One of the more significant developments in econometric modeling over the past decade has been the invention of the forecasting technique known as Bayesian vector autoregression (BVAR). This paper provides a detailed description of the process of specifying a BVAR model of quarterly time series on the U.S. macroeconomy. The postsample forecasting performance of the model is evaluated at an informal level by comparing the model's performance to certain naive forecasting methods, and is evaluated at a formal level by means of efficiency tests. Although the null hypothesis of efficiency is rejected for the model's forecasts, the accuracy of the model exceeds that of naive forecasting methods, and seems comparable to that of commercial forecasting firms for early quarter forecasts.

This paper develops a new method for approximating dynamic competitive equilibria in economies in which competitive equilibrium is not necessarily Pareto optimal. The method involves finding approximate equilibrium policy functions by iterating on the stochastic Euler equations which characterize the economy's equilibrium. Two applications are presented: the stochastic growth model of Brock and Mirman (1971) modified to allow distortionary taxation, and a model of inflation and capital accumulation based on Stockman (1981). The computational speed and accuracy of this approach suggests that it may be a feasible method for studying suboptimal economies with large state spaces.

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 on 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 wedge plays at best a minor role.

This paper is interested in the small sample properties of the indirect inference procedure which has been previously studied only from an asymptotic point of view. First, we highlight the fact that the Andrews (1993) median-bias correction procedure for the autoregressive parameter of an AR(1) process is closely related to indirect inference; we prove that the counterpart of the median-bias correction for indirect inference estimator is an exact bias correction in the sense of a generalized mean. Next, assuming that the auxiliary estimator admits an Edgeworth expansion, we prove that indirect inference operates automatically a second order bias correction. The latter is a well known property of the Bootstrap estimator; we therefore provide a precise comparison between these two simulation based estimators.

Some economic policies and regulations seem to have only one purpose: to prevent technological development and economic growth from occurring. In this paper, we attempt to rationalize such policies as outcomes of voting equilibria. In our environment, some agents will be worse off if the economy grows, since their skills are complementary to resources that can be allocated to growth-stimulating activities. In the absence of arrangements where votes are traded, we show that for some initial skill distributions, the economy may stagnate due to growth-preventing policies. Different initial skill distributions, however, lead to voting outcomes and policies in support of technological development, and to persistent economic growth. In making our argument formally, we use a dynamic model with induced heterogeneity in agents' skills. In their voting decisions, agents compare how they will be affected under each policy alternative, and then vote for the policy that maximizes their welfare.

This paper is the first of a series of explorations in the relative performance and sources of productivity growth of U.S. businesses across industries and legal structure. In order to assemble the disparate data from various sources to develop a coherent productivity database, we developed a general system to manage data. The paper describes this system and then applies it by building such a database. The paper presents updated estimates of gross output, intermediate input use and value added using the BEA=s GPO data set. It supplements these data with estimates of missing data on intermediate input use and prices for the 1977-1986 period, and it concords these data, which are organized on a 1972 SIC basis, to the 1987 SIC in order to have consistent time series covering the last twenty-four years. It further refines these data by disaggregating them by legal form of organization. The paper also presents estimates of labor hours, investment, capital services and, consequently, multifactor productivity disaggregated by industry and legal form of organization, and it analyzes the contribution of various industries and business organizations to aggregate productivity. The paper also reconsiders these estimates in light of the surge in spending in advance of the century-date change.

There were three important changes in the United States economy during the 1980s. First, from 1982-90, the decade featured the longest consecutive stretch of positive quarterly output growth in United States history. Second, wage inequality expanded greatly as the wages of highly skilled workers grew markedly faster than the wages of less skilled workers (Katz and Murphy (1992)). Finally, consumption inequality also expanded as the consumption of highly skilled workers grew faster than that of less skilled workers (Attanasio and Davis (1994)). This paper argues that these three aspects of the United States economic experience can be interpreted as being part of an efficient response to a macroeconomic shock given the existence of a particular technological impediment to full insurance. I examine the properties of efficient allocations of risk in an economic environment in which the outside enforcement of risksharing arrangements is infinitely costly. In these allocations, relative productivity movements have effects on both the current and future distribution of consumption across individuals. If preferences over consumption and leisure are nonhomothetic, these changes in the allocation of consumption will generate persistent cycles in aggregate output that do not occur in efficient allocations when enforcement is costless.

