income dispersion and counter cyclical markups recent advances in measuring cyclical changes in the income distribution raise new questions how might these distributional changes affect the business cycle itself we show how counter cyclical income dispersion can generate counter cyclical markups in the goods market without any preference shocks or price setting frictions in recessions idiosyncratic labor productivity shocks raise income dispersion lower the price elasticity of demand and increase imperfectly competitive firms optimal markups the calibrated model explains not only many cyclical features of markups but also cyclical and long run patterns of standard business cycle aggregates

nonrenewable resource scarcity nonrenewable resource theory often is summarized by hotelling s rule this paper reviews theoretical extensions and empirical investigations of resource extraction models observed data are often inconsistent with the hotelling rule suggesting that other characteristics of nonrenewable resource supply including exploration heterogeneous ore quality technological progress and capital investment are important determinants of the dynamic behavior of resource prices given the persistent recurrence of concern about nonrenewable resource scarcity measures of nonrenewable resource scarcity and the empirical evidence for the time trends of those measures are reviewed finally the implications of nonrenewable resource scarcity for economic growth are examined

the future of macroeconomics macro theory and models at the bank of england abstract the adoption as policy models by central banks of representative agent new keynesian dynamic stochastic general equilibrium models has been widely criticised including for their simplistic micro foundations at the bank of england the previous generation of policy models is seen in its 1999 medium term macro model mtmm instead of improving that model to correct its considerable flaws many shared by other non dsge policy models such as the federal reserve s frb us it was replaced in 2004 by the dsge based beqm though this clearly failed during and after the global financial crisis it was replaced in 2011 by the dsge compass complemented by a suite of models we provide a general critique of dsge models for explaining forecasting and policy analyses at central banks and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory rather than seeking to impose simplistic and unrealistic theory

an equilibrium conflict model of land tenure in hunter gatherer societies i apply features of the economics of conflict and spatial competition in developing a model of the emergence of land ownership in hunter gatherer societies tenure regimes are the result of interactions between those seeking to defend claims to land and those seeking to infringe on those claims the model highlights the dependence of land ownership on ecological parameters such as resource density and predictability and allows for situational ownership in which the nature of ownership changes as realized ecological conditions change the paper concludes with a comparative assessment of tenure across a representative sample of hunter gatherer peoples

wage inequality welfare and downsizing abstract by making use of a simple model that does not explicitly include capital this paper examines the impact of downsizing on skilled unskilled wage inequality and welfare the paper shows that downsizing increases wage inequality and its effect on welfare is positive but the relative well being of the unskilled workers declines

wealth accumulation over the life cycle and precautionary savings this article constructs and simulates a life cycle model of wealth accumulation and estimates the parameters of the utility function the rate of time preference and the coefficient of risk aversion by matching the simulated median wealth profiles with those observed in the panel study of income dynamics and in the survey of consumer finances the estimates imply a low degree of patience and a high degree of risk aversion the results are used to study the importance of precautionary savings in explaining wealth accumulation they imply that wealth accumulation is driven mostly by precautionary motives at the beginning of the life cycle whereas savings for retirement purposes become significant only closer to retirement

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

equilibrium heterogeneous agent models as measurement tools some monte carlo evidence abstract this paper discusses a series of monte carlo experiments designed to evaluate the empirical properties of heterogeneous agent macroeconomic models in the presence of sampling variability the calibration procedure leads to the welfare analysis being conducted with the wrong parameters the ability of the calibrated model to correctly predict the long run welfare changes induced by a set of policy experiments is assessed the results show that for the policy reforms with sizable welfare effects i e more than 0 2 the model always predicts the right sign of the welfare effects however the welfare effects can be evaluated with the wrong sign when they are small and when the sample size is fairly limited quantitatively the maximum errors made in evaluating a policy change are very small for some reforms in the order of 0 02 percentage points but bigger for others in the order of 0 6 percentage points finally having access to better data in terms of larger samples does lead to substantial increases in the precision of the welfare effects estimates though the rate of convergence can be slow

