'Structural unemployment' is said to occur in regions or 'sectors' of the economy as a consequence of technological changes. In this paper we present a model which provides an environment which gives rise to unemployment which could be labelled structural unemployment. There is exogenous technological change and vintage specific human capital. Unemployment arises as workers specialized in a particular technology within a vintage decide to search for a job within their vintage, so that their previously acquired special skills are used, instead of getting employed as unskilled workers in the newest vintage. As the rate of technological change increases, the incentives to reassign specialized workers to their same vintage, inccuring therefore in search costs, becomes less attractive, and in consequence the fraction of specialized workers doing search activities decreases. This provides some rationale for the negative correlation between rates of growth and unemployment observed in the data.

This paper develops a model of vintage human capital in which each technology requires vintage specific skills. We examine the properties of a stationary equilibrium for our economy. The stationary equilibrium is characterized by an endogenous distribution of skilled workers across vintages. The distribution is shown to be single peaked and, under general conditions, there is a lag between the time when a technology appears and the peak of it's usage, a phenomenon known as diffusion. An increase in the rate of exogenous technological change shifts the distribution of human capital to more recent vintages thereby increasing the diffusion rate.

We present a model of vintage human capital. The economy exhibits exogenous deterministic technological change. Technology requires skills that are specific to the vintage. A stationary competitive equilibrium is defined and shown to exist and be unique, as well as Pareto optimal. The stationary equilibrium is characterized by an endogenous distribution of skilled workers across vintages. The distribution is shown to be single peaked and there is diffusion of technology in the sense that there is a lag between the time when a technology appears and the peak of its usage. An increase in the rate of exogenous technological change shifts the distribution of human capital to more recent vintages and increases the relative wage of the unskilled workers in each vintage.

This paper develops a model of vintage human capital in which each technology requires vintage specific skills. We examine the properties of a stationary equilibrium for our economy. The stationary equilibrium is characterized by an endogenous distribution of skilled workers across vintages. The distribution is shown to be single peaked and, under general conditions, there is a lag between the time when a technology appears and the peak of it's usage, a phenomenon known as diffusion. An increase in the rate of exogenous technological change shifts the distribution of human capital to more recent vintages thereby increasing the diffusion rate.

We present a model of vintage human capital. The economy exhibits exogenous deterministic technological change. Technology requires skills that are specific to the vintage. A stationary competitive equilibrium is defined and shown to exist and be unique, as well as Pareto optimal. The stationary equilibrium is characterized by an endogenous distribution of skilled workers across vintages. The distribution is shown to be single peaked and there is diffusion of technology in the sense that there is a lag between the time when a technology appears and the peak of its usage. An increase in the rate of exogenous technological change shifts the distribution of human capital to more recent vintages and increases the relative wage of the unskilled workers in each vintage.

In this paper, we characterize those situations in which after the introduction of futures markets there is either an unambiguous change in the volatility of spot prices or an unambiguous change in welfare. We provide examples of the usefulness of this approach by giving two alternative sets of sufficient conditions for price volatility to decline following the introduction of futures trading. We also provide a set of sufficient conditions for the introduction of futures trading to increase the welfare of all agents.

The fiscal year and the calendar year coincide for a large fraction of firms traded in the New York and American Stock Exchanges. It is therefore possible that part of the large positive abnormal return earned by stocks as a group during the first week of trading in January may be due to temporal resolution of uncertainty accompanying the end of the fiscal year. We study this hypothesis by examining whether stocks of firms with fiscal years ending in months other than December also realize positive abnormal returns, following the end of their fiscal years. We find that there are no excess returns for such firms in the first five trading days following the end of the fiscal year.

This paper examines the limiting behavior of cooperative and noncooperative fiscal policies as countries market power goes to zero. In the first part we provide sufficient conditions for these policies to converge. In the second part we provide examples where these policies diverge. Briefly, we show that if there are unremovable domestic distortions then there can be gains to coordination between countries even when countries have no ability to affect world prices. These results are at variance with the received wisdom in the optimal tariff literature. The key distinction is that we model explicitly the spending decisions of the government while the optimal tariff literature does not.