In this paper we will consider a simple small open economy with three assets - domestic capital, foreign securities and public debt - to study the government's incentives to devalue and to repay or default the debt. We show that the announcement of a devaluation is anticipated by domestic agents who reduce domestic investments and increase foreign holdings. Once a government devalues, the expectations vanish and the economy recovers its past levels of investment and GDP. However, in a country with international debt denominated in US dollars if a government devalues it requires a higher fraction of GDP to repay its external debt. In consequence, there exists a trade-off between recovering the economy and increasing the future cost of repaying the debt. Our main result is to show that, as devaluation beliefs exists, a devaluation increase government incentives to default and devalue. We calibrate our model to match the decrease in investment of domestic capital, the reduction in production, the increase in trade balance surplus, and the increase in debt levels observed throughout 2001 in Argentina. We show that for a probability of devaluation consistent with the risk premium of the Argentinian Government bonds nominated in dollars issued on April 2001 the external debt of Argentina was in a crisis zone were the government find optimal to default and to devalue.

A number of theoretical models of technology adoption have been proposed that emphasize technological switching, loss of expertise and subsequent technology-specific learning. These models imply that measured productivity may initially fall and then later rise after the adoption of a new technology. This paper investigates whether or not this implication is a feature of plant-level data from the Colombian manufacturing sector. We regress measures of productivity growth at the plant level on a plant-specific measure of technology adoption and its lagged values. We find that...

ln environments with private information and spatial separation, the ability of agents to establish mutually beneficial arrangements can be limited by their ability to communicate contemporary dealings and histories of past dealings. Indeed, with the extension of some recent work in contract theory and mechanism design, this paper argues that location or person-specific assignment systems, portable object record-keeping systems, written message systems, and telecommunication systems can be viewed as communication systems which are successively more complete in this sense. An attempt is made also to match these various communication systems with systems in use in historical primitive, and/or contemporary societies and to interpret these communication systems as financial structures.

This paper examines the effect of different education financing systems on the level and distribution of resources devoted to public education. We focus on California, which in the 1970's was transformed from a system of mixed local and state financing to one of effectively pure state finance and subsequently saw its funding of public education fall between ten and fifteen percent relative to the rest of the US. We show that a simple political economy model of public finance can account for the bulk of this drop. We find that while the distribution of spending became more equal, this was mainly at the cost of a large reduction in spending in the wealthier communities with little increase for the poorer districts. Our model implies that there is no simple trade-off between equity and resources; we show that if California had moved to the opposite extreme and abolished state aid altogether, funding for public education would also have dropped by almost ten percent.

This paper develops a model of firm location where communities differ by exogenous endowments of a factor of production. Firms choose to locate based on local subsidies to production. Community and firm optimal strategies are then examined. Through the introduction of information asymmetries about the communities' endowments, equilibrium bidding strategies for communities are found. The results show that auction institutions used by firms may in fact be signaling on the part of communities. These results also indicate that community bids reveal information, and restrictions on this bidding may do more harm than good.

This paper presents a method to perform likelihood-based inference in nonlinear dynamic equilibrium economies. This type of models has become a standard tool in quantitative economics. However, existing literature has been forced so far to use moment procedures or linearization techniques to estimate these models. This situation is unsatisfactory: moment procedures suffer from strong small samples biases and linearization depends crucially on the shape of the true policy functions, possibly leading to erroneous answers. We propose the use of Sequential Monte Carlo methods to evaluate the likelihood function implied by the model. Then we can perform likelihood-based inference, either searching for a maximum (Quasi-Maximum Likelihood Estimation) or simulating the posterior using a Markov Chain Monte Carlo algorithm (Bayesian Estimation). We can also compare different models even if they are nonnested and misspecified. To perform classical model selection, we follow Vuong (1989) and use the Kullback-Leibler distance to build Likelihood Ratio Tests. To perform Bayesian model comparison, we build Bayes factors. As an application, we estimate the stochastic neoclassical growth model.

Federal systems are crippled by power grabbing between central and regional governments, as well as burden-shifting schemes between regions. Existing models of federalisms assume regional diversity to account for inter-regional tension. However, these models set aside entirely the problem of inter-level competition. This paper presents a unified framework for understanding threats to federal stability. The model's n + 1 structure accomodates both dimensions of federal instability. Furthermore, this paper is able to offer a theoretical alternative to explanations of instability that rely upon regional diversity or citizen patriotism; identically selfish preferences, in the decentralized setting, can generate instability. Additionally, under certain institutional conditions, the paper offers an equilibrium that embraces the persistence of competition in a stable federation.