do demographics prevent consumption aggregates from reflecting micro level preferences abstract most simulated micro founded macro models use solely consumer demand aggregates in order to estimate preference parameters of a representative consumer for use in policy evaluation focusing on dynamic models with time separable preferences we show that aggregation holds if and only if momentary utility functions fall in the identical shape harmonic absolute risk aversion ishara utility class identifying which parameters of ishara utility functions are allowed to vary over time given this theoretical result it should be easy to empirically reject the aggregation properties that the macroeconomic representative consumer identification approach requires it suffices to show that permanent incomes guaranteeing the same living standard across households of different size violate an affine relationship in order to test the validity of this affine equation we develop a vignette survey that produces appropriate data without demand estimation restrictions imposed by models surprisingly in six countries this equation is not rejected lending support to using consumer demand aggregates

requiem for the representative consumer aggregate implications of microeconomic consumption behavior macroeconomists pursuing microfoundations for aggregate consumption have generally adopted one of two approaches either to model microeconomic consumption behavior carefully and then to aggregate or to thoroughly understand the behavior of a representative consumer in general equilibrium then to introduce microeconomic risk and heterogeneity the broad conclusion from the bottom up approach has been that precautionary saving and microeconomic heterogeneity can profoundly change behavior stephen p zeldes 1989 angus s deaton 1991 christopher d carroll 1992 the broad conclusion from the top down approach has been that precautionary saving is of little importance in determining the aggregate capital stock s rao aiyagari 1994 per krusell and anthony a smith 1998 leading some economists to conclude that heterogeneity is unimportant for macroeconomic purposes this paper shows that while general equilibrium effects do imply that the aggregate magnitude of precautionary saving is modest nevertheless when a model with uninsurable idiosyncratic risk is modified so that it can match the key micro facts it produces behavior very different in important respects from that produced by the representative agent economy this leads to the conclusion that for many purposes the representative consumer model should be abandoned in favor of a model which matches key microeconomic facts this abstract was borrowed from another version of this item

trade migration costs and asymmetric migration patterns increase in trade has an asymmetric impact on emigration by skill types for a developing country cost of migration is a dynamic function of the type of emigration and it determines a complementary relation between emigration of skilled workers and expansion of trade emigration of unskilled workers is a substitute however and these outcomes coexist with endogenously determined emigration rates that depend crucially on wage responses among the own skill types at the source additionally asymmetric emigration patterns increase wage inequality

stabilization of human population through economic increasing returns abstract the assumptions of declining fertility with rising income and rising per capita output with rising population imply the existence of a stable demographic equilibrium with a high standard of living and relatively low total population this smithian equilibrium differs from the well known malthusian equilibrium in its comparative statics technical progress lowers the smithian equilibrium population while it raises the malthusian equilibrium population a fall in fertility lowers the smithian equilibrium income but raises the malthusian equilibrium income economic data show strong support for the hypotheses of increasing economic returns to population and declining fertility with income and suggest that the human population of the world and per capita output will stabilize at about 25 30 above their current size that is at 7 8 5 billion people with a per capital output of 6500 7500 1990 dollars

the reaction of household consumption to predictable changes in social security taxes the key implication of rational expectations and the basic life cycle permanent income hypothesis that predictable changes in income have no effect on the growth rate of consumption expenditures is examined this implication is important for understanding the effectiveness and optimal timing of fiscal policy the causes and propagation of business cycles and the effects of income fluctuations on the growth rate of the economy using household level consumption data from the consumer expenditure survey whether expenditures on nondurable goods increase contemporaneously with predictable changes in social security tax withholding is tested it is found that households do change their consumption expenditures in response to the predictable fluctuations in income induced by the social security tax system

population consumption and resources ethical issues abstract this article is about the concept of optimum population and consumption even though it is primarily concerned with foundational issues the various ideas that have been discussed in the literature are tested in the context of economic models with limited resources it is argued that broadly speaking existing theories of optimum population and consumption are variants of average and what is often termed classical utilitarianism respectively both classes of theories are shown to have deficiencies in great measure because of their reliance on a defective concept of personhood it is also argued that contractual theories are of little use because potential people as opposed to future people cannot be parties to any contract a generation relative ethics is developed and is put to work in an overlapping generations model it is shown that generation relative ethics even when it is a variant of classical utilitarianism can prescribe a considerably lower population than classical utilitarianism

relative wage movements and the distribution of consumption we analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare our empirical work draws on the best available cross sectional data sets to construct synthetic panel data on u s consumption labor supply and wages during the 1980s we find that low frequency movements in the cohort education structure of pretax hourly wages among men drove large changes in the distribution of household consumption the results constitute a spectacular failure of between group consumption insurance a failure not explained by existing theories of informationally constrained optimal consumption behavior a welfare analysis indicates that the cost of between group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude

a theory of the consumption function with and without liquidity constraints fifteen years ago milton friedman s 1957 treatise a theory of the consumption function seemed badly dated dynamic optimization theory had not been employed much in economics when friedman wrote and utility theory was still comparatively primitive so his statement of the permanent income hypothesis never actually specified a formal mathematical model of behavior derived explicitly from utility maximization instead friedman relied at crucial points on intuition and verbal descriptions of behavior although these descriptions sounded plausible when other economists subsequently found multiperiod maximizing models that could be solved explicitly the implications of those models differed sharply from friedman s intuitive description of his model furthermore empirical tests in the 1970s and 1980s often rejected these rigorous versions of the permanent income hypothesis in favor of an alternative hypothesis that many households simply spent all of their current income today with the benefit of a further round of mathematical and computational advances friedman s 1957 original analysis looks more prescient than primitive it turns out that when there is meaningful uncertainty in future labor income the optimal behavior of moderately impatient consumers is much better described by friedman s original statement of the permanent income hypothesis than by the later explicit maximizing versions furthermore in a remarkable irony much of the empirical evidence that rejected the permanent income hypothesis as specified in tests of the 1970s and 1980s is actually consistent both with friedman s original description of the model and with the new version with serious uncertainty there are four key differences between the explicit maximizing models

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

imperfect insurance and differing propensities to consume across households abstract this paper extends previous tests of consumption insurance by splitting the sample to examine whether the marginal propensity to consume mpc out of idiosyncratic income shocks is larger for low wealth households than it is for high wealth households using data from the psid i find 1 the mpc of low wealth households is higher than that of high wealth households there are indications that both precautionary savings behavior and liquidity constraints contribute to this difference 2 splitting the data using two different measures of wealth indicates that households perceive housing equity as illiquid 3 when low wealth households are split into two subgroups the mpc of the very low wealth group is smaller reflecting the insurance aspects of means tested safety net programs

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

a new approach to business fluctuations heterogeneous interacting agents scaling laws and financial fragility abstract in this paper we discuss a scaling approach to business fluctuations our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to re discover a set of stylized facts which have to be satisfactorily accounted for in their models standard macroeconomics based on a reductionist approach centered on the representative agent is definitely badly equipped for this task on the contrary we show that a simple financial fragility agent based model based on complex interactions of heterogeneous agents is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision

beyond the economics of more the place of consumption in ecological economics abstract the relation between consumption and welfare generally assumed by orthodox economists must be re examined by ecological economists present attitudes towards consumption among the latter are often ambiguous resulting in a modified form of consumerism yet questioning the often dubious benefits of consumption is as important for the environmental debate as emphasising its neglected costs beyond basic needs satisfaction it is at most one s consumption level relative to others which counts for welfare so that benefits from consumption cannot be increased in the aggregate thus there is much scope for reducing consumption and thus environmental costs while increasing or maintaining welfare identifying those goods the consumption of which adds little or nothing to welfare and assessing the effect of reducing their consumption on resource use natural and human should be a major concern of an ecological economics aimed at promoting sustainable welfare

the impact of international trade on wages since the early 1980s the us economy has experienced a growing wage differential high skilled workers have claimed an increasing share of available income while low skilled workers have seen an absolute decline in real wages how and why this disparity has arisen is a matter of ongoing debate among policymakers and economists two competing theories have emerged to explain this phenomenon one focusing on international trade and labour market globalization as the driving force behind the devaluation of low skill jobs and the other focusing on the role of technological change as a catalyst for the escalation of high skill wages this collection brings together innovative new ideas and data sources in order to provide more satisfying alternatives to the trade versus technology debate and to assess directly the specific impact of international trade on us wages this volume offers a thorough appraisal of the wage distribution predicament examining the continued effects of technology and globalization on the labour market