This paper examines the validity of one very special version of Coase's Theorem. The version we examine is that in any economy in which the property rights are fully allocated, competition will lead to efficient allocations. One repercussion of this result is that one way to "solve" the public goods problem would be to allocate property rights fully, transforming the economy to a private goods one and let markets do their work. This is particularly appealing due to its decentralized nature, but one must question the claim that the market will lead to efficient outcomes in this case. That is, the privatized economy created above is of a very special type which, as it turns out is highly susceptible to strategic behavior. We show that the "mechanism" suggested above is not likely to work well in economies with either pure public goods or "global" externalities. Basically, the free-rider problem manifests itself as one of monopoly power in this private goods setting. On the other hand, if the public goods or externalities are "local" in nature, there is reason to hope that this (and perhaps other) mechanism(s) will work well. The work is related to the recent literature on the foundations of Walrasian Equilibrium in that it points up a relationship between the appropriateness of Walrasian equilibrium as a solution concept, the incentives for strategic play, the aggregate level of complementarities in the economy and the problem of coordinating economic activity.

In this paper we analyze the constraints imposed by dynamic consistency in a model of optimal taxation. We assume that only distorting taxes are available to finance government consumption. Optimal fiscal policy requires the use of debt to smooth distortions over time. Dynamic consistency requires that governments at each point in time not have an incentive to default on the inherited debt. We consider policy functions which map the history of the economy including the actions of past governments into current decisions. A sustainable plan is a sequence of history-contingent policies which are optimal at each date given that future policies will be selected according to the plan. We show that if agents discount the future sufficiently little and if government consumption fluctuates then optimal sustainable plans yield policies and allocations which are identical to those under full commitment. We contrast our notion of dynamic consistency with other definitions.

We propose a definition of time consistent policy for infinite horizon economies with competitive private agents. Allocations and policies are defined as functions of the history of past policies. A sustainable equilibrium is a sequence of history-contingent policies and allocations that satisfy certain sequential rationality conditions for the government and for private agent3. We provide a complete characterization of the sustainable equilibrium outcomes for a variant of Fischer's (1980) model of capital taxation. We also relate our work to recent developments in the theory of repeated games.

We propose a definition of time consistent policy for infinite horizon economies with competitive private agents. Allocations and policies are defined as functions of the history of past policies. A sustainable equilibrium is a sequence of history-contingent policies and allocations that satisfy certain sequential rationality conditions for the government and for private agent3. We provide a complete characterization of the sustainable equilibrium outcomes for a variant of Fischer's (1980) model of capital taxation. We also relate our work to recent developments in the theory of repeated games.

We propose a definition of time consistent policy for infinite horizon economies with competitive private agents. Allocations and policies are defined as functions of the history of past policies. A sustainable equilibrium is a sequence of history-contingent policies and allocations that satisfy certain sequential rationality conditions for the government and for private agent3. We provide a complete characterization of the sustainable equilibrium outcomes for a variant of Fischer's (1980) model of capital taxation. We also relate our work to recent developments in the theory of repeated games.

In this paper we analyze the constraints imposed by dynamic consistency in a model of optimal taxation. We assume that only distorting taxes are available to finance government consumption. Optimal fiscal policy requires the use of debt to smooth distortions over time. Dynamic consistency requires that governments at each point in time not have an incentive to default on the inherited debt. We consider policy functions which map the history of the economy including the actions of past governments into current decisions. A sustainable plan is a sequence of history-contingent policies which are optimal at each date given that future policies will be selected according to the plan. We show that if agents discount the future sufficiently little and if government consumption fluctuates then optimal sustainable plans yield policies and allocations which are identical to those under full commitment. We contrast our notion of dynamic consistency with other definitions.

Technical appendix for Working Paper 619, https://doi.org/10.21034/wp.619

We revisit the question of how capital should be taxed, arguing that if governments are allowed to use the kinds of tax instruments widely used in practice, for preferences that are standard in the macroeconomic literature, the optimal approach is to never distort capital accumulation. We show that the results in the literature that lead to the presumption that capital ought to be taxed for some time arise because of the initial confiscation of wealth and because the tax system is restricted.

We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should restrictions be placed to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? How can a Ramsey allocation be implemented with residence-based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.