This paper analyzes the political economy of growth as an issue of intergenerational distribution. The first part of the paper develops a model of endogenous growth via human capital accumulation in an overlapping generations setting. Equilibrium growth is inefficient due to the presence of an intergenerational externality. We characterize the set of Pareto efficient paths for physical and human capital accumulation, and find that there is a continuum of efficient growth rate-interest rate combinations. The preferred combination for an infinitely-lived planner will depend on the social discount rate. Competitive equilibrium with subsidized or mandated human capital accumulation may give rise to a Pareto efficient steady state, though for some parameters efficiency requires some intergenerational redistribution. We then argue that a social planner or government with an infinite horizon is incongruous in an OG model when the agents all have finite horizons. Hence the second part of the paper addresses the question of how a government whose decisionmakers reflect the finite horizons of their constituents would choose policies that affect physical and human capital accumulation. Specifically we assume that each government maximizes a weighted sum of utilities of those currently alive. Each period the government selects a policy that takes into account the effect (through state variables) on subsequent policy decisions (and hence on the welfare of the current young generation). Numerical methods involving polynomial approximations are used to compute equilibria under specific parametric assumptions. Equilibrium growth rates turn out to be substantially below efficient rates.

This paper proposes a model of diversifiable uncertainty, irreversible investment decisions, and endogenous growth. The detailed microeconomic structure of the model makes it possible to study the. general equilibrium effects of obstacles to labor mobility, due to institutional as well as technological features of the economy. Labor mobility costs reduce private returns to investment, and the resulting slower rate of endogenous growth unambiguously lowers a representative individual's welfare. Turnover costs can have positive effects on full employment equilibrium wages when all external effects are disregarded: this may help explain why policy and institutions often tend to decrease labor mobility in reality, rather than to enhance it. Lower flexibility, however, reduces the growth rate of wages in endogenous growth equilibrium, with negative welfare effects even for agents who own only labor.

In this paper we make the following three claims. (1), in contradiction with the conventional view according to which the French depression was very different to that observed in the US, we argue that there are more similarities than differences between the French and U.S. experiences and therefore a common explanation should be sought. (2), poor growth in technological opportunities appear neither necessary nor sufficient to account for the French depression. (3), changes in institutional and market regulation appear necessary to account for the overall changes observed over the period. Moreover, we show that the size of these institutional changes may by themselves be enough to quantatively explain the French depression. However, at this time, we have no theory to explain the size or the timing of these changes.

This paper reports some empirical evidence on the relation between the expected real interest rate and monetary aggregates in postwar U.S. data. We find some evidence against the hypothesis, implied by the Real Business Cycle model of Litterman and Weiss (1985), that the expected real interest rate follows a univariate autoregressive process, not Granger-caused by monetary aggregates. Our findings, however, are consistent with a more general bivariate model--suggested by what Barro (1987, Chapter 5) refers to as "the basic market-clearing model"--in which the real rate depends on its own lagged values and on lagged output. Taking this bivariate model as our null hypothesis, we find no evidence that money-stock changes have a significant liquidity effect on the expected real interest rate.

Procedures for computing the parameters of a broad class of multifactor continuous time models of the term structure based on indirect estimation methods are proposed. The approach consists of simulating the unknown factors from a set of stochastic differential equations which are used to compute synthetic bond yields. The bond yields are calibrated with actual bond yields via an auxiliary model. The approach circumvents many of the difficulties associated with direct estimation of this class of models using maximum likelihood. In particular, the paper addresses the identification issues arising from singularities in the yields and spreads which tend not to be recognised in existing estimation procedures and thereby overcome potential misspecification problems inherrent in direct methods. Indirect estimates of single and multifactor models are computed and compared with the estimates based on existing estimation procedures.

This paper studies efficient insurance arrangements in village economies when there is complete information but limited commitment. Commitment is limited because only limited penalties can be imposed on households which renege on their promises. Any efficient insurance arrangement must therefore take into account the fact that households will renege if the benefits from doing so outweigh the costs. We study a general model which admits aggregate and idiosyncratic risk as well as serial correlation of incomes. It is shown that in the case of two households and no storage the efficient insurance arrangement is characterized by a simple updating rule. An example illustrates the similarity of the efficient arrangement to a simple debt contract with occasional debt forgiveness. The model is then extended to multiple households and a simple storage technology. We use data from the ICRISAT survey of three villages in southern India to test the theory against three alternative models: autarky, full insurance, and a static model of limited commitment due to Coate and Ravallion (1993). Overall, the model we develop does a significantly better job of explaining the data than does any of these alternatives.

