Creator: Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 336 Keyword: Payment methods, Payment processing fees, and Agents Subject (JEL): G20 - Financial Institutions and Services: General
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 494 Abstract:
During the downturn of 2008–2009, output and hours fell significantly while labor productivity rose. These facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven, at least in part, by fluctuations in total factor productivities of firms. We show that once investment in intangible capital is included in the analysis, there is no inconsistency. Measured labor productivity rises if the fall in output is underestimated; this occurs when there are large unmeasured intangible investments. Microevidence suggests that these investments are large and cyclically important.
Keyword: Intangible capital, Business cycles, and Productivity Subject (JEL): E13 - General Aggregative Models: Neoclassical and E32 - Business Fluctuations; Cycles
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff Reports (Federal Reserve Bank of Minneapolis) Number: 494 Keyword: Intangible capital, Productivity, and Business cycles Subject (JEL): E13 - General aggregative models - Neoclassical and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Mehra, Rajnish and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 081 Abstract:
Restrictions that general equilibrium theory place upon average returns are found to be strongly violated by the U.S. data in the 1889–1978 period. This result is robust to model specification and measurement problems. We conclude that equilibrium models which are not Arrow-Debreu economies are needed to rationalize the large average equity premium that prevailed during the last 90 years.
Creator: Parente, Stephen L. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 333 Abstract:
This essay develops a theory of the evolution of international income levels. In particular, it augments the Hansen-Prescott theory of economic development with the Parente-Prescott theory of relative efficiencies and shows that the unified theory accounts for the evolution of international income levels over the last millennium. The essence of this unified theory is that a country starts to experience sustained increases in its living standard when production efficiency reaches a critical point. Countries reach this critical level of efficiency at different dates not because they have access to different stocks of knowledge, but rather because they differ in the amount of society-imposed constraints on the technology choices of their citizenry.
Keyword: Catch-up, Trading clubs, Capital share, Aggregate economic efficiency, and Transition to modern economic growth Subject (JEL): E00 - Macroeconomics and Monetary Economics: General, O19 - International Linkages to Development; Role of International Organizations, O11 - Macroeconomic Analyses of Economic Development, and F40 - Macroeconomic Aspects of International Trade and Finance: General
Creator: Prescott, Edward C. and Wallenius, Johanna Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 457 Abstract:
There have been tremendous advances in macroeconomics, following the introduction of labor supply into the field. Today it is widely acknowledged that labor supply matters for many key economic issues, particularly for business cycles and tax policy analysis. However, the extent to which labor supply matters for such questions depends on the aggregate labor supply elasticity—that is, the sensitivity of the time allocation between market and non-market activities to changes in the effective wage. The magnitude of the aggregate labor supply elasticity has been the subject of much debate for several decades. In this paper we review this debate and conclude that the elasticity of labor supply of the aggregate household is much higher than the elasticity of the identical households being aggregated. The aggregate household utility function differs from individuals’ utility functions for the same reason the aggregate production function differs from individual firms’ production functions being aggregated. The differences in individual and aggregate supply elasticities are what aggregation theory predicts.
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 534 Abstract:
Many countries are facing challenging fiscal financing issues as their populations age and the number of workers per retiree falls. Policymakers need transparent and robust analyses of alternative policies to deal with demographic changes. In this paper, we propose a simple framework that can easily be matched to aggregate data from the national accounts. We demonstrate the usefulness of our framework by comparing quantitative results for our aggregate model with those of a related model that includes within-age-cohort heterogeneity through productivity differences. When we assess proposals to switch from the current tax and transfer system in the United States to a mandatory saving-for-retirement system with no payroll taxation, we find that the aggregate predictions for the two models are close.
Keyword: Retirement, Medicare, Social Security, and Taxation Subject (JEL): H55 - Social Security and Public Pensions, E13 - General Aggregative Models: Neoclassical, and I13 - Health Insurance, Public and Private
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 407 Abstract:
Appendix A provides firm-level and industry-level evidence that is consistent with several key features of our model, including the predictions that rates of return increase with a firm’s intangible investments and foreign affiliate rates of return increase with age and with their parents’ R&D intensity. Appendix B provides details for the computation of our model’s equilibrium paths, the construction of model national and international accounts, and the sensitivity of our main findings to alternative parameterizations of the model. We demonstrate that the main finding of our paper—namely, that the mismeasurement of capital accounts for roughly 60 percent of the gap in FDI returns—is robust to alternative choices of income shares, depreciation rates, and tax rates, assuming the same procedure is followed in setting exogenous parameters governing the model’s current account. Appendix C demonstrates that adding technology capital and locations to an otherwise standard two-country general equilibrium model has a large impact on the predicted behavior of labor productivity and net exports.
Subject (JEL): F23 - Multinational Firms; International Business and F32 - Current Account Adjustment; Short-term Capital Movements