Volume 24, Issue 1

This paper investigates multistage taxes on firms in a limited tax capacity economy. We characterize the optimal taxation of informal firms reinterpreting behavioral and mechanical effects. Our numerical exercises highlight the relationship between misreporting costs and the elasticities of reported revenues and costs. We explore a tax reform in Brazil with a survey of informal firms to estimate these elasticities (0.55 and 0.94, respectively), which imply smaller sheltering costs for input expenditures. The optimal multistage tax system includes (i) differential linear taxes across the production chain and (ii) a positive, but very small, tax refund rate.

This paper evaluates how initial beliefs uncertainty can affect data weighting and the estimation of models with adaptive learning. One key finding is that misspecification of initial beliefs uncertainty, particularly with the common approach of artificially inflating initials uncertainty to accelerate convergence of estimates, generates time-varying profiles of weights given to past observations in what should otherwise follow a fixed profile of decaying weights. The effect of this misspecification, denoted as diffuse initials, is shown to distort the estimation and interpretation of learning in finite samples. Simulations of a forward-looking Phillips curve model indicate that (i) diffuse initials lead to downward biased estimates of expectations relevance in the determination of actual inflation, and (ii) these biases spill over to estimates of inflation responsiveness to output gaps. An empirical application with U.S. data shows the relevance of these effects for the determination of expectational stability over decadal subsamples of data. The use of diffuse initials is also found to lead to downward biased estimates of learning gains, both estimated from an aggregate representative model and estimated to match individual expectations from survey expectations data.

In China, state-owned firms exhibit easier access to external credit but have lower productivity than private firms. We construct a dynamic general equilibrium model incorporating heterogeneous financial frictions to investigate their impact on credit resource misallocation and macroeconomic fluctuations in the Chinese economy. A calibration of our model suggests that heterogeneity in financial frictions can reduce macroeconomic volatility. The mechanism is that heterogeneity in financial frictions induces the procyclicality of credit resource misallocation within entrepreneurs, thus the procyclicality of productivity loss. The stabilization effect depends on the relative magnitude of the impact of the shock on credit resource misallocation within entrepreneurs compared to its impact on the output. In addition, we show that the cost of the stabilization effect of heterogeneity in financial frictions is that it reduces the economy’s aggregate TFP and output at the steady state. Our results imply that neglecting heterogeneity may overestimate the impact of financial frictions on economic volatility in previous studies.

On average, stocks have a much higher rate of return than bonds; this has led to research on the equity premium puzzle . Similarly, Bitcoin outperforms stocks; I call this the Bitcoin premium puzzle . I show that standard macroeconomic models predict a low or negative Bitcoin premium. Though Bitcoin is extremely volatile, the model is rejected even when the coefficient of relative risk aversion is above 10. The Bitcoin premium declined after a structural break in late 2013. However, the puzzle is persistent; there has been no downward trend in the premium since.

Recent research has begun to imply intermediate goods–skill complementarity; however, this possible complementarity has been hypothesized but not statistically tested, despite the increasing importance of intermediate goods in production. This study provides statistical evidence regarding whether intermediate goods are more complementary with skilled labor than with unskilled labor. Using panel data from 40 countries over the period 1995–2009, we estimate a two-level constant elasticity of substitution (CES) production function. Our major findings are fivefold. First, at the aggregated one-sector level, the elasticity of substitution between intermediate goods and unskilled labor is 1.22, which is significantly greater than that between intermediate goods and skilled labor of 1.05, indicating intermediate goods–skill complementarity. Second, at the disaggregated level, such complementarity is primarily observed in heavy manufacturing industries and the service sector, whereas complementarity is observed between intermediate goods and unskilled labor in the primary sector and light manufacturing industries. Third, the normalization of the data and the cumulant estimators exhibit stronger results. Fourth, our baseline results are confirmed applying several robustness checks, such as switching skilled and unskilled labor or considering capital–skill complementarity. Finally, intermediate goods–skill complementarity tends to be higher for industries that use more imported intermediate goods.

It is widely considered that a (perfectly) competitive equilibrium cannot survive to the existence of fixed costs because firms generate losses in equilibrium. In this theoretical and methodological article, I demonstrate that this statement is not valid by developing some counter-examples. In particular, I clearly show that a competitive equilibrium and fixed costs are tenable, depending on the ownership structure of models. I then delimit the role of fixed costs in macroeconomic models. Notably, I find that fixed costs can improve the level of aggregate output in the long run.

