aggregate scale economies market integration and optimal welfare state policy abstract using a two sector two country model with aggregate scale economies and unionisation we show that optimal welfare state policy entails positive levels of unemployment benefits under free trade and capital mobility in this setting economic integration does not reduce the revenue raising capacity of governments and thus does not lead to a race to the bottom in social standards instead trade and capital flows interact with welfare state policies in increasing welfare even when each government acts independently non cooperatively in determining its optimal welfare payment cooperation is shown to improve upon non cooperative outcomes by raising both the generosity of the welfare state and aggregate welfare

financial factors in economic development financial factors have been assigned strategic importance in economic development but very different factors have been isolated in the respective experiences in asia unrepressed financial markets in mobilizing saving and allocating investment have been given prominence in latin america the central question is the role of inflationary finance the scope for deficits to enhance growth and increasingly the feedback from high and unstable inflation to poor economic performance this paper reviews and contrasts the two approaches and concludes that the strong claims for the benefits of financial liberalization are not supported by evidence financial factors are important but probably only when financial instability becomes a dominant force the scope for inflationary finance is small and the risks are larger than commonly accepted when hyperinflation takes over and foreign exchange crises disrupt the price system and shorten the economic horizon to a week or a month normal economic development is suspended moreover difficult to reverse capital flight puts savings outside the home economy attention should focus on these extreme cases and explore deeper the thresholds at which financial factors become dominant and the channels through which this occurs superior growth performance in this perspective may be more a reflection of adaptability than financial deepening this abstract was borrowed from another version of this item

the relation between price and marginal cost in u s industry a contradiction in a recent article in this journal hall 1988 examined productivity shocks at the industry level derived from constant returns to scale production functions in which firms were assumed to be competitive hall had two important conclusions first he showed that productivity shocks i e solow residuals were correlated with aggregate demand variables implying that the former are not exogenous impulses second his results implied that firms persistently charge prices above marginal costs making inappropriate the constant returns to scale competitive production function assumed in many theoretical frameworks because of the importance of hall s findings the article has led to many extensions evans 1992 confirms the empirical finding of significant correlations between productivity shocks and aggregate demand variables burnside eichenbaum and rebelo 1993 show that this correlation can be explained by introducing labor hoarding into a theoretical model with competitive firms and constant returns to scale production functions the markups above marginal cost are explained by eden and griliches 1991 and galeotti and schiantarelli 1991 by modifying the theoretical production function caballero and lyons 1992 using the hall data and methodology examine the possibility of external economies in the aggregate manufacturing production finally waldmann 199 1 argues in this journal that the

learnability and equilibrium selection under indeterminacy abstract this paper presents an equilibrium selection procedure for linear rational expectations models under equilibrium indeterminacy in the procedure a specific equilibrium is chosen such that the perceived law of motion for agents with adaptive learning rules converges to the particular solution the procedure is applicable only under empirically implausible parameter settings if the agents perceive fundamental shock processes completely however if they misperceive the fundamental shocks in some degree the procedure works under plausible parameters it is also demonstrated that the selected particular solution exhibits different dynamics from that under the assumption often made in the literature

the gatt agreement on trade related investment measures implications for developing countries and their relationship with transnational corporations this article addresses three issues first it argues that the use of trade related investment measures trims by ldcs can only be analysed in the context of their dealings with transnational corporations tncs second it considers the applicability of existing gatt rules to trims and shows that they are inadequate and can pose difficulties for ldcs seeking foreign direct investment by tncs third it suggests a framework for regulating trims as one element of host tnc relations the article concludes with proposals for enhancing the capacity of ldcs in their dealings with tncs

estimation of scale economies underlying growth and productivity the empirical implications of data aggregation estimation of scale economies underlying growth and productivity patterns is typically based on aggregated data raising questions about the potential for aggregation biases this paper provides empirical evidence on the existence and patterns of such biases we use a cost based model to estimate short long run and internal external scale effects for u s manufacturing data at different aggregation levels our results suggest that aggregation biases in such a model are not substantive also internal scale economies seem more appropriately represented by the aggregate data whereas more disaggregated data appears preferable for estimation of external or spillover effects that occur between industries or sectors

production function regressions returns to scale and externalities a number of recent papers have used simple linear regressions in an attempt to identify market structure the extent of returns to scale and possible external effects in u s manufacturing industries the results obtained from these regressions have important implications for several branches of modern macroeconomics as a result the macro literature frequently cites specific numerical evidence from caballero and lyons 1992 and hall 1990 which suggests that there are quantitatively significant increasing returns to scale or external effects in u s manufacturing in contrast it is the argument of this paper that this evidence is not convincing the most robust evidence suggests that the typical u s manufacturing industry displays constant returns with no external effects on the other hand there is significant heterogeneity across industries

increasing returns capital utilization and the effects of government spending abstract we show that a one sector real business cycle model with mild increasing returns to scale variable capital utilization and saddle path stability is able to produce qualitatively realistic business cycles driven solely by disturbances to government purchases due to an endogenous increase in labor productivity a positive spending shock can lead to simultaneous increases in output consumption investment employment and real wage our analysis illustrates a close relationship between this result and the recent literature that explores indeterminacy and sunspots in real business cycle models under laissez faire in particular the condition which governs the required magnitude of increasing returns for government spending shocks to generate procyclical macroeconomic effects is identical to that necessary for a laissez faire one sector real business cycle model to exhibit local indeterminacy