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

georgescu roegen daly versus solow stiglitz revisited there are two key issues which are not fullyelaborated in the papers in a recent special issueof ecological economics the contribution ofnicholas georgescu roegen vol 22 no 3 1997 i the operational meaning of substitutionin production function and ii the effect of tech nological improvement on resource utilization inthis piece we examine these two issues based on i georgescu roegen s conceptualization of pro duction process and ii jevons paradox neoclassical production functions whether forindividual rms or the aggregate economy as sume that any factor can always be substituted forany other factor except the cases of xed coef cients and or the existence of limitational factors the implication or entailment of this assumptionis that an increase in the input of any factoralways yields an increase in output this is thebasis for solow s contention that t he world can in effect get along without natural resources solow 1974 however those neoclassical economists adopt ing the substitution assumption have not paid dueattention to the essential distinction between ows quantities of materials qualitatively trans formed in the process and funds agents trans forming a given set of in ows into a given set ofout ows in the material production process georgescu roegen 1971 neglecting this dis tinction results in a systematic indifference to thebiophysical foundation of economic activities infact according to georgescu roegen 1990 fordesigning a blueprint of a factory process anexpert has to consider a set of three relationships i the normal rate of output

the effect of skilled emigration on real exchange rates through the wage channel abstract building on an analytical model we provide cross country empirical evidence that net skilled emigration appreciates bilateral real exchange rates through the wage channel in source countries chains of causality in the presence of the law of one price run through the spending effect and the resource allocation effect analogous to the remittance based dutch disease effect a pricing to market model allows pass through for both traded and nontraded prices when the law of one price is violated the skilled emigration elasticity of real exchange rate is estimated to be in the range of between 0 6 and 0 8 with internal prices playing a dominant role alternative model specifications show robust outcomes

risky higher education and subsidies abstract tertiary education in the u s requires large investments that are risky lumpy and well timed tertiary education is also heavily subsidized our model suggests that despite adverse selection arising from encouraging poorly prepared students to enroll observed collegiate subsidies improve outcomes substantially relative to the fully decentralized case this result occurs because increases in subsidy rates for college education generate reductions in college failure risk without altering mean returns we find that this mechanism is robust and that tertiary subsidy rates well in excess of those observed in the u s can be justified by failure risk alone

the neoclassical growth model with heterogeneous quasi geometric consumers this paper investigates how the assumption of quasi geometric hyperbolic discounting affects the distributional implications of the standard one sector neoclassical growth model with infinitely lived heterogeneous agents the agents are subject to idiosyncratic shocks and face borrowing constraints we confine attention to an interior markov recursive equilibrium the consequence of quasi geometric discounting is that the effective discount factor of an agent is not a constant but an endogenous variable which depends on the agent s current state we show both analytically and by simulation that this new feature can significantly affect the distributional implications of the neoclassical growth model

ethics politics and nonsatiation in consumption a synthesis in contrast with the production of goods and services by firms where the production costs are minimized under appropriate behavioral assumptions consumer producers in neoclassical theory maximize consumption expenditure i e production costs of their outputs according to kenneth boulding were the impact upon the limited resources available on planet earth taken into account consumption expenditure should be minimized we propose that we keep consumer theory as a reasonable description of reality however we should evaluate the long run consequences of such postulated behavior in a larger context which as a consequence of larger population with increasing per capita consumption comprises the overburdening of natural resources by decomposing the time horizon of cultural evolution into shorter periods of adjustment we may then distinguish several types of institutional determination of how societies take decisions as a group and individually the consumer theory simply reflects the predominant ethical values of which ideologies political platforms and demand patterns are shorter run adjustments

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

the evolution of preferences why sovereign preferences may not lead to sustainable policies and what to do about it abstract the conventional economic paradigm assumes that tastes and preferences are exogenous to the economic system and that the economic problem consists of optimally satisfying those preferences tastes and preferences usually do not change rapidly and in the short term this assumption makes sense sustainability is an inherently long term problem and in the long run it does not make sense to assume tastes and preferences are fixed and given if preferences are expected to change over time and under the influence of education advertising changing cultural assumptions etc the old assumption of consumer sovereignty is not adequate different criteria of optimality are needed how preferences change how they relate to the goal of sustainability and how they can or should be actively influenced to satisfy the new criteria needs to be determined ecological economics has emphasized the three rank ordered goals of ecological sustainability fair distribution and allocative efficiency this paper examines how preferences evolve and change over time and the implications of this for developing policies that meet these three goals in democratic societies

