase the capital–labor ratio. In particular, it is shown that the effect of the pension contribution rate on capital intensity depends on the elasticity of substitution between consumption and leisure. If the elasticity of substitution is between 0 and 1, an increase in the contribution rate will increase capital intensity. Moreover, it is shown that the result regarding welfare may also be overturned. An increase in the PAYG contribution rate may increase steady-state welfare.

This paper establishes some stylized facts of the long-run relationship between growth and labor shares using historical data for the USA (1898–2010), the United Kingdom (1856–2010), and France (1896–2010). Performing individual country time–frequency analysis, we demonstrate the existence of long-term cycles in labor share of 30–50 years explaining a major part of the variance in the data. Further, the impact of labor share on growth changes sign with the frequency considered from negative at high frequencies to positive at low frequencies. Finally, the positive coefficient associated with the labor share at low frequencies increases over time.

Why is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank’s interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound.

When the financial positions of pension funds worsen, regulations prescribe that pension funds reduce the gap between their assets (invested contributions) and their liabilities (accumulated pension promises). This paper quantifies the business cycle effects and distributional implications of various types of restoration policies. We extend a canonical New-Keynesian model with a tractable demographic structure and, as a novelty, a flexible pension fund framework. Fund participants accumulate inflation-indexed or non-indexed benefits and funding adequacy is restored by revaluing previously accumulated pension wealth (Defined Contribution (DC)) or changing the pension fund contribution rate on labor income (Defined Benefit (DB)). Economies with DC pension funds respond similarly to adverse capital quality shocks as economies without pension funds. DB pension funds, however, distort labor supply decisions and exacerbate economic fluctuations. While DB pension funds achieve intergenerational risk-sharing, welfare analyses indicate that the negative effects of the induced distortions are sizeable.

When observably heterogeneous firms engage in R&D and policy can be conditioned on the heterogeneity, what is the optimal policy? This paper starts with a static duopoly model of R&D competition with uncertainty and finds it welfare enhancing to subsidize the larger firms with no subsidies for the smaller firm, extending existing results. This result follows because the policymaker’s goal is to minimize the average cost of production. Our paper demonstrates that these results are not robust to a dynamic setting. The optimal policy depends on the equilibrium type of competition that emerges without intervention—an insight that cannot be found in a static setting. In a dynamic setting, the degree of competition becomes an endogenous variable. Interestingly, although the optimal policy in some cases provides a slightly larger subsidy for the larger firm, it is the smaller firm that benefits most in terms of firm value.

We analyze the optimal debt reduction problem in an uncertainty context. The social planner has a finite horizon and seeks to minimize the social costs associated with debt repayment by taking into account not only the short-run costs of the policy, but also the long-run costs associated with the outstanding level of debt. We characterize the optimal policy and the dynamics of the debt-to-GDP ratio, showing that it will decrease over time if economic policy is effective enough. We characterize how the evolution of the debt-to-GDP ratio depends on the main parameters and we present a simple calibration based on Greek data to illustrate the implications of our analysis in real-world setups.

The paper compares the effects of market-based (M-B) and command-and-control (C&C) climate policies on the direction of technical change and the prevention of environmental disasters. Drawing on a model of endogenous growth and directed technical change, we show that M-B policies (carbon taxes and subsidies toward clean sectors) suffer from path dependence and exhibit bounded window of opportunities: delays in their implementation make them ineffective both in redirecting technical change, (i.e. triggering a transition toward clean energy) and in avoiding environmental catastrophes. On the contrary, we find that C&C interventions are favored by path dependence and guarantee policy effectiveness irrespectively of the timing of their introduction. As the hypothesis of path dependence in technological change has received vast empirical support and it is a key feature of many models of growth, we argue that C&C policies should be seen as a valuable and non-equivalent alternative to M-B interventions.