increasing returns home production and persistence of business cycles abstract this paper presents a business cycle model with a propagation mechanism capable of generating persistence of output growth comparable to that observed in the us data the key is that in this model consumption and labor move together not only at the impact of a shock but also for a few periods after that this can happen if there are sufficient increasing returns to make the equilibrium indeterminate the exact degree of increasing returns is estimated so that the distance between the spectra of the model and us output growth is minimized

computing productivity firm level evidence we explore the effect of computerization on productivity and output growth using data from 527 large us firms over 1987 1994 we find that computerization makes a contribution to measured productivity and output growth in the short term using one year differences that is consistent with normal returns to computer investments however the productivity and output contributions associated with computerization are up to five times greater over long periods using five to seven year differences the results suggest that the observed contribution of computerization is accompanied by relatively large and time consuming investments in complementary inputs such as organizational capital that may be omitted in conventional calculations of productivity the large long run contribution of computers and their associated complements that we uncover may partially explain the subsequent investment surge in computers in the late 1990s

aggregate savings financial intermediation and interest rate there has been considerable controversy about the role of financial factors as determinants of savings in developing countries this paper explores the importance of two such factors namely real interest rate and financial intermediation using pooled time series cross section data a model of savings is estimated for asia latin america and for the total sample particular attention is paid to the error structure in estimation the results suggest that pooling is not justified further there is no unequivocal support for the effect of either of the two factors some qualified support is found for asia but none for latin america copyright 1987 by mit press

impact of information technology capital on firm scope and performance the role of asset characteristics this research draws on transaction cost and resource based theory to examine how information technology it capital moderates the relationship between different types of assets and firm scope both vertical integration and diversification the analysis suggests that it capital enables firms with narrowly valuable assets to be less vertically integrated and less diversified and enables firms with broadly valuable assets to be more vertically integrated and more diversified the moderating influence of it capital on the relationship between different types of assets and firms vertical and product market scope is consistent with transaction cost as well as resource based traditions abstract from author

comparing four models of aggregate fluctuations due to self fulfilling expectations abstract this paper compares four equilibrium business cycle models with increasing returns to scale production technologies that allow for aggregate fluctuations due to self fulfilling expectations necessary and sufficient conditions for the existence of stationary sunspot equilibria are derived numerical examples demonstrate that the degree of increasing returns necessary for the existence of stationary sunspot equilibria lies in the upper range of available empirical estimates the paper also shows that persistent fluctuations are not a necessary property of these four models when the only source of fluctuations is changes in people s expectations about the future path of the economy journal of economic literature classification numbers e32 d43

endogenous markups and the effects of income taxation theory and evidence from oecd countries abstract existing studies on the effects of fiscal policy under imperfect competition typically treat each firm s price cost markup as fixed this paper examines the implications of endogenising the markup in a simple model of income taxation under monopolistic competition it is demonstrated that an increase in income tax reduces the number of firms lessens competition among surviving firms and raises the optimal markups in the new steady state through this channel the effects of income taxation on the key macroeconomic variables as well as on consumer welfare are unambiguously enlarged the simple model prediction is largely supported by cross section regressions with data from oecd countries

capital externalities in olg economies abstract the recent literature has stressed that externalities however small may lead to indeterminacy and endogenous fluctuations while on the contrary intertemporal substitution in consumption leads to local uniqueness this paper introduces increasing returns through aggregate capital externalities into the overlapping generations model with endogenous labor and consumption in both periods of life we show that local determinacy of the steady state prevails when externalities are arbitrarily small as long as the fraction of young age consumption out of wage income is large enough conversely local indeterminacy with small externalities requires both labor supply to be close to indivisible and irrealistic values of the propensity to save out of the wage income more surprising is the fact that increasing the size of externalities indeed reduces the range of values of the consumption to wage ratio associated with multiple equilibria because of two conflicting effects on savings that operate through wage and interest rate

monopolistic competition increasing returns to scale and the importance of productivity shocks abstract the neoclassical growth model is extended to incorporate monopolistic competition and increasing returns to scale implications for the measurement of productivity change through the solow residual are studied it is found that for this extension productivity fluctuations continue to account for a substantial fraction of output volatility the model cannot account for volatility of employment

an investigation into the power of insiders in wage determination abstract this paper is concerned with the role of insider forces in wage determination various union and non union models of wage behaviour are considered and they imply that wages are a convex combination of internal and external factors certain union models also imply a degree of hysteresis data on fourteen british production industries reveal that i insider forces are important ii their importance is directly related to both union power and the degree of monopoly in the product market iii the state of the aggregate labour market is also important and iv hysteresis effects arising from insider power are only significant in a small minority of sectors

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

the hump shaped behavior of inflation and a dynamic externality we propose a general equilibrium model that explains the empirical evidence of the hump shaped response of inflation to a monetary policy shock the model replaces backward looking indexation a la christiano et al 2005 nominal rigidities and the dynamic effect of a shock to monetary policy journal of political economy 113 1 1 45 with a dynamic externality into the production function of firms the model armed with sticky wages and variable capital utilization has two offsetting effects on real marginal cost over the business cycle first increasing factor prices raise real marginal cost in response to an expansionary monetary policy shock in the intermediate run second a dynamic externality reduces real marginal cost in the short run because it raises productivity in response to an increase in output following the shock overall the resulting short run decrease and intermediate run increase in marginal cost replicate the hump shaped behavior of inflation under purely forward looking price and wage phillips curves