This paper considers a standard New Keynesian model with matching frictions and explores the impact of modeling the opportunity cost of employment as government unemployment transfers. The findings reveal that under such circumstances, maintaining full price stability at all times ceases to be optimal. This outcome persists even when production subsidies are introduced to address inefficiencies caused by imperfect competition in product and factor markets, and when wages are fully flexible and the Hosios condition holds. For a realistic calibration of the opportunity cost, the Ramsey-optimal policy necessitates a positive inflation rate with high volatility. The degree of inflation volatility required increases with the magnitude of unemployment transfers. Consequently, committing to an inflation targeting regime proves to be highly costly in this context. Additionally, the study demonstrates that the optimal inflation variability decreases with workers’ bargaining power. This is because higher workers’ bargaining power leads to reduced labor market fluctuations, thereby lowering the need for large inflation adjustments.

This paper studies the effects of labor market duality in terms of employment legislation protection (EPL) on labor market volatilities. Modeling contractual heterogeneity through a gap in EPL of temporary and permanent workers (weakly protected temporary/highly protected permanent contracts), I simulate both supply and demand shocks in a New Keynesian model with unemployment. I find that unemployment fluctuations follow an inverted U-shape over the magnitude of the EPL gap: small EPL gaps amplify, while large EPL gaps dampen the reaction of unemployment. In a subsequent empirical analysis, I find that the model’s predictions are consistent with panel data for a large set of OECD countries. Uncovering the non-linear course of unemployment volatility helps reconcile previous divergent research results.

Based on two-country scenarios (entrants vs. incumbents), this paper employs the synthetic control method to quantify the macroeconomic effects of the European Union (EU) enlargement, and examines whether these effects varied before, during, and after economic crises. We find that enlargement effects are very complex, and significantly varied across economic cycles and the country groups. In particular, EU enlargement induced large and positive effects on the entrants which were merely stifled in the wake of the financial crisis and the subsequent euro crisis. In the interim, the 2004 enlargement triggered an instantaneous negative shock on the incumbents which was further exacerbated by the crises. Subsequently, the entrants recovered beyond their pre-crises gains, registering approximately 14 % higher per capita incomes by 2019, with Poland emerging as a clear winner . Meanwhile, incumbents’ per capita incomes have, on average, declined by approximately 9 %. While our findings largely support the notion that the entrants are en route to catching up with their incumbent counterparts, a formal β -convergence analysis exploiting the observed and synthetic data intuitively confirms that EU integration reduces the half-life by 50 %.

This paper revisits the crucial issue of current account imbalances and focuses on the determinants of their gaps between eurozone Member States. We conduct robust estimations of the current account balances for a panel of ten founding euro area economies and construct a measure that allows us to diagnose why some countries have started to diverge from the eurozone mean in the last two decades. Our findings show evidence of remaining differences in countries’ economic development, meaning that real macroeconomic convergence has failed in the zone. Price and cost competitiveness, as well as fiscal balances, have also participated in this growing macroeconomic divergence. Overall, while the European authorities cannot influence the part of the current account gaps due to demographic factors, the role of fiscal redistribution and investment at the euro area level could help achieve macroeconomic convergence and thus reduce current accounts’ divergence in the zone.

Recent economic crises have posed important challenges for forecasting. Models estimated pre-crisis may perform badly when normal economic relationships have been disrupted. Meanwhile, forecasting, especially in central banks, is increasingly based on a suite of models, following two main approaches: structural (DSGE) and reduced form. The challenge remains to identify which model – or combination of models – is likely to make better forecasts in a changing environment. We explore this issue by assessing the forecasting performance of combinations of a medium-scale DSGE model with standard reduced-form methods applied to the Spanish economy and a reference period that includes both the great recession and the sovereign debt crisis. Our findings suggest that: (i) the mean reverting properties of the DSGE model cause it to underestimate the growth of real variables following the inclusion of crisis episodes in the estimation period; (ii) despite this, reduced-form VARs benefit from the imposition of an economic prior from the structural model; but (iii) pooling information in the form of variables extracted from the structural model with (B)VAR methods does not improve forecast accuracy. By analysing the quantiles of the predictive distributions, we also provide evidence that merging models can help improve the forecast in a context including crisis episodes.