This paper explores the extent and character of interest group influence on legislative policy in a model of decision making under incomplete information. A committee may propose an alternative to a given status quo under closed rule. Policies are related to consequences with ex ante uncertainty. An interest group is able to acquire policy—relevant information at a price, and has access to legislators at both the agenda setting stage and the vote stage. Lobbying is modeled as a game of strategic information transmission. The price of information is itself a private datum to the group, and legislators cannot observe whether the group elects to become informed. If the group is informed, then its information is likewise private. Among the results are: that not all informed lobbyists choose to try and influence the agenda directly; that there can coexist influential lobbying at both stages of the process; and that while informative agenda stage lobbying is genetically influential, the same is not true of voting stage lobbying.

This paper develops a dynamic general equilibrium model of economic growth. The model has a steady state equilibrium in which some firms devote resources to discovering qualitatively improved products and other firms devote resources to copying these products. Rates of both innovation and imitation are endogenously determined based on the outcomes of R&D races between firms. Innovation subsidies are shown to unambiguously promote economic growth. Welfare is only enhanced however if the steady state intensity of innovative effort exceeds a critical level.

Different monetary aggregates covary very differently with short term nominal interest rates. Broad monetary aggregates like Ml and the monetary base covary positively with current and future values of short term interest rates. In contrast, the nonborrowed reserves of banks covary negatively with current and future interest rates. Observations like this 'sign switch' lie at the core of recent debates about the effects of monetary policy actions on short term interest rates. This paper develops a general equilibrium monetary business cycle model which is consistent with these facts. Our basic explanation of the 'sign switch' is that movements in nonborrowed reserves are dominated by exogenous shocks to monetary policy, while movements in the base and Ml are dominated by endogenous responses to non-policy shocks.

This paper considers the relationship between total private factor productivity and stock and flow government expenditure variables. The empirical results indicate that (i) the nonmilitary public capital stock is dramatically more important in determining productivity than is either the flow of nonmilitary or military spending, (ii) military capital is not productive, and (iii) the public stock of structures--especially a "core" infrastructure of streets, highways, sewers, and water systems--has more explanatory power for productivity than does the stock of equipment. The paper also suggests an important role for the net public capital stock in the "productivity slowdown" of the last fifteen years.

This paper presents a model of growth through technical progress. The nature and scope of what is learned is derived from a set of axioms, and optimal search behavior by agents is then analyzed. Agents can search intensively or extensively. Intensive search explores a technology in greater depth, while extensive search yields new technologies. Agents alternate between these two modes of search. The economy grows forever and the growth rate is bounded away from zero. The growth rate is on average higher during periods of intensive search than during periods of extensive search. Epochs of higher growth are initiated by discoveries that call for further intensive exploration. This mechanism is reminiscent of the process described by Schumpeter as causing long-wave business cycles. Serial correlation properties of output and growth stem from the presence of intensive rather than extensive search. The two key parameters are technological opportunity and the cost of the extensive search.

"Sudden Stops " experienced during emerging markets crises are characterized by large reversals of capital inflows and the current account, deep recessions, and collapses in asset prices. This paper proposes an open-economy equilibrium asset pricing model in which financial frictions cause Sudden Stops. Margin requirements impose a collateral constraint on foreign borrowing by domestic agents and trading costs distort asset trading by foreign securities firms. At equilibrium, margin constraints may or may not bind depending on portfolio decisions and equilibrium asset prices. If margin constraints do not bind, productivity shocks cause a moderate fall in consumption and a widening current account deficit. If debt is high relative to asset holdings, the same productivity shocks trigger margin calls forcing domestic agents to fire-sell equity to foreign traders. This sets off a Fisherian asset-price deflation and subsequent rounds of margin calls. A current account reversal and a collapse in consumption occur when equity sales cannot prevent a sharp rise in net foreign assets.

