The events driven by the financial crisis have highlighted limits and drawbacks of current paradigms. Economists began to rethink the role and impacts of financial factors and standard policies. At the same time, a more general sentiment of revision has challenged several consolidated “dogmas.” Accordingly, this special issue of Macroeconomic Dynamics aims to refresh the debate on some important macroeconomic topics from new and fresh perspectives. A number of questions relating to the challenges faced by macroeconomic theory and policies are raised. The issue, first, discusses some topics that stemmed from the financial factors, such as overleveraging, forward guidance, bank regulation; it then explores other “waters” related to price-setting behavior, productivity, and growth.

We analyze the consequences of overleveraging and the potential for destabilizing effects from financial- and real-sector interactions. In a theoretical model, we demonstrate that, in the presence of regime-dependent macro feedback relations, a highly leveraged banking system can result in instabilities and downward spirals. To investigate this question empirically, we analyze time series from eight advanced economies on industrial production and the components of the country-specific financial stress indices constructed by the IMF. Employing nonlinear, multiregime vector autoregressions, we examine how industrial production is affected by the individual risk drivers making up the indices. Our results strongly suggest that financial-sector stress has a substantial, nonlinear influence on economic activity and that individual risk drivers affect output rather differently across stress regimes and across groups of countries.

For the United States, the supply and wages of skilled labor relative to those of unskilled labor have grown over the postwar period. The literature has tended to explain this through “skill-biased technical change” (SBTC). Empirical work has concentrated around two variants: (1) capital-skill complementarity, (2) skill-augmenting technical change. Our purpose is to nest and discriminate between these two explanations. We do so in the framework of multilevel Constant Elasticity of Substitution (CES) production function, where factors are disaggregated into skilled and unskilled labor, and capital into structures and equipment capital. Using a five-equation system approach and several nesting alternatives, we retrieve estimates of the substitution elasticities and technical changes. Our estimations can produce results in line with capital-skill-complementarity hypothesis. However, those results are outperformed where the only source of the widening skill premium has been skill-augmenting technical change. We also show that the different explanations for SBTC have different implications for projected developments of the premium.

In this paper, we examine the influence of monetary policy on the speed of convergence in a standard monetary growth model à la Sidrauski allowing for differences in the elasticity of substitution between factors of production. The respective changes in the rate of convergence and its sensitivities to the central model parameters are derived both analytically and numerically. By normalizing the constant elasticity of substitution (CES) production functions both outside the steady state and within the steady state, it is possible to distinguish between an efficiency and a distribution effect of a change in the elasticity of substitution. We show that monetary policy is the more effective, the lower is the elasticity of substitution, and that the impact of monetary policy on the speed of convergence is mainly channeled via the efficiency effect.

Optimal growth theory as it stands today does not work. Using strictly concave utility functions systematically inflicts on the economy distortions that are either historically unobserved or unacceptable by society. Moreover, we show that the traditional approach is incompatible with competitive equilibrium: Any economy initially in such equilibrium will always veer away into unwanted trajectories if its investment is planned using a concave utility function. We then propose a rule for the optimal savings-investment rate based on competitive equilibrium that simultaneously generates three intertemporal optima for society. The rule always leads to reasonable time paths for all central economic variables, even under very different hypotheses about the future evolution of population and technical progress.

In previous work, we estimated a dynamic model of the Italian economy, showing that its weakness in the past two decades is mainly due to the slowdown in total factor productivity growth. In those models, two parameters play a key role: technological progress and the elasticity of substitution. Recent estimates of those parameters are affected, in our opinion, by a specification problem: technological parameters are inherently long-run but their estimates are based on short-run data. Looking deeply into the estimation procedure, we show that the misspecification issue present in the estimates gives rise to a spurious regression bias (high R2, low DW), because the standard approach does not incorporate frictions and rigidities. Our modeling strategy takes account of them. Although we cannot in general say that our framework gets rid of the serial correlation problem, the statistics for our model do show that residuals are not serially correlated.

We construct a theory of forward guidance in economic policy making in order to provide a framework for explaining the role and strategic advantages of including forward guidance as an explicit part of policy design. We do this by setting up a general policy problem in which forward guidance plays a role, and then examine the consequences for performance when that guidance is withdrawn. We show that forward guidance provides enhanced controllability and stabilizability—especially where such properties may not otherwise be available. As a by-product, we find that forward guidance limits the scope and incentives for time-inconsistent behavior in an economy whose policy goals are ultimately reachable. It also adds to the credibility of a set of policies.

This paper reconsiders optimal inflation targeting in a model where persistence is generated by rational choices of the price makers because of a time-dependent pricing mechanism. In this framework, which generalizes the traditional Calvo model, inflation persistence is intrinsic, as it is micro-founded assuming that firms' pricing decisions depend on the time elapsed from the last price reset. We use a linear–quadratic approach to study the welfare effects and optimal policies. We disentangled two distortion sources showing how welfare falls in both the average of the probability of changing prices and its distribution among different firms. Described the underlying distortions of our setup, we analyze its normative implications for optimal inflation. The issues of uncertainty and robustness are also considered: By using robust control techniques, we, in fact, consider the consequences of implementing a “wrong” monetary rule due to a misinterpretation of sources of inflation inertia.

We consider a DSGE model with monopolistically competitive banks together with endogenous firms' entry. We find that our model implies higher volatilities of both real and financial variables than those implied by a dynamic stochastic general equilibrium (DSGE) model with a monopolistic banking sector and a fixed number of firms. The response of the economic activity is also more persistent in response to all shocks. Furthermore, we show that inefficient banks enhance the endogenous propagation of the shocks with respect to a model where banks compete under perfect competition and can fully ensure against the risk of firms' default.