This study develops a monetary Schumpeterian model with endogenous market structure (EMS) to explore the effects of monetary policy on the number of firms, firm size, economic growth, and social welfare. EMS leads to different results from previous studies in which market structure is exogenous. In the short run, a higher nominal interest rate reduces the growth rates of innovation, output, and consumption and decreases firm size through reduction in labor supply. In the long run, a higher nominal interest rate reduces the equilibrium number of firms but has no steady-state effect on economic growth and firm size because of EMS. Although monetary policy has no long-run growth effect, increasing the nominal interest rate permanently reduces the levels of output, consumption, and employment. Taking transition dynamics into account, we find that welfare is decreasing in the nominal interest rate and the Friedman rule is optimal in this economy.

This paper aims at characterizing the debt-consolidation processes put forward by some European countries in order to assess welfare and, in particular, the inequality effects involved. For this purpose, we built a general equilibrium heterogeneous-agent model capable of exploring the relationship between fiscal policy variables and the endogenous cross-section distribution of income and wealth. Using a utilitarian welfare criterion, results show that different strategies yield different outcomes. Despite the positive welfare gains observed, transition costs affect all episodes and are determinant in sorting among the welfare-enhancing strategies. Our results confirm the superiority of adjustments partially based on the reduction of unproductive expenditures over those based on tax raises or on the reduction of social transfer. Welfare is further enhanced when consolidation strategies involve an equilibrated mix between expenditure and transfer cuts and tax increases, because debt consolidation processes mostly or exclusively based on social transfers cuts have a strong negative effect on welfare inequality. Moreover, shock volatility and persistency (also shaping inequality) help explain different results across countries: under high income inequality, consolidation processes are expected to yield smaller inequality effects on welfare, whereas a worse consumption–leisure trade-off may arise.

We calculate that the extension of unemployment insurance benefits during downturns has significantly increased the variability of unemployment and vacancies in the United States. Taking this into account reduces the value of leisure necessary to match the wide labor market business cycles experienced in the United States using the Mortensen--Pissarides model. For this calculation, we analyze a version of the model where unemployment insurance benefits not only expire but must be earned with prior employment. With these features, we can calibrate the model to be consistent with unemployment responding strongly to productivity shocks and mildly to changes in unemployment insurance policies. Our preferred calibration predicts that the standard deviation of unemployment since 1945 would have fallen by around 37% if there had not been programs extending unemployment benefits during recessions. We also find that the enactment of the Emergency Unemployment Compensation program in 2008 increased the unemployment rate by 0.5 percentage points.

By concentrating a stimulus on the domestic economy, Buy National clauses are argued to lead to higher fiscal multipliers. We show that this argument falls short. Although it is true that domestic demand for domestic goods is increased, at the same time foreign demand for domestic goods is reduced by adverse changes in the real exchange rate. The two effects are of similar magnitude, so that Buy National clauses do not lead to a stronger stimulus to GDP. Apart from that, restricting the stimulus to domestic products makes the stimulus more expensive, because cheap foreign products are ignored. Consequently, real public consumption is lowered by Buy National clauses.

We estimate a number of macroeconomic variables as logistic smooth transition autoregressive (LSTAR) processes with uncertainty as the transition variable. The notion is that the effects of increases in uncertainty should not be symmetrical with the effects of decreases in uncertainty. Nonlinear estimation allows us to answer several interesting questions left unanswered by a linear model. For a number of important macroeconomic variables, we show that (i) a positive shock to uncertainty has a greater effect than a negative shock and (ii) the effect of the uncertainty shock is highly dependent on the state of the economy. Hence, the usual linear estimates for the consequences of uncertainty are underestimated in circumstances such as the recent financial crisis.

This paper investigates the link between consumer pessimism and U.S. economic recessions empirically. First we use structural vector autoregressive models to identify negative structural shocks to consumer confidence, which are used as a proxy for recession fear. We then apply probit models and time-varying-transition-probability Markov-switching autoregressive models to investigate how the lack of consumer confidence affects the probability of recession. We find that recession fear leads to a higher probability of economic downturns. Furthermore, strong evidence exists that an increase in market pessimism may push the economy from an expansion state to a recession state. We also find weaker evidence suggesting that a lack of consumer confidence may trap the economy in the depressed regime longer. We conclude that a lack of confidence can push the economy into recession.

