Band 21, Heft 2

Informality is pervasive in many developing countries and it can affect occupational and educational decisions. Cross-country data shows that the rate of entrepreneurship as well as the gap between the skill premium for entrepreneurs and for workers increase with the size of the informal economy. Also, in countries with larger informal sectors the fraction of high-skilled individuals that choose to be entrepreneurs is larger. To explain these facts, I develop a model economy with human capital investments, occupational choice and an informal sector, in which the investment in human capital improves the efficiency of labor as well as managerial skills, and the technology to produce goods exhibits capital-skill complementarity. Model predictions can account for cross-country evidence and also shed light on the mechanisms at work when the level of informality in the economy increases. In particular, a higher level of informality discourages human capital investments for workers while it incentivizes these investments for the case of some managers, mostly informal but talented.

In this paper, we first use a structural vector autoregression model to examine whether the US economy responds asymmetrically to expansionary and contractionary monetary policies. The empirical results show that monetary policy has significant asymmetric effects on output and investment. To provide an explanation of such asymmetries, we consider a nonlinear dynamic stochastic general equilibrium (DSGE) model in which collateral constraints are occasionally binding over the business cycle. The nonlinear DSGE model is able to match the empirical findings that macroeconomic aggregates react asymmetrically to positive and negative monetary policy shocks.

Recent monetary policy studies have shown that the trend productivity growth has non-trivial implications for monetary policy. This paper investigates how trend growth alters the effect of model uncertainty on macroeconomic fluctuations by introducing a robust control problem. We show that an increase in trend growth reduces the effect of the central bank’s model uncertainty and, hence, mitigates the large macroeconomic fluctuations. Moreover, the increase in trend growth contributes to bringing the economy into determinacy regions even if larger model uncertainty exists. These results indicate that trend growth contributes to stabilizing the economy in terms of both variance and determinacy when model uncertainty exists.

This paper explores the delegation of several targeting regimes in a small open new Keynesian (NK) model and examines how central banks overcome stabilization bias in a small open NK model. Results indicate that both speed limit and real exchange rate targeting can carry the isomorphic properties of optimal monetary policy over to the closed economy. In addition, neither nominal income growth targeting nor CPI inflation targeting replicates a commitment policy. These findings provide new implications for optimal monetary policy in an open economy.

The UK historical monetary policy experience is rich of institutional changes, but it remains unclear which of these many events dominated the policy actions and what timing characterised the inception of different policy regimes. We develop a new empirical approach to answer these questions and we identify in particular the historical institutional events that effectively translated into a shift of the systematic actions of the UK monetary authorities. We find that not all institutional events triggered a contemporaneous change in the actual policy conduct, although a coherent evolution in phases is evident since 1978, when a significant monetary policy rule emerges. These occasional but not sporadic regime changes explain a considerable share of the movements in the official interest rate, as well as an overstatement of the importance of policy inertia.

How long is the long run in the relationship between money growth and inflation? How important are high inflation episodes for the unit slope finding in the quantity theory of money? To answer these questions, we study the relationship between excess money growth and inflation over time and across frequencies using annual data from 1870 to 2013 for 16 developed countries. Wavelet-based exploratory analysis shows the existence of a close stable relationship between excess money growth and inflation only over long time horizons, i.e. periods greater than 16–24 years, with money growth mostly leading. When we investigate the sensitivity of the unit slope finding to inflation episodes using a “time-frequency-based” panel data approach, we find that low-frequency regression coefficients estimated over variable-length subsamples are largely affected by high inflation episodes occurring in the 1910s, the 1940s, and the 1970s. Taken together, our results suggest that inflationary upsurges affect regression coefficients, but not the closeness of the long-run relationship. This reconciles the validity of the quantity theory of money with the current disinterest of monetary policymaking in money growth.