indeterminacy and sunspots with constant returns recently there has been a renewed interest in the possibility of indeterminacy and sunspots or alternatively put in the existence of a continuum of equilibria that arises in dynamic economies with some market imperfections much of the research in this area has been concerned with the empirical plausibility of indeterminacy in markets with external effects or with monopolistic competition and which exhibit some degree of increasing returns while the early results on indeterminacy relied on relatively large increasing returns and high markups more recently benhabib and farmer 1996a showed that indeterminacy can also occur in two sector models with small sector specific external effects and very mild increasing returns

cyclical productivity in europe and the united states evaluating the evidence on returns to scale and input utilization this paper studies procyclical productivity growth at the industry level in the united states and three european countries france germany and the netherlands industry specific demand side instruments are used to examine the prevalence of non constant returns to scale and unmeasured input utilization for the aggregate us economy unmeasured input utilization seems to explain procyclical productivity however this correction still leaves one in three us industries with procyclical productivity this failure of the model can also be seen in europe and is mostly concentrated in services industries

measuring the cyclicality of real wages how important is the firm s point of view there is a growing consensus among economists that real wages in the postwar united states have been procyclical greatly bolstering technology driven theories of business cycles at the expense of more classical models this paper makes the point that technological movements in firm s labor demand curves should be tested with a wage that is deflated by the firm s own price of output with appropriate controls for intermediate inputs and with respect to the cyclical state of the firm s own industry as opposed to the state of the aggregate economy failure to control for these factors is found to lead to substantial overrejection of the classical model in detailed industry data with controls for changes in worker composition i find that a vast majority of sectors have paid real product wages that vary inversely that is countercyclically with the state of their industry

asymmetric phase shifts in u s industrial production cycles abstract we identify cyclical turning points for 74 u s manufacturing industries and uncover new empirical regularities a industries tend to comove between expansion and contraction phases over the business cycle b clusters of industry turning points are highly asymmetric between peaks and troughs troughs are much more concentrated and sharper than peaks c the temporal pattern of phase shifts across industries supports the spillovers through input output linkages and d macroeconomic shocks such as unanticipated changes in monetary policy government spending oil prices and financial conditions are significant drivers of industrial phase shifts

returns to scale market power and the nature of price rigidity in new keynesian models with self fulfilling expectations increasing returns to scale and firms market power are two potential sources of sunspot expectations in neoclassical models we show that in new keynesian models returns to scale and market power can have fundamentally different implications for broad macroeconomic issues including self fulfilling expectations depending on the nature of price rigidity our findings suggest that the design of stabilization monetary policy can depend on precise knowledge about the economy s real and nominal features therefore a clear understanding of the specific economic environment and its relevance to monetary policymaking for ensuring macroeconomic stability can be an integrated part of monetary policy practice

free entry and business cycles under the influence of animal spirits abstract we provide a business cycle model in which endogenous markup fluctuations are the main driving force these fluctuations occur due to some form of animal spirits impelling firms in their entry exit decisions within each sector by contrast to existing models of the business cycle emphasizing the role of animal spirits we do not rely on the sink property of the equilibrium to generate indeterminacy hence while our model does pretty well in accounting for the main features of us business cycles it avoids several criticisms addressed to these former models concerning either their dependence upon strongly increasing returns too high markups or their implication of countercyclical movements of consumption

indeterminacy under constant returns to scale in multisector economies recently there has been a renewed interest in indeterminacy or alternatively put in the existence of a continuum of equilibria in dynamic economies that exhibit some market imperfections one of the primary concerns of this literature has been the empirical plausibility of indeterminacy which arises in markets with external effects or with monopolistic competition often coupled with some degree 10 of increasing returns

balanced budget rules and macroeconomic in stability abstract it has been shown that under perfect competition and constant returns to scale a one sector real business cycle model may exhibit indeterminacy and sunspots when income tax rates are determined by a balanced budget rule with a pre set level of government expenditures this paper shows that indeterminacy disappears if the government finances endogenous public spending and transfers with fixed income tax rates under this type of balanced budget formulation the economy exhibits saddle path stability and equilibrium uniqueness regardless of the source of government revenue and or the existence of lump sum transfers

balanced budget rules distortionary taxes and aggregate instability a traditional argument against a balanced budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction this paper suggests an additional source of instability that may arise from this type of fiscal policy rule it shows that within the standard neoclassical growth model a balanced budget rule can make expectations of higher tax rates self fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short run fiscal imbalances calibrated versions of the model show that indeterminacy occurs for income tax rates that are empirically plausible for the u s economy and other group of seven countries

understanding self fulfilling rational expectations equilibria in real business cycle models abstract necessary conditions for indeterminacy in standard rbc models have been extensively studied but intuitive understanding of the economic mechanism that generates indeterminacy has yet to be fully explored following the permanent income theory this paper provides an alternative framework for understanding and deriving the technical conditions of indeterminacy in rbc models a virtue of this approach is that in deriving the conditions of indeterminacy one can see clearly not only how indeterminacy arises but also how robust the indeterminacy is to structural perturbations in preferences technologies and market structures

endogenous business cycles and the dynamics of output hours and consumption abstract this paper studies the business cycle fluctuations predicted by a two sector endogenous business cycle model with sector specific external increasing returns to scale it focuses on aspects of actual fluctuations that have been identified both as defining features of business cycles and as ones standard real business cycle models cannot explain for empirically realistic calibrations of the degree of returns to scale the results suggest that endogenous fluctuations do not provide the dynamic element that is missing in existing real business cycle models jel e32