Governments are always dealing with unexpected shocks, like wars, terrorism, financial crises, natural disasters, and the like. A recent prominent example is the SARS-CoV-2 pandemic. Since early 2020, governments around the world have enacted a range of unprecedented measures in an attempt to protect their citizens, with quite mixed results. This varied record has in turn had dramatic effects on peoples’ perceptions of their government, especially on their trust in government and so on their willingness to obey the many government mandates generated by the pandemic. This willingness to obey government mandates extends well beyond pandemic policies to all other dimensions of government laws and regulations. An important dimension of individual compliance with government mandates is tax evasion. What will be the effects of the pandemic and the associated government policies on post-pandemic tax evasion and economic growth, especially via the effects of government policies on “trust” in the government? In this paper we incorporate both tax evasion and trust in an endogenous growth model in order to examine the short and long run impacts on tax evasion of various shocks – a pandemic shock, a government policies shock, and a tax morale shock (and the resulting impact on trust in government). We then use real data on 11 representative economies to simulate these effects, economies representing developed and developing countries as well as economies representing governments that opted for various policy responses to COVID-19, modelled as a labor productivity shock. We find that varied public policy responses to the pandemic have immediate and persistent impacts on tax evasion in the short and long run, largely via their effects on trust in government. We also find that these evasion impacts vary in important and predictable ways that depend especially on whether government dealt effectively or not with the pandemic. Our methodology is readily adapted to examine the effects of other shocks and their respective policy responses on trust in government, tax evasion, and economic growth.

This paper explores whether public investment crowds out or crowds in private investment. To this aim, we build a database of about half a million firms from 49 countries. We find that the effect of public investment on corporate investment depends on leverage, liquidity constraint, and firm’s operating (labor) efficiency. In line with theory, public investment boosts private investment for firms with low leverage, but not for firms with high leverage, for firms that are financially constrained or that have low operating efficiency.

The aim of this research paper is to investigate whether there are non-linearities in the relationship between fiscal consolidation and investment. To achieve this, we take into account the overall state of the economy, as represented by the level of uncertainty. We analyzed a sample of 27 OECD countries from 1996 to 2019 and identified two different regimes of low and high uncertainty. We found that the relationship between fiscal policy and investment is significantly different in these two regimes. In the low uncertainty regime, fiscal tightening has no significant effect on investment. In contrast, in the high uncertainty regime, fiscal tightening has a negative impact on investment, which is three times larger than in the low uncertainty regime. Our results are robust, and have been confirmed through a range of sensitivity tests.

This paper develops a new approach to analyze the relationship between the government spending multiplier and monetary policy. We embed measures of monetary policy activism into a nonlinear SVAR model. Our model allows the central bank to adjust its monetary policy regime in response to the economic conditions that arise after government spending shocks. We find that, regardless of the monetary policy regime at the time of a spending shock, the central bank adjusts its regime quickly and responds actively towards inflation only a few quarters after the shock hits the economy. This rapid response of monetary policy leaves medium-run multipliers ultimately unaffected by whether the initial regime was active or passive. For both initial regimes, our five-year multiplier estimates lie between 1.2 and 1.5. An apparent exception to this result is the zero lower bound period between 2008Q4 and 2015Q4-during which monetary policy kept nominal interest rates at zero. Our multiplier point estimates for that era are consistently larger than unity.

How relevant are government-owned banks in the economy, especially during recessions? We study the role of government-owned banks in a dynamic stochastic general equilibrium (DSGE) model with heterogeneous financial intermediaries, heterogeneous households, and minimum capital requirement constraints. We show that the capitalization of government-owned banks during recessions smooths the effects of a negative shock and helps the economy recover more quickly. However, these stabilizing effects could be partially offset by banks’ inefficiency in transforming one unit of capital into loans. Therefore, ignoring the heterogeneity between private and government-owned banks may lead to misleading assessments and conclusions regarding the effects of economic policies on the macroeconomic and banking variables. This is particularly important for evaluating the effectiveness of macroprudential policies.