Innovative activities have public good characteristics in the sense that the cost of producing the innovation is high compared to the cost of producing subsequent units. Moreover, knowledge of how to produce subsequent units is widely known once the innovation has occurred and is, therefore, non-rivalrous. The main question of this paper is whether mechanisms can be found which exploit market information to provide appropriate incentives for innovation. The ability of the mechanism designer to exploit such information depends crucially on the ability of the innovator to manipulate market signals. We show that if the innovator cannot manipulate market signals, then the efficient levels of innovation can be implemented without deadweight losses–for example, by using appropriately designed prizes. If the innovator can use bribes, buybacks, or other ways of manipulating market signals, patents are necessary.

The United States is indisputably undergoing a financial crisis and is perhaps headed for a deep recession. Here we examine three claims about the way the financial crisis is affecting the economy as a whole and argue that all three claims are myths. We also present three underappreciated facts about how the financial system intermediates funds between households and corporate businesses. Conventional analyses of the financial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, during financial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing. Moreover, we argue that even if current increase in spreads indicate increases in the riskiness of the underlying projects, by itself, this increase does not necessarily indicate the need for massive government intervention. We call for policymakers to articulate the precise nature of the market failure they see, to present hard evidence that differentiates their view of the data from other views which would not require such intervention, and to share with the public the logic and evidence that burnishes the case that the particular intervention they are advocating will fix this market failure.

In the 1970s macroeconomists often disagreed bitterly. Macroeconomists have now largely converged on method, model design, and macroeconomic policy advice. The disagreements that remain all stem from the practical implementation of the methodology. Some macroeconomists think that New Keynesian models are on the verge of being useful for quarter-to-quarter quantitative policy advice. We do not. We argue that the shocks in these models are dubiously structural and show that many of the features of the model as well as the implications due to these features are inconsistent with microeconomic evidence. These arguments lead us to conclude that New Keynesian models are not yet useful for policy analysis.

The Ramsey approach to policy analysis finds the best competitive equilibrium given a set of available instruments. This approach is silent about unique implementation, namely designing policies so that the associated competitive equilibrium is unique. This silence is particularly problematic in monetary policy environments where many ways of specifying policy lead to indeterminacy. We show that sophisticated policies which depend on the history of private actions and which can differ on and off the equilibrium path can uniquely implement any desired competitive equilibrium. A large literature has argued that monetary policy should adhere to the Taylor principle to eliminate indeterminacy. Our findings say that adherence to the Taylor principle on these grounds is unnecessary. Finally, we show that sophisticated policies are robust to imperfect information.

Here we reply to Robert Solow’s comment on our work, Modern Macroeconomics in Practice: How Theory is Shaping Policy.

We make three comparisons relevant for the business cycle accounting approach. We show that in theory representing the investment wedge as a tax on investment is equivalent to representing this wedge as a tax on capital income as long as the probability distributions over this wedge in the two representations are the same. In practice, convenience dictates that the underlying probability distributions over the investment wedge are different in the two representations. Even so, the quantitative results under the two representations are essentially identical. We also compare our methodology, the CKM methodology, to an alternative one used in Christiano and Davis (2006) as well as by us in early incarnations of the business cycle accounting approach. We argue that the CKM methodology rests on more secure theoretical foundations. Finally, we show that the results from the VAR-style decomposition of Christiano and Davis reinforce the results of the business cycle decomposition of CKM.

The main substantive finding of the recent structural vector autoregression literature with a differenced specification of hours (DSVAR) is that technology shocks lead to a fall in hours. Researchers have used these results to argue that business cycle models in which technology shocks lead to a rise in hours should be discarded. We evaluate the DSVAR approach by asking, is the specification derived from this approach misspecified when the data are generated by the very model the literature is trying to discard? We find that it is misspecified. Moreover, this misspecification is so great that it leads to mistaken inferences that are quantitatively large. We show that the other popular specification that uses the level of hours (LSVAR) is also misspecified. We argue that alternative state space approaches, including the business cycle accounting approach, are more fruitful techniques for guiding the development of business cycle theory.