of empty boxes returns to scale revisited this paper highlights the bias in returns to scale or price cost markup coefficients when estimated from the inverse of a production relationship coefficients estimated from the inverse are larger than when estimated directly and the size of the bias increases as the price cost markup or the scale elasticity of the underlying production function gets smaller an instrumental variables estimator although consistent still exhibits a small sample bias if more than one instrument is used for comparison direct estimates of scale elasticities are provided for two digit sic private business sectors and for four digit manufacturing sectors little evidence is found for increasing returns to scale in the manufacturing sector

indeterminacy aggregate demand and the real business cycle abstract we show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard rbc models predict fairly well but also aspects of actual fluctuations that standard rbc models cannot explain such as the hump shaped trend reverting impulse responses to transitory shocks found in us output cogley and nason am econom rev 85 1995 492 the large forecastable movements and comovements of output consumption and hours rotemberg and woodford am econom rev 86 1996 71 and the fact that consumption appears to lead output and investment over the business cycle indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale

externalities endogenous productivity and poverty traps abstract we present a version of the neoclassical model with an endogenous industry structure we construct a distribution of firms productivity that implies multiple steady state equilibria even with an arbitrarily small degree of increasing returns to scale while the most productive firms operate across all the steady states in a poverty trap less productive firms operate as well this results in lower average firm productivity and total factor productivity the distributions of employment by firm size across steady states are consistent with the empirical observation that poor countries have a higher fraction of employment in small firms than rich countries differences in output and total factor productivity across steady states are increasing in the degree of returns to scale the capital share and the frisch elasticity of labor supply

complementarities and comovements short run interindustry comovement may be due either to common shocks or to complementarities that progagate shocks across sectors this paper assesses the importance of input output linkages aggregate activity spillovers and local activity spillovers to comovement in postwar u s manufacturing i find that input output linkages and local activity spillovers are important to comovement while aggregate activity spillovers are not important i find that complementarities are important to aggregate volatility even after i remove observable aggregate shocks from the data local spillovers are particularly important explaining between 15 and 36 percent of manufacturing employment volatility the importance of local spillovers stems from the fact that industries that cluster together in space also comove through time contrary to the marshallian idea that industries with negatively correlated fluctuations should cluster together in order to stabilize local demand

aggregate consumption interest rates and inflation in ldcs an error correction model this article explores the relationship between the real interest rate and the consumption saving decisions in ldcs following the error correction methodology the model also includes an income term the inflation rate and a term for inflation uncertainty the main conclusion drawn from this exercise is that for low inflation countries there is a positive and stronger interest rate effect on saving while this effect is less clear and not significant for most high inflation countries also the results show that for at least half of the countries in the sample an ec model with a unit elasticity restriction seems to be an adequate representation of the data

can imperfect competition explain the difference between primal and dual productivity measures estimates for u s manufacturing it is well known that under the assumptions of constant returns to scale perfect competition and the absence of factor hoarding primal and dual productivity measures should be highly correlated the apparent lack of correlation is usually attributed to fixed factors of production in this paper i propose an alternative explanation by relaxing the assumption of perfect competition by controlling for the presence of a markup component i demonstrate that both productivity measures are in fact highly correlated for u s manufacturing the analysis also provides an alternative method of estimating a markup of prices over marginal cost that avoids certain difficulties inherent in some existing methods of estimation

capacity utilization under increasing returns to scale abstract this paper overcomes an important objection against the empirical relevance of the benhabib farmer model as a potential account of actual business cycle fluctuations this is attributable to an elasticity effect and a returns to scale effect of capacity utilization these effects are closely related to the empirical puzzles that capital appears to play an insignificant role in explaining cyclical movements in output and that the estimated labor elasticity appears to be larger than labor s share due to these effects multiple equilibria and persistent fluctuations can easily occur in a growth model for externalities mild enough so that the aggregate labor demand curve is downward sloping analyses show that the propagation mechanism generated by capacity utilization under mild increasing returns is capable of explaining the periodic patterns of u s business cycles documented by watson journal of economic literature classification numbers e32 e22 c52

sunspots and the business cycle in a finance constrained economy abstract this paper examines the cyclical properties of a finance constrained economy populated by two classes of households with heterogeneous preferences and featuring social increasing returns to scale the model exhibits indeterminacy for externalities mild enough so that the labor demand curve is downward sloping furthermore simulation results show that endogenous fluctuations driven by expectations are quantitatively relevant in opposition to standard real business cycles and sunspot models with single type of households our finance constrained economy reveals to be able to mimic both an acyclical pattern of the real wage and strong procyclical movements of aggregate consumption journal of economic literature classification numbers e2 e32

indeterminacy and increasing returns abstract we investigate properties of the one sector growth model with increasing returns under two organizational structures capable of reconciling the existence of aggregate increasing returns with competitive behavior by firms the first involves input externalities the second involves monopolistic competition we show for parameters in close accord with recent literature on real business cycles that the model displays an indeterminate steady state that can be exploited to generate a model of business fluctuations driven by self fulfilling beliefs in our first class of models growth is generated by exogenous increases in factor productivity in the second class the marginal product of capital is large enough for endogenous growth journal of economic literature classification numbers e00 e3 o40

monopolistic competition business cycles and the composition of aggregate demand abstract we develop a dynamic general equilibrium model with monopolistically competitive firms and endogenous markups and show the possibility of equilibria with persistent fluctuations driven by self fulfilling revisions of expectations for some parameter values such fluctuations are characterized by time series properties similar to those observed in u s postwar business cycles in contrast with the existing literature our results do not rely on the presence of increasing returns or nominal rigidities a key ingredient of the model is the link between markups and the composition of aggregate demand some econometric evidence on the latter is also reported journal of economic literature classification number d43 d58 e32