This paper develops a dynamic model of general imperfect competition by embedding the Shapley-Shubik model of market games into an overlapping generations framework. Existence of an open market equilibrium where there is trading at each post is demonstrated when there are an arbitrary (finite) number of commodities in each period and an arbitrary (finite) number of consumers in each generation. The open market equilibria are fully characterized when there is a single consumption good in each period and it is shown that stationary open market equilibria exist if endowments are not Pareto optimal. Two examples are also given. The first calculates the stationary equilibrium in an economy, and the second shows that the on replicating the economy the stationary equilibria converge to the unique non-autarky stationary equilibrium in the corresponding Walrasian overlapping generations economy. Preliminary on-going work indicates the possibility of cycles and other fluctuations even in the log-linear economy.

This paper examines data on point and probabilistic forecasts of inflation from the Survey of Professional Forecasters. We use this data to evaluate current strategies for the empirical modeling of forecast behavior. In particular, the analysis principally focuses on the relationship between ex post forecast errors and ex ante measures of uncertainty in order to assess the reliability of using proxies based on predictive accuracy to describe changes in predictive confidence. After we adjust the data to account for certain features in the conduct and construct of the survey, we find a significant and robust correlation between observed heteroskedasticity in the consensus forecast errors and forecast uncertainty. We also document that significant compositional effects are present in the data that are economically important in the case of forecast uncertainty, and may be related to differences in respondents' access to information.

Results in Lucas (1987) suggest that if public policy can affect the growth rate of the economy, the welfare implications of alternative policies will be large. In this paper, a stochastic, dynamic general equilibrium model with endogenous growth and money is examined. In this setting, inflation lowers growth through its effect on the return to work. However, the welfare costs of higher inflation are extremely modest.

This paper develops the Kiyotaki-Wright model of monetary general equilibrium in which trade is bilateral and enforced by requiring that transactions be quid pro quo, and studies which goods are chosen, and under what conditions, as media of exchange. We prove the existence of a rational expectations equilibrium in which agents' expectations concerning trading opportunities are realized in the present and all future periods. We also show that, exceptional cases aside, no rational expectations barter equilibrium exists; that an equilibrium generally supports multiple money goods; and that a fiat money (i.e., a good that is produced, has minimum storage costs, but is not consumed) cannot be traded in rational expectations equilibrium.

In this paper we examine the evidence for two competing views of how monetary and financial disturbances influenced the real economy during the national banking era, 1880-1914. According to the monetarist view, monetary disturbances affected the real economy through changes on the liability side of the banking system's balance sheet independent of the composition of bank portfolios. According to the credit rationing view, equilibrium credit rationing in a world of asymmetric information can explain short-run fluctuations in real output. Using structural VARs we incorporate monetary variables in credit models and credit variables in monetarist models, with inconclusive results. To resolve this ambiguity, we invoke the institutional features of the national banking era. Most of the variation in bank loans is accounted for by loans secured by stock, which in turn reflect volatility in the stock market. When account is taken of the stock market, the influence of credit in the VAR model is greatly reduced, while the influence of money remains robust. The breakdown of the composition of bank loans into stock market loans (traded in open asset markets) and other business loans (a possible setting for credit rationing) reveals that other business loans remained remarkably stable over the business cycle.

A cash-in-advance constraint on consumption is incorporated into a standard model of consumption and capital accumulation. Monetary policy consists of lump-sum cash transfers. Methods are developed for establishing the existence and uniqueness of an equilibrium. and for explicitly constructing this equilibrium. The model economy's dependence on monetary policy is explored.

As a network, a payment system is likely to exhibit network externalities and perhaps some public good characteristics. Such properties may be more pronounced in an electronic payment system, because of its greater reliance on communication infrastructures with high fixed and low variable costs, for instance. This paper presents the basic economics of network externalities and reviews some basic principles regarding public goods. It then asks what these phenomena imply about the role of the Federal Reserve in emerging payment systems. The general conclusion is that there is reason to be skeptical that network externalities and public goods will be significant sources of market failure in electronic payment systems. These phenomena, by themselves, give rise to no particular, essential central bank role in these markets.

In this paper a dynamic model is constructed in which labor and capital taxes are determined endogenously through majority voting. The wealth distribution of the economy is shown to influence the voting behavior, and hence the equilibrium levels of the tax rates, which in turn affect the future distribution of wealth. It is shown that the economy exhibits a unique dynamic behavior. Because of the endogenously determined taxes, the asset prices, wealth distribution, and the tax rates can display persistent fluctuations, and even limit cycles, in reaction to exogenous disturbances, or even due to initial conditions. It is also shown that "tax smoothing" does not necessarily appear to naturally arise in such a model, as the economy can display extreme fluctuations in the endogenously determined tax rates.