This paper proposes a simple method for guiding researchers in developing quantitative models of economic fluctuations. We show that a large class of models, including models with various frictions, are equivalent to a prototype growth model with time-varying wedges that, at least at face value, look like time-varying productivity, labor taxes, and capital income taxes. We label the time-varying wedges as efficiency wedges, labor wedges, and investment wedges. We use data to measure these wedges and then feed them back into the prototype growth model. We then assess the fraction of fluctuations accounted for by these wedges during the great depressions of the 1930s in the United States, Germany, and Canada. We find that the efficiency and labor wedges in combination account for essentially all of the declines and subsequent recoveries. Investment wedges play, at best, a minor role.

Herd behavior is argued by many to be present in many markets. Existing models of such behavior have been subjected to two apparently devastating critiques. The continuous investment critique is that in the basic model herds disappear if simple zero-one investment decisions are replaced by the more appealing assumption that investment decisions are continuous. The price critique is that herds disappear if, as seems natural, other investors can observe asset market prices. We argue that neither critique is devastating. We show that once we replace the unappealing exogenous timing assumption of the early models that investors move in a pre-specified order by a more appealing endogenous timing assumption that investors can move whenever they choose then herds reappear.

We show that the desirability of fiscal constraints in monetary unions depends critically on the extent of commitment of the monetary authority. If the monetary authority can commit to its policies, fiscal constraints can only impose costs. If the monetary authority cannot commit, there is a free-rider problem in fiscal policy, and fiscal constraints may be desirable.

In U.S. elections, voters often vote for candidates from different parties for president and Congress. Voters also express dissatisfaction with the performance of Congress as a whole and satisfaction with their own representative. We develop a model of split-ticket voting in which government spending is financed by uniform taxes but the benefits from this spending are concentrated. While the model generates split-ticket voting, overall spending is too high only if the president’s powers are limited. Overall spending is too high in a parliamentary system, and our model can be used as the basis of an argument for term limits.

This paper shows that bank runs can be modeled as an equilibrium phenomenon. We demonstrate that some aspects of the intuitive “story” that bank runs start with fears of insolvency of banks can be rigorously modeled. If individuals observe long “lines” at the bank, they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run. However, bank runs occur even when no one has any adverse information. Extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations.

The financialization view is that increased trading in commodity futures markets is associated with increases in the growth rate and volatility of commodity spot prices. This view gained credence be-cause in the 2000s trading volume increased sharply and many commodity prices rose and became more volatile. Using a large panel dataset we constructed, which includes commodities with and with-out futures markets, we find no empirical link between increased futures market trading and changes in price behavior. Our data sheds light on the economic role of futures markets. The conventional view is that futures markets provide one-way insurance by allowing outsiders, traders with no direct interest in a commodity, to insure insiders, traders with a direct interest. The data are not consistent with the conventional view and we argue that they point to an alternative mutual insurance view, in which all participants insure each other. We formalize this view in a model and show that it is consistent with key features of the data.

We use the Ramsey and Mirrlees approaches to study how fiscal and trade policy should be set cooperatively when governments must raise revenues with distorting taxes. Free trade and unrestricted capital mobility are optimal. Efficient outcomes can be implemented with taxes only on final consumption goods and labor income. We study alternative tax systems, showing that uniform taxation of household asset returns, and not taxing corporate income yields efficient outcomes. Border adjustments exempting exports from and including imports in the tax base are desirable. Destination- and residence-based tax systems are desirable compared to origin- and source-based systems.

We develop a model in which, in order to provide managerial incentives, it is optimal to have costly bankruptcy. If benevolent governments can commit to their policies, it is optimal not to interfere with private contracts. Such policies are time inconsistent in the sense that, without commitment, governments have incentives to bail out firms by buying up the debt of distressed firms and renegotiating their contracts with managers. From an ex ante perspective, however, such bailouts are costly because they worsen incentives and thereby reduce welfare. We show that regulation in the form of limits on the debt-to-value ratio of firms mitigates the time-inconsistency problem by eliminating the incentives of governments to undertake bailouts. In terms of the cyclical properties of regulation, we show that regulation should be tightest in aggregate states in which resources lost to bankruptcy in the equilibrium without a government are largest.

Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice; we do not. Focusing on the state-of-the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian models are not yet useful for policy analysis.