market entry and international propagation of business cycles abstract in this paper pro cyclical market entry acts as an international transmission mechanism for business cycle shocks in an imperfectly competitive dynamic equilibrium model an expansion in one open economy leads to additional business formation in a parallel large open economy through demand spillovers business formation causes a decline in markups leading to an expansion in employment production and investment in both economies the modeling of the entry decision is critical only when the entry game is modelled as sequential with incumbents enjoying a first mover advantage are markups sufficiently elastic to cause international comovement

market structure and cyclical fluctuations in u s manufacturing the relevance of imperfect competition for models of economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization the authors outline a new methodology for estimating industry markups of price over marginal cost and the influence of market structure on cyclical movements in total factor productivity measures of industry concentration import competition and unionization are important for explaining markups in some industry groups much of the estimated markup of price over marginal cost is accounted for by noncapital fixed costs finally the authors show that their estimated margins fluctuate substantially over the cycle in particular markups are countercyclical especially in concentrated durable goods industries copyright 1988 by mit press

business cycles and the relationship between concentration and price cost margins using a newly constructed panel data base we examine changes in price cost margins in 284 manufacturing industries between 1958 and 1981 a key finding is a dramatic narrowing of the spread between the margins of concentrated and unconcentrated industries over this period we provide evidence that this narrowing is a result of the greater sensitivity of price cost margins in more concentrated industries to demand fluctuations this finding is robust to the inclusion of other industry variables and to measures of import competition the results indicate that cross sectional estimates of the concentration margins relationship are likely to be both biased and misleading

indeterminacy with capital utilization and sector specific externalities abstract we show that the minimum level of increasing returns to scale needed for indeterminacy in a two sector real business cycle model with variable capital utilization and sector specific externalities is extremely small moreover this value is lower than that required in several of our model s predecessors and is quite easily within the range of empirical plausibility

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

public infrastructure investment interstate spatial spillovers and manufacturing costs effects of public infrastructure investment on the costs and productivity of private enterprises have proven difficult to quantify empirically one piece of this puzzle that has received little attention is spatial spillovers we apply a cost function model to 1982 1996 state level u s manufacturing data to untangle the private cost saving effects of inter and intrastate public infrastructure investment we implement two spatial adaptations including a spatial spillover index in the theoretical model and allowing for spatial autocorrelation in the stochastic structure recognizing such spillovers both increases the estimated magnitude and significance of cost savings from intrastate public infrastructure and augments these productive effects

customer and supplier driven externalities the purpose of this paper is to provide empirical evidence helpful for distinguishing different types of externalities we pursue this by extending the productionfunction framework of robert e hall 1990 and caballero and lyons 1990 1992 to exploit two key dimensions of the data disaggregate input output relationships and differences between estimates emphasizing time series versus cross sectional aspects of the data we obtain three main results first from the within estimates using annual data which emphasize the time series properties common across sectors we find a strong reduced form relationship between industry productivity and the activity level input growth of customers in sharp contrast supplier activity levels are insignificant the second result derives from between estimates which emphasize the cross sectional dimension of the data here we find the opposite is true there is a strong reduced form relationship between industry productivity and the activity level of suppliers but no relationship with customer activity levels we interpret the first two results as suggesting that over shorter horizons the linkage between an industry and its customers is pivotal in the transmission of external effects while in the long run external effects are mostly related to intermediate goods linkages the third result concerns the transition from short to long run we find that as the number of periods over which the variables are averaged is incrementally increased from one year toward the full sample period 27 years the significance of customers versus suppliers smoothly reverses itself the remainder of the paper is organized in four sections section i presents the core model and the econometric methods for disentangling the external effects section ii describes the data and estimation section iii presents the main results and our conclusions are presented in section iv

local determinacy with non separable utility this paper introduces general formulations for both technology with input substitution and non separable utility compatible with balanced growth and stationary worked hours into a benchmark rbc model it is shown that intertemporal substitution and input substitutability lead to local determinacy and rule out stationary sunspot equilibria when labor demand is downward sloping in contrast with recent results obtained under the assumption of separable utility the main intuition behind this result is shown to work as follows in contrast with separable preferences increasing the elasticity of intertemporal substitution in consumption necessarily implies decreasing the elasticity of constant consumption labor supply when utility is non separable and concave which affects unfavorably the occurrence of local indeterminacy

indeterminacy home production and the business cycle a calibrated analysis abstract in this paper i present a business cycle model with one market sector that produces a standard good and another that produces a non market or home good the model can have multiple equilibria and therefore cycles driven only by self fulfilling expectations with low externalities to market production in particular an upward sloping aggregate labor demand as e g in farmer and guo j economic theory 63 1994 42 72 is not required for indeterminacy the effect of technology shocks is also studied in all cases the time series that are generated have properties that are comparable to the real us postwar series

