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.

By studying complete and incomplete dynamic financial markets, I show that if some agents are money-illusioned and neglect inflation, the rational agents who are aware of inflation are driven out of the market in the long run, in the sense that the money-illusioned agents consume the economy's entire endowment. The reason for this finding is that with inflation, the money-illusioned agents always believe that the return on their savings is higher than it actually is. Because these agents trade financial assets in markets with the rational agents, the rational agents end up being borrowers and the money-illusioned agents lenders. Because the rational agents' debt accumulates over time, they become so indebted that the money-illusioned agents eventually consume the economy's entire endowment. If there is deflation, the opposite is true, and the rational agents evolutionarily dominate.

This paper uses a Bayesian approach to estimate a standard international real business cycle model augmented with preferences with zero wealth effect, variable capacity utilization, and investment adjustment costs. First, I find that the bulk of fluctuations in country-specific outputs, consumption, investments, and international relative prices can be attributed to country-specific neutral technology, investment-specific technology, and preference shocks. Second, my estimated model with economically meaningful shocks simultaneously accounts for the negative correlation between the real exchange rate and relative consumption and the negative correlation between the terms of trade and relative output. Last, through a marginal likelihood comparison exercise, I find that the success of the model depends on preferences with zero wealth effects; other frictions and alternative asset market structures play a less important role.

The European sovereign debt crisis has revived the debate about appropriate fiscal rules in the European Economic and Monetary Union. Whereas the Stability and Growth Pact and the Fiscal Compact make no distinction between public consumption and investment expenditure, the aim of the current paper is to analyze the implications of the adoption of the Golden rule in a monetary union, distinguishing between the two types of public expenditure. With the help of a macroeconomic model, we show that introducing a Golden rule and smoothing public investment expenditure would be welfare-improving, and mostly for countries where taxation rates and the productivity of public investment are highest, and for the most closed countries. It would also be the most beneficial for countries where the monetary transmission parameter, the propensity to consume, and the price elasticity of supply are weakest, whereas supply-side distortions are the strongest.

The paper reexamines the long-run Phillips curve in a New Keynesian model with job turnover and trend productivity growth. We show that an increase in money growth has substantial positive effects on steady state output, consumption, and employment in the presence of (i) observed job turnover rates and, if consumption smoothing is sufficiently strong, (ii) observed productive growth rates. Furthermore, we show that the optimal inflation rate is slightly under 2% for reasonable calibrations of job turnover and trend growth.

This paper tests the optimality of consumption decisions at the aggregate level, taking into account popular deviations from the canonical constant-relative-risk-aversion (CRRA) utility function model—rule of thumb and habit. First, we provide extensive empirical evidence of the inappropriateness of linearization and testing strategies using Euler equations for consumption—a drawback for standard rule-of-thumb tests. Second, we propose a novel approach to testing for consumption optimality in this context: nonlinear estimation coupled with return aggregation, where rule-of-thumb behavior and habit are special cases of an all-encompassing model. We estimated 48 Euler equations using GMM. At the 5% level, we only rejected optimality twice out of 48 times. Moreover, out of 24 regressions, we found the rule-of-thumb parameter to be statistically significant only twice. Hence, lack of optimality in consumption decisions represent the exception, not the rule. Finally, we found the habit parameter to be statistically significant on four occasions out of 24.

In overlapping-generations economies with life-cycle saving and exogenous growth, the laissez-faire equilibrium balanced growth path fails in general to achieve optimality, but is dynamically efficient if the marginal product of physical capital is greater than the growth rate of the economy. In this paper, we accommodate the concept of dynamic (in)efficiency in an overlapping-generations economy with endogenous growth due to human capital accumulation. We show that the condition that the marginal product of physical capital is larger than the growth rate of the economy is necessary but no longer sufficient for the dynamic efficiency of the laissez-faire equilibrium balanced growth path.

This paper explores a one-sector AK model with a cash-in-advance (CIA) constraint that itself depends on relative income, which implies status. This constraint is referred to in this study as the CIA-status constraint and it means that agents with higher income are more creditworthy and can make purchases with fewer money holdings. We mainly show that the relationship between the endogenous growth rate and money growth changes from negative to positive when the elasticity of the CIA constraint with respect to status exceeds one.

The present study examines the problem facing a resource-importing economy seeking to achieve energy independence by developing a renewable substitute. The invention of the substitute is assumed to follow a stochastic process that can be influenced by investment in energy research and development. I analyze the optimal investment strategy under alternative assumptions with respect to the economy's access to international financial markets, the terms on which credit is available, and the country's degree of dependence on resource imports. It is found that, in general, having access to capital markets does not necessarily lead to a higher investment rate. However, in the empirically relevant range of elasticity of intertemporal consumption substitution, the economy with access to credit invests more than under financial autarky. A higher degree of dependence on resource imports implies a lower optimal investment. Arrival of the substitute does not necessarily cause an immediate improvement in the net foreign asset position but may in fact cause its further deterioration.