In most developed countries, housing receives preferential tax treatment relative to other assets. In particular (i) the housing services provided by owner-occupied housing (generally referred to as imputed rents) are untaxed and (ii) mortgage interest payments reduce taxable income. The potential economic distortions resulting from the unique treatment of housing may be substantial, especially in light of the fact that residential capital accounts for more than half of the assets in the U.S. In particular, this tax treatment distorts the households' portfolio composition, their saving rates and their tenure choice. In this paper we build a general equilibrium model populated by heterogeneous agents subject to idiosyncratic risk. We use this framework to quantitatively assess the macroeconomic and distributional distortions introduced by this preferential tax treatment. We also study the effects of alternative tax schemes which could correct the current system's bias.

This paper analyzes how political stability depends on economic factors. Fluctuations in groups' economic capacities and in their abilities to engage in rent-seeking or predatory behavior create periodic incentives for those groups to renege on their social obligations. A constitution remains in force so long as no party wishes to defect to the noncooperative situation, and it is reinstituted as soon as each party finds it to its advantage to revert to cooperation. Partnerships of equals are easier to sustain than are arrangements in which one party is more powerful in some economic or noneconomic trait. In this sense, inequality is bad for social welfare. Surprisingly, perhaps, it is the rich, and not the poor segments of society who in our model pose the greater threat to the stability of the social order. Using cross-country data, we test and confirm the prediction that most constitutional disruptions should be accompanied by increases in income inequality.

The objective of this paper is to investigate whether, in a Sidrauski type model with uncertainty, welfare maximization calls for following the famous "Chicago Rule". This question will be answered in the affirmative in this paper, i.e. social welfare optimization calls for a zero nominal interest rate on one-period bonds. The zero nominal interest rate, however, does not imply in an uncertain world that there is no systematic difference between the expected rate of deflation and the rate of time preference in an economy without growth. The magnitude of this difference turns out to be small, however. Numerical welfare comparisons are made between the optimal policy and policies in which the growth rate of money is fixed. The optimal policy requires that the monetary authorities react every period to the available information and they choose a growth level of the money stock that will set the interest rate equal to zero. If we compare the time paths of the real variables under the optimal policy with the time paths if the money supply decreases at a rate equal to the rate of time preference, then we see hardly any differences. The price dynamics can be very different, however. The paper also investigates the issue of superneutrality and finds that the quantitative deviations from superneutrality are substantial if a model with a shopping time technology is used. The neo-classical models in this paper are solved numerically using a technique developed in Marcet (1988).

The durable goods sector is much more interest sensitive than the non-durables sector, and these sectoral differences have important implications for monetary policy. In this paper, we perform VAR analysis of quarterly US data and find that a monetary policy innovation has a peak impact on durable expenditures that is roughly five times as large as its impact on non-durable expenditures. We then proceed to formulate and calibrate a two-sector dynamic general equilibrium model that roughly matches the impulse response functions of the data. We derive the social welfare function and show that the optimal monetary policy rule responds to sector-specific inflation rates and output gaps. We show that some commonlyprescribed policy rules perform poorly in terms of social welfare, especially rules that put a higher weight on inflation stabilization than on output gap stabilization. By contrast, it is interesting that certain rules that react only to aggregate variables, including aggregate output gap targeting and rules that respond to a weighted average of price and wage inflation, may yield a welfare level close to the optimum given a typical distribution of shocks.

The data and press commentaries studied in this paper call for a reinterpretation of the French inflationary crisis and its stabilization in 1926. In contrast with T. J. Sargent's (1984) interpretation, there is evidence that the budgetary situation was well in hand and that only fear of a capital levy made the public unwilling to buy government bonds. As a result, the government had to repay the bonds coming to maturity with monetary financing. Only when Poincare introduced a bill to shift the tax burden off bondholders did the demand for government bonds recover and inflation stop.

This paper examines the determination of the rate of growth in an economy in which two political parties, each representing a different social class, negotiate the magnitude and allocation of taxes. Taxes may increase growth if they finance public services, but reduce growth when used to redistribute income between classes. The different social classes have different preferences about growth and redistribution. The resulting conflict is resolved through the tax negotiations between the political parties. I use the model to obtain empirical predictions and policy lessons about the relationship between economic growth and income inequality. In particular, I show that, although differences in growth rates across countries may be negatively related to income inequality, redistributing wealth does not enhance growth.