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

endogenous markups intensity of competition and persistence of business cycles in order to study the propagation mechanism of business cycles in particular to investigate how the intensity of competition affects market structure and output persistence over business cycles this paper presents a real business cycle model with imperfect competition and increasing returns to scale this analysis considers the markups of price over cost to be endogenous with endogenous markups two standard forms of oligopolistic competition bertrand and cournot are considered results show that 1 the propagation mechanism in the sense of output persistence is greater under cournot 2 the propagation mechanism is unequivocally greater with imperfect competition regardless of whether markups are endogenous or not and 3 under imperfect competition the propagation mechanism is greater with endogenous markups than with exogenous markups overall these results suggest that more intense competition produces lower persistence in output growth and thus a weaker propagation mechanism in a calibration exercise these differences were also found to be quantitatively important

aggregate returns to scale and embodied technical change theory and measurement using stock market data abstract we develop a new general equilibrium growth accounting framework that features increasing returns to scale imperfect competition and incorporates technological revolutions into the description of technical progress we propose a way to tell apart revolutionary changes in technology and incremental innovations using stock market data we use our framework to jointly estimate the overall embodied tfp change during 1953 1995 and the aggregate output elasticity we find that the it revolution raised the aggregate tfp level by about 20 we suggest a 1 09 1 11 range for the aggregate returns to scale

computers productivity and input substitution i introduction the last two decades has been a puzzling time for many productivity analysts while computer prices fell at extraordinary rates and firms invested hundreds of billions of dollars in new computer equipment aggregate productivity growth remained sluggish this computer productivity paradox has generated a large literature that examines the economic impact of the computer revolution 1 this paper offers a simple solution to the computer productivity paradox by making careful distinction between computers as an output from one sector and an input to other sectors data for 35 manufacturing and service sectors for 1947 1991 show that sectoral differences are crucial in understanding the impact of computers aggregate analysis is inappropriate since it obscures basic distinctions between a shifting production function in the computer producing sector multi factor productivity growth and movements along production functions in the computer using sectors substitution and capital accumulation once these differences are isolated the growth impact of computers is readily observable the computer producing sector experienced fundamental technological progress and now produces cheaper better computers the sectoral data show this as rapid multi factor productivity mfp growth for 1973 1991 although aggregate mfp growth remains below historic averages the computer producing sector has clearly done its part mfp growth in this sector is many times the economy average and has contributed over one third of aggregate mfp growth for 19811991 the sectoral detail shows that the slowdown in aggregate productivity would have been much more severe were it not for such large mfp gains in the computer producing sector for the other sectors of the economy computers affect growth in a more traditional although less glamorous way when the price of real computing power fell so dramatically in the 1970s and 1980s firms responded by substituting away from relatively expensive labor and non computer capital and investing heavily in cheap computers for these sectors the computer revolution affects output growth not by raising mfp but by inducing firms to accumulate computers at extraordinary rates real computer services for example grew in excess of 20 per year in 14 out of 35 sectors for 1973 1991 although virtually all sectors are rapidly accumulating computer equipment computers remain small in levels in 1991 for example computer investment was only 10 of private fixed investment so the growth contribution of computers remains small relative to sectoral aggregates of labor and non computer capital the rapid rates of accumulation however are clearly making computers a more important source of growth across sectors with this heavy investment also came the wide spread expectation that computers would fundamentally alter the way firms operate and lead to higher mfp the reality has been very different as the most computer intensive sectors show steep declines in mfp growth after 1973 with three quarters of all computers concentrated in three service sectors trade fire and other services however this finding must be interpreted with caution as griliches 1994 notes output in these sectors is largely unmeasurable and thus mfp growth will be understated nonetheless it is quite reasonable that even computer using sectors where output is easier to measure show no mfp gains computer investment creates a capital input that enters the production function like any other purchased input since constant quality deflators embody productivity improvements in investment the direct impact is seen through the rapid capital accumulation only if the adoption of computers leads to production externalities or spillovers would computer investment also increase mfp growth the data however show no evidence of this ii computers and growth the national statistics most clearly show the computer revolution in the investment data

microeconomic uncertainty and macroeconomic indeterminacy we propose a stylized intertemporal macroeconomic model wherein the combination of decentralized trading and microeconomic uncertainty taking the form of privately observed and uninsured idiosyncratic shocks creates an information problem between agents and generates indeterminacy of the macroeconomic equilibrium for a given value of the economic fundamentals the economy admits a continuum of equilibria that can be indexed by the sales expectations of firms at the time of investment the walrasian equilibrium is one of these possible equilibria but it is reached only if firms are optimistic enough with a weaker degree of optimism equilibrium output employment and real wages will be lower than in the walrasian equilibrium moreover the range of possible equilibria will depend positively on the wage elasticity of the labour supply and on the magnitude of the information problem between buyers and sellers in our case the variance of the idiosyncratic shocks stochastic simulations performed on a calibrated version of the model show that pure demand expectation shocks may generate business cycle statistics that are not inconsistent with the observed ones 2006 elsevier b v all rights reserved

the cyclical behavior of marginal cost and price the author examines the cyclical behavior of price marginal cost margins for u s manufac turing after 1956 short run marginal cost is markedly procyclical this is primarily due to procyclical overtime payments incurred beca use employment is not perfectly flexible in most industries output price fails to respond to the cyclical movement in marginal cost so price marginal cost margins are markedly countercyclical the res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing they support theories that explain low production in a recession by the inability of firms to sell their output copyright 1987 by american economic association

tracing the effects of agricultural commodity prices and food costs we estimate a system of product and input demand equations for food processing industries to trace the links among farm commodity prices food processing costs and food prices disembodied technical change which likely reflects increasing consumer demand for convenience and product variety has sharply reduced agricultural materials demand relative to most other food processing inputs this implies weakening impacts of farm price shocks on food prices but improving quality and falling relative prices for agricultural inputs in combination with increasing factor substitution has counteracted these forces to encourage greater usage of agricultural inputs in food processing and limit these trends food prices today often appear less responsive to farm price shocks than in the past a development sometimes attributed to failures in market institutions however powerful long run technological and social changes leading to adaptations in production processes and food consumption patterns have also altered the demand for primary agricultural materials by changing the structure of food processing industries the social shifts surrounding the expanded role of women in the labor force represent one striking example of such changes the fraction of married women in the labor force less than one third in 1960 rose sharply through the next three decades before stabilizing at around 61 in the 1990s such demographic shifts increased the demand for food products requiring less home preparation time which in combination with enhanced technology has led to more in plant processing of agricultural materials and likely a growing share of nonagricultural inputs in