This paper investigates whether temporary agency employment complements or substitutes for regular employment. We use unique administrative data that provide information on the overall size of the German market for temporary agency workers for the period 1991–2010. To take into account the interaction between the two employment forms, we identify a SVAR model with correlated innovations by volatility regimes. We find that a positive shock to temporary agency employment increases overall employment, but also leads to substitution for regular jobs.

This paper analyzes the determination of public debt in a dynamic politico-economic model with overlapping generations. Sizeable levels of public debt can be rationalized in this model. The elasticity of substitution between public and private consumption determines the size of public debt and could explain differences of debt across countries. I compare the optimal policies under commitment and in a “political equilibrium” without commitment. Public debt can be higher or lower when commitment is absent, depending on the elasticity of substitution between public and private consumption. Consequently, under certain conditions, the no-commitment debt level can be closer to a normative benchmark with higher weight for future generations.

This paper assesses the empirical relevance of financial frictions in the Euro Area (EA) and the United States (US). It provides a comprehensive set of comparisons between two models: (i) a Smets and Wouters (SW) [F. Smets and R. Wouters, Shocks and frictions in US business cycles: A Bayesian DSGE approach, American Economic Review 97(3), 586–606 (2007)] model with financial frictions originating in nonfinancial firms and (ii) a SW model with frictions originating in financial intermediaries. The introduction of financial frictions in either way improves the models' fit compared to a standard SW model, and the empirical comparisons reveal that the latter model outperforms the former both in the euro area and in the United States. Two main factors explain this result: first, the magnitude of the financial accelerator effect, and second, the role of the investment-specific technology shock in affecting financial variables.

This study considers adult mortality and analyzes the effect of public health investment on economic development, whereby investment increases savings but decreases fertility through a decrease in adult mortality. As the labor force increases, investment temporarily decreases capital per unit of labor. However, the decrease in fertility increases capital per unit of labor in subsequent periods. By considering these two opposing effects of decreasing fertility, we clarify the conditions required for investment to improve economic development via increasing savings and decreasing fertility. We examine panel estimation and present some weak evidence for our model.

This study demonstrates how expectation errors in a credit market generate economic fluctuations. To this end, we employ simulation analysis using a dynamic stochastic general equilibrium model. Our model includes two building blocks that are not included in the standard models: the banking sector and matching friction in the labor market. By introducing the banking sector, we can confirm that if economic agents fallaciously expect a rise in future asset prices, such expectations will cause an economic boom and bust. The variation of this fluctuation is quite large and the recession short-lived, but these drawbacks can be avoided by adding matching friction.

We generalize a trade model with firm-specific heterogeneity and R&D-based growth to allow for endogenous education and fertility. The framework is able to explain cross-country differences in living standards and trade intensities by the differential pace of human capital accumulation among industrialized countries. Consistent with the empirical evidence, scale matters for relative economic prosperity as long as countries are closed, whereas scale does not matter in a fully globalized world. The average human capital of a country, by contrast, influences its relative economic prosperity irrespective of trade-openness.

Viability theory is the study of dynamical systems that asks what set of initial conditions will generate evolutions that obey the laws of motion of a system and some state constraints, for the length of the evolution. We apply viability theory to Judd's dynamic tax model [The welfare cost of factor taxation in a perfect-foresight model, Journal of Political Economy 95(4), 675–709 (1987)] to identify which economic states today are sustainable under only slightly constrained tax-rate adjustments in the future, when the dynamic budget constraint and the consumers' transversality condition at infinity are satisfied. We call the set of such states the economic viability kernel. In broad terms, knowledge of the viability kernel can tell the planner what economic objectives are achievable and assist in the choice of suitable controls to realize them. We observe that high consumption levels can only be sustained when capital is abundant and, unsurprisingly, that a very high consumption economy lies outside such kernels, at least for annual tax-adjustment levels limited by 20 percentage points. Furthermore, we notice that by and large the sizes of the kernel slices do not diminish as the tax rate rises; hence high-taxation economies are not necessarily more prone to explode, or implode, than their low-taxation counterparts. In fact, higher tax rates are necessary to keep many consumption choices viable, especially when capital approaches the constraint-set boundaries.