the response of household consumption to income tax refunds a central implication of the life cycle or permanent income theory is that consumption should not respond to predictable fluctuations in income tests of this implication have yielded mixed results especially on micro data angus deaton 1992 martin browning and annamaria lusardi 1996 in large part this might be due to the difficulties of isolating the predictable component of income at the micro level most tests proceed by instrumenting for income but since the available instruments are typically poor such tests might be prejudiced against finding significant excess sensitivity of consumption to income john shea 1995 also it is not clear how closely the resulting econometric predictions of income coincide with agents actual expectations of income to avoid these difficulties this paper examines the response of household consumption to a particular type of income that is both predictable and transitory income tax refunds since a refund depends on events in the previous calendar year it is predictable income as regards consumption in the year of its receipt consequently under the life cycle theory consumption should not increase on receipt of a refund 2 in addition to testing the canonical model of consumption this paper provides estimates interpretable as the marginal propensity to consume mpc out of refunds since federal tax refunds now amount to over 80 billion per year averaging well over 1 000 per refund these estimates are of interest in themselves more generally they bear on the impact of even preannounced and temporary changes in fiscal policy the paper begins by surveying related studies in section i section ii describes the data the consumer expenditure survey cex which of the leading u s micro data sets has the most comprehensive coverage of expenditure the empirical specification is set out in section hi section iv reports the results and section v concludes

are we consuming too much this paper articulates and applies frameworks for examining whether consumption is excessive we consider two criteria for the possible excessiveness or insufficiency of current consumption one is an intertemporal utility maximization criterion actual current consumption is deemed excessive if it is higher than the level of current consumption on the consumption path that maximizes the present discounted value of utility the other is a sustainability criterion which requires that current consumption be consistent with non declining living standards over time we extend previous theoretical approaches by offering a formula for the sustainability criterion that accounts for population growth and technological change in applying this formula we find that some poor regions of the world are failing to meet the sustainability criterion in these regions genuine wealth per capita is falling as investments in human and manufactured capital are not sufficient to offset the depletion of natural capital

emigration and wage inequality abstract we look at the implications of labor emigration from a small open economy on pre existing wage gap between the skilled and the unskilled unskilled emigration may worsen the wage gap whereas skill emigration can reduce wage inequality although absolute wages increase with emigration

heterogeneous agents and uninsurable idiosyncratic employment shocks in a linearized dynamic general equilibrium model this paper proposes an analytical solution method for a dynamic general equilibrium model with heterogeneous agents and uninsurable idiosyncratic employment shocks the solution method yields an approximate balanced growth path which depends on the unemployment rate and the unemployment risk but which is independent of the ever changing wealth distribution

inflow of labour producer services and wage inequality abstract this paper examines the issue of skilled unskilled wage inequality in the shortrun when varieties of producer services are traded it is shown that irrespective of the relative size of income share of capital inflow of neither skilled nor unskilled labour affects skilled unskilled wage inequality however an increase in i the level of competition in the services sector and ii relative price of the varieties of producer services can affect the level of wage inequality

factor mobility and wage inequality in the presence of specialisation based external economies abstract by making use of a simple general equilibrium model that is relevant to a high income developing country or a newly industrialised country this paper examines the link between factor mobility and wage inequality it is shown that in the presence of specialisation based external economies emigration of skilled as well unskilled labour increases wage inequality even if the income shares of capital are identical across industries on the other hand outflow of capital decreases wage inequality

the time varying volatility of earnings and aggregate consumption growth time varying specifications for the conditional variance of earnings of u s households are estimated with micro data over the period 1968 92 the cross sectional mean of the estimated time varying uncertainty of individual households has a significant impact on aggregate consumption growth as such aggregate precautionary savings may be more important than what is suggested by the results of estimating standard regression equations for aggregate consumption growth that incorporate only lagged income growth and the real interest rate the estimation of a buffer stock consumption model with time varying earnings uncertainty suggests that the precautionary savings motive is cyclical and has become less important in the 1980s

on the concavity of the consumption function at least since keynes 1935 many economists have had the intuition that the marginal propensity to consume out of wealth declines as wealth increases nonetheless standard perfect certainty and certainty equivalent versions of intertemporal optimizing models of consumption imply a marginal propensity to consume that is unrelated to the level of household wealth we show that adding income uncertainty to the standard optimization problem induces a concave consumption function in which as keynes suggested the marginal propensity to consume out of wealth or transitory income declines with the level of wealth