I examine whether an RBC model can generate a higher volatility of consumption relative to output, a strong negative correlation between output and the trade balance, and a weak countercyclicality of the real interest rate, phenomena that have been observed in the business cycles of emerging economies, including Korea. From an RBC model with recursive utility, I show that it is not the degree of relative risk aversion, but the elasticity of intertemporal substitution (EIS), that governs the movements of the variables of the model in the log linearized environment. The Bayesian estimation results based on Korean data from the period 1987 to 2013 suggest that there are some elements of success in describing the Korean economy based on the simple RBC model both with the EIS larger than one and with an error term for the real interest rate equation. An EIS larger than one improves the performance of the simple RBC model mainly in the direction of raising the volatility of consumption relative to output. Simulation results show that the error term for the real interest rate process mostly reflects the endogenous channel of financial frictions where the domestic real interest rate depends negatively on the expected (transitory) productivity shock.

This study constructs a variety expansion growth model with public research spending. Public researchers financed by taxes on asset income, consumption, and corporate profits raise the productivity of private research and development. We show that the welfare-maximizing level of public research spending is below the growth-maximizing level. With regard to tax policy, a zero-profit tax maximizes the welfare of households. In addition, the study analyzes the dynamics of the economy, showing that equilibrium is indeterminate when the government's revenue source depends on an asset income tax.

This paper develops a computable overlapping generations (OLG) model for gender and growth policy analysis that brings to the fore the role of access to public infrastructure. The model accounts for human and physical capital accumulation, intra- and intergenerational health persistence, fertility choices, and women's time allocation between market work, child rearing, and home production. Bargaining between spouses and gender bias, in the form of discrimination in the work place and mothers' time allocation between daughters and sons, are also accounted for. The model is calibrated for a low-income country and various experiments are conducted, including improved access to infrastructure, an increase in subsidies to child care, a reduction in gender bias, and a composite gender-based reform program to assess the role of policy complementarities. The results illustrate the importance of accounting for changes in women's time allocation in assessing the impact of public policy on economic growth.

Financial crises lead to substantial declines in output and consumption in emerging markets. The fact that fiscal policy is procyclical in these countries shows that the effects of a crisis are exacerbated by spending cuts and tax increases, which are usually attributed to borrowing constraints they face in bad times. This paper quantitatively analyzes the costs of reduced borrowing during crises by studying the effects of expansionary fiscal policies that would have been possible to implement, had the government been able to borrow more. The model shows that a 25% reduction of taxes on labor income, capital income, and consumption during the 1997 Korean crisis would have required an additional borrowing of 4.10% of GDP, while increasing output and consumption by 5.23 and 5.92 percentage points, respectively. When the effects of each tax rate are analyzed separately, labor tax reduction turns out to be more effective than the other policies.

We incorporate emission into a general equilibrium model with rich dispersion in productivity among monopolistically competitive plants. Emission is modeled as a by-product of goods production. An abatement technology is available to the plants for reducing emission. We compare an emission tax with an emission intensity standard. The tax is shown to dominate the standard in welfare for all values of market power if either productivity is sufficiently dispersed or the abatement technology is not effective. On the other hand, if productivity dispersion is small and the abatement technology is effective, there exists sufficiently strong market power so that the standard will dominate the tax in welfare. Even in the case where the standard unambiguously induces a higher output of dirty goods than the tax, the general equilibrium framework is necessary for ranking the two policies in welfare.

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.

We investigate the effects of monetary policy shocks in the new European Union (EU) member states the Czech Republic, Hungary, Poland, and Slovakia. In contrast to existing studies, we explicitly account for external developments in European Monetary Union (EMU) countries and in other acceding countries. We do so by using factor-augmented vector autoregressive models that employ information from nonstationary factor time series. One set of VAR models includes factors obtained from a large cross section of time series from EMU countries, whereas another set includes factors obtained from other acceding countries. We find that including EMU factors does change impulse response patterns in some but not all acceding countries. In contrast, including factors from other acceding countries leads to substantial changes in impulse responses and to economically more plausible results. Overall, our analysis highlights that taking external economic developments properly into account is crucial for the analysis of monetary policy in the new EU member states.

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.

Coefficient drivers are observable variables that feed into time-varying coefficients (TVCs) and explain at least part of their movement. To implement the TVC approach, the drivers are split into two subsets, one of which is correlated with the bias-free coefficient that we want to estimate and the other with the misspecification in the model. This split, however, can appear to be arbitrary. We provide a way of splitting the drivers that takes account of any nonlinearity that may be present in the data, with the aim of removing the arbitrary element in driver selection. We also provide an example of the practical use of our method by applying it to modeling the effect of ratings on sovereign-bond spreads.

I embed a competitive search model of the labor market into a small open economy model with heterogeneous firms and workers. Search frictions generate equilibrium unemployment and income inequality between identical workers, in addition to income differences between skill groups. A quantitative evaluation of the U.S. trade experience suggests that the effect of the increase in goods trade since 1980 may have contributed to the increase in the college premium, but not to the increase in residual inequality.

This paper studies the cyclical fluctuations in unemployment and vacancies in a search and matching model in which workers lose skills during periods of unemployment. Firms' profits fluctuate more because aggregate productivity affects the economy's average human capital. Moreover, wages for workers with lower levels of human capital are closer to the value of nonmarket time, leading to more rigid wages. Fluctuations in the vacancy--unemployment ratio are larger than those in the baseline search and matching model and similar to those we observe in the data.