dynamic factor demands and the effects of energy price shocks a dynamic model is used to understand how sharp changes in energy prices affect investment behavior employment and energy use the authors discuss the theory behind their model selection model specifications estimation methods and data list parameter estimates and elasticities for the selected model and describe the simulations they conclude that 1 the data strongly reject the hypothesis of constant returns to scale within their specification of aggregate production 2 the data indicate adjustment costs on labor are small and 3 their results help reconcile some of the conflicting estimates of energy demand elasticities appearing in recent literature 23 references 3 figures 3 tables

a survey of new keynesian theories of aggregate supply and their relation to industrial organization i survey the recent literature on the phillips curve along the way i will try to relate this literature to topics of interest to industrial organization i will also point out the gaps in our understanding and places where more careful micro economic analysis would be helpful to macroeconomists in the conclusion i summarize what an industrial organization economist might take away from this literature

determinants of consumption and savings behavior in developing countries the determinants of savings generally and the specific effects of government policies on savings and consumption are pivotal forces in investment and economic growth the hall hypothesis states that consumption is a function of lifetime permanent income rather than income in each period independently changes in interest and tax rates money supply or government expenditure will affect permanent income and hence consumption and savings only if they are unexpected and thus not already incorporated in the estimation of permanent income we are unable to reject the hall hypothesis in tests for developing countries when we allow for varying interest rates we do find evidence of a negative effect of inflation on consumption and a positive relationship between the real interest rate and consumption the evidence for the hall hypothesis also suggests that ricardian equivalence may be valid this is barro s hypothesis that the effect on savings is the same whether government deficits are financed through taxation or debt our preliminary testing however does not support ricardian equivalence savings is the part of one s current income that is not spent on current consumption and it constitutes a large part of a nation s aggregate savings and investment and thus is a major determinant of the growth of future income and consumption households balance the tradeoffs between current and future consumption possibilities when making their individual consumption decisions understanding the determinants of households consumption behavior has been central to macroeconomics the three main theoretical approaches to this issue are keynesian consumption theory the life cycle permanent income hypothesis under rational expectations and the theory of the infinitely lived agent or altruistically linked consumers the theories differ in the extent to which they explain the observed consumer behavior and in their predictions regarding the effects of government policies on individual savings behavior for instance increased taxes higher nominal interest rates or an increase in the money

optimal taxation with imperfect competition and aggregate returns to specialization in this paper we explore the proposition that in economies with imperfect competitive markets the optimal capital income tax is negative and the optimal tax on firms profits is confiscatory we show that if the total factor productivity as well as the measure of firms or varieties are endogenous instead of fixed then the optimal fiscal policy can lead to different results the government faces a trade off between the fixed costs that the society pays for the

tracing externalities as sources of indeterminacy abstract this paper offers further inquiry into sources of indeterminacy in general equilibrium we take a more agnostic approach than previous work as we allow for a more general interpretation of externalities in particular we identify the origin of scale economies as being from either labor or capital we find that in the one sector model it is primarily the externalities associated with labor that generate the result however in the two sector model indeterminacy can be ultimately traced back to the externalities from capital in the investment sector

imperfect competition and indeterminacy of aggregate output abstract this paper shows imperfect competition can lead to indeterminacy in aggregate output in a standard dsge model with imperfect competition indeterminacy arises in the model from the composition of aggregate output in sharp contrast to the indeterminacy literature pioneered by benhabib and farmer j benhabib r farmer indeterminacy and increasing returns j econ theory 63 1 1994 19 41 and gali j gali monopolistic competition business cycles and the composition of aggregate demand j econ theory 63 1 1994 73 96 indeterminacy in our model is global hence it is more robust to structural parameters in addition sunspots in our model can be autocorrelated the paper provides a justification for exogenous variations in desired markups which play an important role as a source of cost push shocks in the monetary policy literature our model outperforms a standard rbc model driven by technology shocks in several dimensions including the volatility of labor market and the hump shaped output dynamics

investment policies in the gatt host country policies toward inward direct investment can have predictable effects on trade flows trade related investment measures trims such as local content requirements and minimum export requirements have recently come under official scrutiny in the general agreement on tariffs and trade this paper examines the economic and political context of the uruguay round negotiations on trims in the negotiations investment measures have been treated as a particular instance of a broader problem the proliferation of nontariff trade distortions as with other trade distortions the negotiating strategy has been to identify specific policies to be proscribed or limited however this approach ignores the typical interactions between multinational firms and host governments observed investment regimes are often the result of a lengthy and complex bargaining process while some investment regimes actually alter the allocation of resources in production and trade others affect mainly the distribution of rents between firms and host countries in particular the trade impact if any depends as much on economic conditions as on the specific combination of investment measures imposed this abstract was borrowed from another version of this item

what determines aggregate returns to scale abstract this paper develops a unified framework that incorporates four features important in existing models with increasing returns fixed costs decreasing marginal costs product variety and market power when fixed costs are not allowed to vary and profits are imposed to be zero in every period only the degree of returns to variety determines the degree of aggregate increasing returns to scale when fixed costs respond to changes in aggregate activity or the zero profit condition does not hold in the short run aggregate returns depend not only on product variety but also on diminishing marginal costs or market power the degree of market power however does not affect input prices which are critical to determine the uniqueness of equilibrium

