Research Database

This note shows that basic theorems of dynamic programming hold when the return function is homogeneous of degree theta <= 1.

We revisit recent empirical evidence about the rise in top income inequality in the United States, drawing attention to key issues that we believe are critical for an informed discussion about changing inequality since 1980: the definition of income (labor versus total), the unit of analysis (individual versus tax unit), the importance of partnership and S-corporation income, income shifting between the corporate and personal sectors in response to tax incentives, the definition of the top of the distribution, and trends in the middle and bottom of the distribution. Our goal is to inform researchers, policymakers, and journalists who are interested in top income inequality.

This paper develops a model of competitive economy which is used to study the effect that distortionary taxes have on the business cycle and on agents’ welfare. In the presence of distortions, the equilibria are not Pareto optimal and standard computational techniques cannot be used. Instead, methods that take into account the presence of distorting taxes are applied. Maximum likelihood estimates of taste, technology and policy parameters from U.S. post-war time series are used to obtain several results. I find that a significant portion of the variance of the aggregate consumption, output, hours worked, capital stock, and investment can be attributed to the factor tax and government spending processes. Also, I compute the deadweight loss due to alternative tax changes and compare these estimates to others in the literature. Specification of taxes as constant versus state-contingent can have a significant effect on the results.

COMPUSTAT data on 12,000 firms for the years 1956–1992 indicate that large firms hold less cash as a percentage of sales than do small ones. Whether comparisons are made within or across industries, the elasticity of cash balances with respect to sales is about 0.75. Firms headquartered in counties with high wages hold more money for a given level of sales, a finding consistent with the idea that time can substitute for money in the provision of transactions services. The estimates are consistent with both scale economies in the holding of money and secular declines in velocity.

The extent to which there are aggregate returns to scale at the level of aggregate production has important implications both for the types of shocks generating business cycles and for optimal policy. However, prior attempts to measure the extent of these returns using instrumental variable techniques have yielded quite imprecise estimates. In this article, we show that the production shocks implied by a range of returns to scale that encompasses both large increasing returns and large decreasing returns are almost identical. This makes clear that there is a fundamental reason for the imprecision of prior estimates and casts doubt on our ability to generate more precise estimates.

We examine nominal and real exchange rates, interest rates, prices, and evolutions of real variables in a two-country, monetary general-equilibrium model that includes a financial sector and shocks to technologies and money growth rates. Qualitative properties of the model are provided and moment predictions from a calibrated version of the model are compared to moments of time series drawn from actual economies. We focus on international monetary shock transmissions, and effects of monetary innovations on nominal and real exchange rates and nominal interest rates.

This article describes the academic debate about the usefulness of the capital asset pricing model (the CAPM) developed by Sharpe and Lintner. First the article describes the data the model is meant to explain—the historical average returns for various types of assets over long time periods. Then the article develops a version of the CAPM and describes how it measures the risk of investing in particular assets. Finally the article describes the results of competing studies of the model's validity. Included are studies that support the CAPM (Black; Black, Jensen, and Scholes; Fama and MacBeth), studies that challenge it (Banz; Fama and French), and studies that challenge those challenges (Amihud, Christensen, and Mendelson; Black; Breen and Korajczyk; Jagannathan and Wang; Kothari, Shanken, and Sloan). The article concludes by suggesting that, while academic debate continues, the CAPM may still be useful for those interested in the long run.

Historically, competition, or the extension of markets, has repeatedly brought tremendous increases in wealth. However, there is still plenty of uncertainty among economists as to why that is so. This article develops a model in which competition, modeled as the movement of goods between two areas, reduces resistance to new technology and, hence, leads to increased technology adoption and wealth. Here, the extension of markets leads to wealth increases because it reduces activities that block the use of new, more productive technology.