Fiscal constitutions and the determinacy of intergenerational transfers.

We study the impact offiscal constitutions on intergenerational transfers by analyzing how political veto power influences social security. Transfers in this paper are outcomes of an infinite-horizon social security game among selfish agents whose lifecycles we embed in an overlapping generation model with a linear technology. Policies are decided one period at a time and may change later at zero cost. Simple majoritarian systems, which accord the current median voter maximum fiscal discretion alld minimal influence over future policy, are known to sustain as subgame perfect equilibria all individually rational allocations. Among these are a continuum of stationary sequences (including dynamically inefficient ones) as well as a double continuum of non-stationary sequences (including cyclical or chaotic ones). We investigate how equilibrium is pinned down by constitutional "rules" that give minorities veto power over fiscal policy changes proposed by the majority. Veto power turns out to be equivalent to precommitment. Among subgame perfect equilibria, it eliminates fluctuating and dynamically inefficient transfers, reducing the equilibrium set to weakly increasing transfer sequences that converge to the golden rule. Veto power combined with Markov perfect equilibrium results in a unique, dynamic efficient allocation - the golden rule.Intergenerational transfers; Veto power; Constitutional rules;

Capital misallocation and aggregate factor productivity

We propose a sectoral–shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, a constant production possibilities frontier, and finitely many sectors producing the same good. Both the growth rate and total factor productivity in these economies respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to persistent and reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki–Moore (1997), and also as unsecured reputational loans suggested in Bulow–Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk– adjusted equity yields across sectors. Economy–wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. If sector productivities follow a symmetric two–state Markov process, many of our economies converge to a limit cycle alternating between mild expansions and abrupt contractions. We also find highly periodic and volatile limit cycles in economies with small amounts of collateral.Industrial productivity

Capital Misallocation and Aggregate Factor Productivity

TFP, misallocation, sectoral shocks, collateral, reputation

Discretion, rules and volatility

Business cycles

Les marchés imparfaits dans la théorie macroéconomique

Cet essai considérera une variété de situations macroéconomiques où l’information privée, les indivisibilités et d’autres facteurs empêchent soit le développement de marchés financiers complets soit la libre participation des ménages aux marchés existants. Parmi les exemples présentés, mentionnons l’inefficacité dynamique de l’équilibre concurrentiel, le rationnement du crédit, les contraintes de liquidité et la demande de monnaie, les contrats implicites et le chômage, ainsi que l’accumulation du capital humain.This essay will survey a variety of macroeconomic situations in which private information, indivisibilities, and other factors inhibit either the development of complete financial markets or the free participation of individual households in all existing markets. Among the examples developed in some detail are the dynamic inefficiency of competitive equilibrium, credit rationing and its consequences, cash-in-advance constraints and the demand for money, implicit contracts and unemployment, and the accumulation of human capital

Les marchés imparfaits dans la théorie macroéconomique

This essay will survey a variety of macroeconomic situations in which private information, indivisibilities, and other factors inhibit either the development of complete financial markets or the free participation of individual households in all existing markets. Among the examples developed in some detail are the dynamic inefficiency of competitive equilibrium, credit rationing and its consequences, cash-in-advance constraints and the demand for money, implicit contracts and unemployment, and the accumulation of human capital. Cet essai considérera une variété de situations macroéconomiques où l’information privée, les indivisibilités et d’autres facteurs empêchent soit le développement de marchés financiers complets soit la libre participation des ménages aux marchés existants. Parmi les exemples présentés, mentionnons l’inefficacité dynamique de l’équilibre concurrentiel, le rationnement du crédit, les contraintes de liquidité et la demande de monnaie, les contrats implicites et le chômage, ainsi que l’accumulation du capital humain.

Private and public circulating liabilities

Changes in the legal and technological environment in the U.S. have created the possibility of private banknote issue, or its electronic equivalent. We wish to understand the implications of this possibility for economic performance. Accordingly, we construct and analyze a dynamic general equilibrium model in which privately-issued liabilities may circulate, either by themselves, or alongside a stock of outside money. In each case we provide results on the existence and multiplicity of equilibria, and we characterize local dynamics in a neighborhood of a steady state. Our results support Friedman's (1960) idea that circulating private liabilities as associated with endogenous (or "excess") volatility. But implementing Friedman's (1960) advice-the government should ban private issuance of close currency substitutes-causes significant inefficiency in our model. And implementing the polar opposite advice of Hayek (1976) and Fama (1980)-that the government should withdraw from currency issuance altogether in the presence of circulating private liabilities-also is often constrained suboptimal in our economies. Instead, our economies have both public and private circulating liabilities as part of an optimal monetary arrangement.Money ; Monetary theory

Growth or equality ? Losers and gainers from financial reform

We explore the consequences of liberalized credit markets for growth and inequality in a lifecycle economy with physical and human capital accumulation, populated by households of different abilities, and calibrated to match the long-run economic performance of a panel of emerging countries. Relatively modest improvements in extending credit to the ablest households appear to have large economic consequences : upfront costs (slower initial growth, higher income inequality) followed by delayed benefits (faster long-run growth). Reform also lowers lifecycle utility for substantial majority of currently active households. Premature liberalization in the least developed countries (low TFP or capital intensity) may redirect economic growth towards a poverty trap.Liberalization;credit constraint;poverty trap;human capital;emerging economies

Trend-reverting fluctuations in the life-cycle model

Aggregate time series provide evidence of short term dynamic adjustment that appears to be governed by complex or negative real eigenvalues. This finding is at odds with the predictions of reasonably parameterized, convex one-sector growth models with complete markets. We study life cycle economies in which aggregate saving depends non-trivially on the distribution of wealth among cohorts. If consumption goods are weak gross substitutes near the steady state price vector, we prove that the unique equilibrium of a life cycle exchange economy converges to the unique non-monetary steady state via damped oscillations. We also discuss examples and extensions. ; Earlier title: Complex Eigenvalues and Trend-Reverting FluctuationsBusiness cycles ; Econometric models ; Time-series analysis ; Regression analysis

The optimal inflation target in an economy with limited enforcement

We formulate the central bank's problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted utility for a heterogeneous population of infinitely-lived households in an economy with constant aggregate income. Households are divided into cash agents, who store value in currency alone, and credit agents who have access to both currency and loans. The planner's problem is equivalent to choosing inflation and nominal rates consistent with a resource constraint along with an incentive constraint that ensures credit agents prefer the superior consumption-smoothing power of loans to that of currency. We show that the optimum rate of inflation is positive, and the optimum nominal interest rate is higher than the inflation rate, if the social welfare function weighs credit agents no more than their population fraction.Inflation (Finance) ; Deflation (Finance) ; Monetary policy - United States