Are Nonconvexities Important For Understanding Growth?

Everyday experience and a simple logical argument show that nonconvexities are essential for understanding growth. Compared to previous statements of this well known argument, the presentation here places more emphasis on the distinction between two of the fundamental attributes of any economic good: rivalry and excludability. It also emphasizes the difference between public goods and the technological advances that are fundamental to economic growth. Like public goods, technological advances are rionrival goods. Hence, they are inextricably linked to nonconvexities. But in contrast to public goods, which are nonexcludable, technological advances generate benefits that are at least partially excludable. Hence, innovations in the technology are for the most part privately provided. This means that nonconvexities are relevant for goods that trade in private markets. Consequently, an equilibrium with price-taking in all markets cannot be sustained. Concluding remarks describe some of the recent equilibrium growth models that do not rely on price-taking and highlight some of the implications of these models.

Retirement in a Life Cycle Model of Labor Supply with Home Production

We analyze the forces that can generate retirement in different versions of standard life cycle models of labor supply. While nonconvexities in production can generate retirement, we show that the size of nonconvexities needed increases sharply as the intertemporal elasticity of substitution for labor decreases. In a model with home production, we show that these models imply a large increase in time devoted to home production at retirement. This is contrary to what is found in the ATUS data. We suggest that nonconvexities in the enjoyment of leisure time may be a promising alternative feature to generate retirement.

General Equilibrium with Nonconvexities, Sunspots, and Money

We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasilinearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemployment.

General equilibrium with nonconvexities, sunspots, and money

We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasilinearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemployment.Equilibrium (Economics) ; Money

Plant-Level Nonconvexities and the Monetary Transmission Mechanism

Micro-level empirical evidence suggests that plant managers adjust production by utilizing capital along nonconvex margins. Existing models of the monetary transmission mechanism (MTM), however, assume that production units adjust output smoothly. The objective of this paper is to determine whether such plant-level nonconvexities affect the MTM in a quantitatively significant way. To this end we replace the smooth production function in a prototypical model of the MTM with heterogeneous plants that adjust output along three nonconvex margins: intermittent production, shiftwork, and weekend work. We calibrate the model such that steady-state utilization of these margins is in line with U.S. data. We find that the nonconvexities dampen the responses of aggregate economic activity and prices to monetary policy shocks by about 50 percent relative to the standard model, thereby significantly reducing the effectiveness of the MTM. Due to heterogeneity and discrete choices at the plant level, monetary policy affects the output decisions of only 'marginal' plants - those close to being indifferent between alternative production plans. In equilibrium the measure of such plants is rather small. In addition, contrary to popular belief, the quantitative effects of monetary policy shocks on aggregate output do not significantly change with the degree of capacity utilization over the business cycle. The effects on inflation, however, do change substantially over the business cycle when monetary policy shocks are persistent.Asymmetries, heterogenous plants, monetary transmission mechanism, nonconvexities, nonlinear approximation.

On the Nature of Capital Adjustment Costs

This paper studies the nature of capital adjustment at the plant-level. We use an indirect inference procedure to estimate the structural parameters of a rich specification of capital adjustment costs. In effect, the parameters are optimally chosen to reproduce the nonlinear relationship between investment and profitability that we uncover in the plant-level data. Our findings indicate that a model which mixes both convex and nonconvex adjustment costs with irreversibility fits the data best.

General Equilibrium with NonConvexities, Sunspots and Money

We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasi-linearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemploymentMoney, Indivisibilities, Sunspots.

The Marginal Product of Capital: A Persistent International Puzzle

Large and sustained differences in marginal products of capital (MPKs) across countries are sharply at odds with the core implications of the neoclassical framework. Lucas (1990) and many subsequent studies have examined reasons for this MPK differential. In a recent contribution, Caselli and Feyrer (2007) take the ground out from under this debate by reconsidering measurement issues and concluding that the MPK differential vanishes. Despite Caselli and Feyrer’s important advances in measurement, the international MPK puzzle persists. We show that the measurement of MPKs in their framework is substantially affected by adjustment costs in the accumulation of capital. With the proper technology and a plausible parameterization of adjustment costs, the MPK in poor countries is much higher than the MPK in rich countries. Why capital flows do not eliminate the MPK differential remains a persistent international puzzle. We examine the quantitative importance of financial frictions, relative prices, and adjustment costs in accounting for the MPK differential and document that adjustment costs provide the leading explanation.marginal product of capital, adjustment costs, macroeconomic analysis of economic development, international capital flows

Technological Change, Sunk Costs, and Competition

macroeconomics, technological change

Externalities and fundamental nonconvexities : a reconciliation of approaches to general equilibrium externality modeling and implications for decentralization

By distinguishing between producible and nonproducible public goods, we are able to propose a general equilibrium model with externalities that distinguishes between and encompasses both the Starrett [1972] and Boyd and Conley [1997] type external effects. We show that while nonconvexities remain fundamental whenever the Starrett type external effects are present, these are not caused by the type discussed in Boyd and Conley. Secondly, we find that the notion of a “public competitive equilibrium” for public goods found in Foley [1967, 1970] allows a decentralized mechanism, based on both price and quantity signals, for economies with externalities, which is able to restore the equivalence between equilibrium and efficiency even in the presence of nonconvexities. This is in contrast to equilibrium notions based purely on price signals such as the Pigouvian taxes