animal spirits technology shocks and the business cycle the last few years have witnessed a revival of business cycle models in which beliefs of agents have played a leading role in explaining economic fluctuations 1 most of these models involve strong economy wide increasing returns to scale in order for sunspot equilibria to exist in a recent paper however basu and fernald 1996 present evidence that returns to scale are far from evenly distributed across the u s economy in particular they report that scale economies are present mainly in the domain of durable goods production in the nondurable goods sector of the u s economy evidence of increasing returns to scale cannot be found

firm dynamics and markup variations implications for sunspot equilibria and endogenous economic fluctuations this paper analyzes how the interaction between firms entry and exit decisions and variations in competition gives rise to self fulfilling expectation driven fluctuations in aggregate economic activity and in measured total factor productivity tfp the analysis is based on a dynamic general equilibrium model in which net business formation is endogenously procyclical and leads to endogenous countercyclical variations in markups this interaction leads to indeterminacy in which economic fluctuations occur as a result of self fulfilling shifts in the beliefs of rational forward looking agents when calibrated with empirically plausible parameter values and driven solely by self fulfilling shocks to expectations the model can quantitatively account for the main empirical regularities characterizing postwar u s business cycles and for 65 of the fluctuations in measured tfp

real business cycles and the animal spirits hypothesis abstract we calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy these fluctuations are due to the self fulfilling beliefs of investors which we call animal spirits we compare the impulse response functions predicted by our model and by two other more standard models with a four variable vector autoregression on u s data our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data journal of economic literature classification numbers e00 e3 e32

a spatial analysis of sectoral complementarity this paper presents a spatial econometric method for characterizing productivity comovement across sectors of the u s economy input output relations provide an economic distance measure that is used to characterize interactions between sectors as well as conduct estimation and inference we construct two different economic distance measures one metric implies that two sectors are close to one another if they use inputs of other industrial sectors in nearly the same proportion and the other metric implies that sectors are close if their outputs are used by the same sectors our model holds that covariance in productivity growth across sectors is a function of economic distance we find that 1 positive cross sector covariance of productivity growth generates a substantial fraction of the variance in aggregate productivity 2 cross sector productivity covariance tends to be greatest between sectors with similar input relations and 3 there are constant to modest increasing returns to scale we tes

some unpleasant general equilibrium implications of executive incentive compensation contracts abstract we consider a simple real business cycle model in which shareholders hire self interested executives to manage their firm a generic family of compensation contracts similar to those employed in practice is studied when compensation is convex in the firm s dividend an increase in the firm s output results in a more than proportional increase in the managers income incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general equilibrium one in which business cycles are driven by self fulfilling fluctuations in managers expectations the proposed family of contracts may yield first best outcomes for specific parameter choices

profiting from agglomeration evidence from the salmon aquaculture industry asche f roll k h and tveteras r profiting from agglomeration evidence from the salmon aquaculture industry regional studies even though most celebrated clusters seem to be in high cost areas many econometric studies represent agglomeration externalities as increased primal productivity or reduced cost while this certainly can be consistent with some observed agglomeration effects it may be insufficient for the growth of a cluster the key condition for this is that profitability is higher the paper tests for agglomeration effects using a profit function approach this may be particularly important for firms in high cost clusters where revenue effects can be as important as productivity and cost effects the paper tests for both intra and inter industry agglomeration externalities using firm level data

on the stability of the two sector neoclassical growth model with externalities we study a class of two sector growth models with sector specific externalities in which one sector produces consumption and the other sector produces investment the novelty is that investment allocated to the consumption sector is an imperfect substitute for investment allocated to the investment sector we show analytically that in this case local indeterminacy near the steady state is impossible for every empirically plausible specification of the model parameters more specifically we show that a necessary condition for local indeterminacy is an upward sloping aggregate labor demand curve in the investment sector which requires a counterfactual strength of the externality we show numerically that an elasticity of substitution of plausible size implies determinacy near the steady state these findings differ sharply from the standard result for two sector models that if the investments allocated to the two sectors are perfect substitutes then local indeterminacy occurs for a wide range of plausible parameter values

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

indeterminacy and endogenous growth with social constant returns abstract by examining endogenous growth models with physical and human capital this paper demonstrates that indeterminacy of equilibrium may emerge even in the absence of increasing returns to scale the model we examine consists of two production sectors one produces final goods and the other produces new human capital both sectors use physical as well as human capital it is assumed that while the private technology of the representative firm in each sector exhibits decreasing returns to scale the social technologies of both sectors satisfy constant returns because of the presence of sector specific externalities we demonstrate that a small divergence between private and social factor intensity conditions generates indeterminacy of equilibrium rather easily even under constant returns intuitive implications of the source of indeterminacy and a generalization of the model are also presented journal of economic literature classification numbers d90 o40 o41

private saving interest rates and liquidity constraints in ldcs recent evidence there is still considerable controversy about the interest rate responsiveness of private saving in developing countries this paper provides recent evidence based on individual country estimations for a sample of 16 countries the model used here follows the uler equation approach and includes rational and forward looking permanent income consumers together with liquidity constrained consumers overall for this sample of countries the results obtained in this paper offer new evidence of a low responsiveness of saving to changes in the interest rate my results also support a strong role of liquidity constraints in these countries