Research Database

We consider four models of consumption that differ with respect to efficient risk-sharing and altruism. They range from complete markets with altruism to family risk-sharing. We use a matched sample of parents and independent children available from the Panel Study of Income Dynamics to discriminate between the four models. Our testing procedure is designed to deal with the set of observed independent children being endogenously selected. The combined hypothesis of complete markets and altruism can be decisively rejected, while we fail to reject altruism and hence family risk-sharing for a subset of families.

This paper critically reevaluates recent claims that the postwar U.S. price level exhibits countercyclicality. While overall countercyclicality is confirmed, temporal disaggregation suggests a shift from pro- to countercyclicality in the early 1970s. Furthermore, the countercyclicality is markedly more pronounced for negative than for positive output innovations. The evidence thus casts doubt on single-source business cycle explanations.

This paper builds a simple but complete model of a political system to analyze the effects of intergenerational conflicts on capital and labor income tax rates, transfers, and government spending. I show how the different nature of tax liabilities for the young and the old can explain why the old receive large gross lump-sum transfers through social security, while the young receive little or none. I also show that there is a natural link between the size of the government as a provider of public goods and the magnitude of transfers that the same government will implement.

A general class of Markov switching regime time series models is presented that allows one to estimate the nontrivial interdependencies between different types of cycles which make the economy grow at an unsteady rate. The paper further explores results obtained in Ghysels (1991b) suggesting that the economy transits from recessions to expansions with an uneven propensity throughout the year. It is also built on the work of Hamilton (1989) who proposed a stochastic switching-regime model for GNP and has important connections with hidden periodic structures discussed by Tiao and Grupe (1980) or Hansen and Sargent (1990), for instance. The time series models we present may have periodic transition probabilities and the drifts may be seasonal. In the latter case, the model exhibits seasonal dummy variation that may change with the stage of the business cycle. While the model is intrinsically nonlinear and stochastic, it produces a linear representation with seasonal effects that appear to be deterministic. The paper provides an elaborate discussion of the regularity conditions for a well-defined covariance structure including explicit formula for characterizing first and second moments. Finally, we present empirical evidence using U.S. GNP data series which tends to support a periodic structure for switching probabilities. The most significant result is the following: it is found that the seasonal in GNP growth significantly affects switching probabilities for regime switches in the nonseasonal growth of GNP. We also analyze the out-of-sample forecast performance of the different models and find that the models exploiting seasonality in transition probabilities perform best.

In this paper we develop a discretized version of the dynamic programming algorithm and derive error bounds for the approximate value and policy functions. We show that under the proposed scheme the computed value function converges quadratically to the true value function and the computed policy function converges linearly, as the mesh size of the discretization converges to zero. Moreover, the constants involved in these orders of convergence can be computed in terms of primitive data of the model. We also discuss several aspects of the implementation of our methods, and present numerical results for some commonly studied macroeconomic models.

This article argues that fiat money’s only technological role in an economy is to act as societal memory: money allows people to credibly record some aspects of their transactions and make that record accessible to other people. This record-keeping role is demonstrated in the three standard paradigms of fiat money: the overlapping generations, turnpike, and search models. In these models, if a new economy is created by removing the money and replacing it only with a historical record of all transactions, known to everyone in the economy, then the original monetary allocation is still achievable as an equilibrium.

A version of the Diamond-Dybvig model of banking is used to evaluate the narrow banking proposal, the idea that banks should be required to back demand deposits entirely by safe short-term assets. It is shown that the mere existence of an amount of safe short-term assets outside the banking system that exceeds banking system liabilities does not make the proposal either innocuous or desirable. In fact, despite such existence, using narrow banking to cope with banking system illiquidity eliminates the role of the banking system.

This essay explains the use of fiat money, or why intrinsically useless objects are accepted as payment in transactions. People accept a particular object as a means of payment because others do: social conventions matter more than the intrinsic characteristics of the object itself. Not everything can become a fiat money, though. If an object is especially costly to hold, for example, it will not be accepted as a means of payment. This explanation of fiat money is illustrated in a simple theoretical economic model.

In 1995, Robert E. Lucas, Jr., was awarded the Nobel Prize in Economic Sciences. This review places Lucas’ work in a historical context and evaluates the effect of this work on the economics profession. Lucas’ central contribution is that he developed and applied economic theory to answer substantive questions in macroeconomics. Economists today routinely analyze systems in which agents operate in complex probabilistic environments to understand interactions about which the great theorists of an earlier generation could only speculate. This sea change is due primarily to Lucas.