This paper develops a unified model of growth, population, and technological progress that is consistent with long-term historical evidence. The economy endogenously evolves through three phases. In the Malthusian regime, population growth is positively related to the level of income per capita. Technological progress is slow and is matched by proportional increases in population, so that output per capita is stable around a constant level. In the post-Malthusian regime, the growth rates of technology and total output increase. Population growth absorbs much of the growth of output, but income per capita does rise slowly. The economy endogenously undergoes a demographic transition in which the traditionally positive relationship between income per capita and population growth is reversed. In the Modern Growth regime, population growth is moderate or even negative, and income per capita rises rapidly. Two forces drive the transitions between regimes: First, technological progress is driven both by increases in the size of the population and by increases in the average level of education. Second, technological progress creates a state of disequilibrium, which raises the return to human capital and induces parents to substitute child quality for quantity.

This paper investigates the optimal tax structure in an overlapping generations model in which individuals face idiosyncratic income risk, borrowing constraints and lifetime uncertainty. The calibrated model economy produces some quantitative results that differ significantly from the findings of the previous research. The main finding in this imperfect insurance setup is that moving away from capital income taxation toward higher labor income taxation yields a (steady-state) welfare benefit of 1% of aggregate consumption compared with the 6% figure Lucas (1990) finds in an infinite-horizon, complete markets model. This is because replacing the tax on capital income with a higher tax on labor income redistributes resources away from the young working years during which borrowing constraints are more likely to bind. Furthermore, when the individuals have access to a private annuity market to insure against uncertain lifetimes, it becomes optimal to tax capital. When a consumption tax is made available, it is optimal to switch to consumption taxation. The welfare benefit from implementing this optimal plan is on the order of 1.5-3.2% of GNP.

This paper considers the unobserved endowment economy of Green (1987) with a restriction that agents can walk away from insurance contracts at the beginning of any period and contract with another insurer (one-sided commitment). An equilibrium is derived characterized by a unique, market determined insurance contract with the property that agents never want to walk away from it. I show that trade (or insurance) still occurs and that a non-degenerate long-ran distribution of consumption exists.

The paper proposes a theory of ambiguous financial contracts. Leaving contractual contingencies unspecified may be optimal, even when stipulating them is costless. We show that an ambiguous contract has two advantages. First, it permits the guarantor to sacrifice reputational capital in order to preserve financial capital as well as information reusability in states where such tradeoff is optimal. Second, it fosters the development of reputation. This theory is then used to explain ambiguity in mutual fund contracts, bank loan commitments, bank holding company relationships, the investment banker's "highly confident" letter, non-recourse debt contracts in project financing, and other financial contracts.

Entrepreneurs bear substantial risk, but empirical evidence shows no sign of a positive premium. This paper develops a theory of endogenous entrepreneurial risk taking that explains why self-financed entrepreneurs may find it optimal to invest into risky projects offering no risk premium. The model has also a number of implications for firm dynamics supported by empirical evidence, such as a positive correlation between survival, size, and firm age.

In this paper we study the relationship between wealth, income distribution and growth in a game-theoretic context in which property rights are not completely enforcable. We consider equilibrium paths of accumulation which yield players utilities that are at least as high as those that they could obtain by appropriating higher consumption at the present and suffering retaliation later on. We focus on those subgame perfect equilibria which are constrained Pareto-efficient (second best). In this set of equilibria we study how the level of wealth affects growth. In particular we consider cases which produce classical traps (with standard concave technologies): growth may not be possible from low levels of wealth because of incentive constraints while policies (sometimes even first-best policies) that lead to growth are sustainable as equilibria from high levels of wealth. We also study cases which we classify as the "Mancur Olson" type: first best policies are used at low levels of wealth along these constrained Pareto efficient equilibria, but first best policies are not sustainable at higher levels of wealth where growth slows down. We also consider the unequal weighting of players to ace the subgame perfect equiliria on the constrained Pareto frontier. We explore the relation between sustainable growth rates and the level of inequality in the distribution of income.

This paper is part of a project to model the interaction between heterogeneous agents in intertemporal stochastic models and to develop numerical algorithms to solve these kind of models. It is well-known that solving dynamic heterogeneous agent models is a challenging problem, since in these models the distribution of wealth and other characteristics evolve endogenously over time. Existing dynamic models in the literature contain therefore just two agents or other simplifying assumptions to limit the heterogeneity.