We describe and numerically simulate the aggregate and distributional properties of an endogenous growth model with an infrastructure externality which is subject to relative congestion. We show that the congested externality induces higher growth, greater inequality, labor/leisure trade-off ambiguities and an ineffective capital income tax for the government to achieve long-term redistribution goals. We demonstrate the economic implications of congestions in production and consumption externalities on the public to private capital ratio, growth and income distribution. Finally, we discuss alternative tax options for promoting inclusive growth.

The labor share may be declining in the data, but it is often assumed constant in neoclassical growth models (NGM). We assess the quantitative importance of this discrepancy by comparing alternative calibration approaches featuring constant and declining labor shares. We find little difference in model performance. Our results derive from strong general equilibrium effects: while a declining labor share mechanically lowers wage growth, the investment response pushes wages back up. Hence, different models deliver nearly identical paths of macro aggregates. Numerous robustness checks (including a CES production function, different time periods, and calculations of the labor share) reinforce the similarity of performance across model specifications. We conclude that the NGM with a constant labor share is still an appropriate choice to study many standard macro aggregates.

We develop an endogenous growth model in which long-run growth is driven by three engines: private abatement R&D, expanding-variety R&D, and capital accumulation. We show that an environmental tax activates private abatement by directing researchers from the variety R&D sector to the abatement R&D sector, which helps the economy avoid the environmental disaster. Our results also show that the effect of the environmental tax on long-run growth is uncertain, depending mainly on the relative productivity between the two R&D sectors. If the abatement R&D sector is sufficiently productive, increasing the environmental tax will enhance the balanced output growth rate and social welfare.

We study the interplay between the decision of firms to innovate and human capital. Based on a dynamic evolutionary model, we show that in the presence of a high stock of human capital, an advanced economy can remain caught in an “innovation trap”. Following the literature on endogenous growth, R&D investments and human capital are modeled as strategic complements. Skilled workers increase productivity and enjoy a wage premium if they are employed in the R&D sector, while they receive the same wage as unskilled workers if they are employed in the production sector. We model the evolutionary dynamics of the share of innovative firms and human capital to determine the conditions under which an economy converges to a high, low or mixed state of innovation.

This paper addresses the lack of consensus in the empirical literature regarding the effects of technology diffusion news shocks. We attribute the conflicting evidence to the wide diversity in terms of variable settings, productivity series used, and identification schemes applied. We analyze the different identification schemes that have been employed in this literature. More specifically, we impose short- and medium-run restrictions to identify a news shock. The focus is on the medium-run identification maximizing at and over different horizons. We show that the identified news shock depends critically on the applied identification scheme and on the maximization horizon. We also investigate the importance of the information content of the model and of the productivity measure used. We find that models which either contain a large set of macroeconomic variables or include variables that are strongly forward looking deliver more robust results. Moreover, we show that the productivity series used may influence results, but there is convergence of findings for newer total factor productivity series vintages. Our conclusion is that news shocks have expansionary properties.

This paper investigates whether the Federal Reserve Bank (FED) reacted to asset price bubbles before the Great Recession and whether this affected macroeconomic variables. We estimate a DSGE model featuring a financial accelerator and a process for asset price bubbles with different Taylor-rule specifications. We find that a Taylor-rule with a feedback to Tobin’s Q and bubble shocks fits best. Our findings suggest that the FED followed a cleaning rather than a leaning approach prior to the global financial crisis (GFC). Then, we perform a counterfactual analysis and show that this policy created a lower interest rate prior to the GFC compared to a standard Taylor-rule without feedback to financial variables.

We study how international trade affects structural change in an agricultural exporting country. For this purpose, we calibrate a three-sector growth model to quantify the role of international trade in explaining structural change patterns observed in Paraguay. This country experienced a significant rise in net agricultural exports as a percentage of aggregate output during the period 1962–2012. We find the following results. First, international trade is crucial to explain the sectoral composition of employment in this country. The model including trade explains 84.2% of observed changes in employment shares during this period, while the model without trade can only account for 35.6% of observed changes. Second, employment in agriculture remains large in order to satisfy foreign demand. Third, employment shifts directly from agriculture into services in the long run, bypassing manufacturing. These patterns can only be explained by the rise in net agricultural exports.