Modern macroeconomics and heterogeneity

Modern macroeconomics has evolved from focusing just on the dynamics of aggregates, such as income, consumption and savings, to the dynamics of the distributions that add up to those aggregates. This is a consequence of theoretical contributions and increasing data availability and computational power. Though contributions regarding heterogeneity in macroeconomics can be traced back to the first half of the 20th century, it is only by the 2010s that we evolved towards a framework where there is a rich interaction between macroeconomic aggregates and their distributions that goes both ways. This special edition focused on contributions that build on such framework to study open questions regarding the impact of fiscal shocks on output, the impact of investment -specific technological change on inequality, optimal tax structures, and the impact of the COVID -19 pandemic on the distribution of earnings.publishersversionpublishe

Climate Policy in an Unequal World: Assessing the Cost of Risk on Vulnerable Households

Policy makers concerned with setting optimal values for carbon instruments to address climate change externalities often employ integrated assessment models (IAMs). While these models differ on their assumptions of climate damage impacts, discounting and technology, they conform on their assumption of complete markets and a representative household. In the face of global inequality and significant vulnerability of asset poor households, we relax the complete markets assumption and introduce a realistic degree of global household inequality. A simple experiment of introducing a range of global carbon taxes shows a household’s position on the global wealth distribution predicts the identity of their most-preferred carbon price. Specifically, poor agents prefer strong public action against climate change to mitigate the risk for which they are implicitly more vulnerable. This preference exists even without progressive redistribution of the revenue. We find that, parallel to the literature on macroeconomic policy and incomplete markets, the carbon tax can partially fill the role of insurance by reducing the volatility of future welfare. It is this role that drives the wedge between rich and poor households’ policy preferences, where rich households’ preferences closely mimic the representative agent. Estimates of the optimal carbon tax and the welfare gains of mitigation strategies may be underestimated if this channel is not taken into account

The impact of public investment in Sweden: A VAR approach.

The traditional approach towards analyzing the impact of public investment has been through including public capital as a third input factor in a Solow-model production function. Nonetheless, such approach implies several problems both at the theoretical and empirical level. Given such problems, econometric models that require as few theoretic assumptions as possible become important. It is in this framework that the Vector Autoregressive model is introduced and explained. An application to the Swedish economy is consequently conduced as it is interesting to verify the impact of public investment in a country known for its comparably large public sector

Setúbal na Rede: o caso de um projecto pioneiro

Nem sempre as grandes ideias nascem dos grandes pensadores. Nem sempre as boas ideias são as grandes ideias..

The impact of public investment in Sweden: A VAR approach.

The traditional approach towards analyzing the impact of public investment has been through including public capital as a third input factor in a Solow-model production function. Nonetheless, such approach implies several problems both at the theoretical and empirical level. Given such problems, econometric models that require as few theoretic assumptions as possible become important. It is in this framework that the Vector Autoregressive model is introduced and explained. An application to the Swedish economy is consequently conduced as it is interesting to verify the impact of public investment in a country known for its comparably large public sector

Are Kant's categorical imperative and instrumental rationality incompatible? The case for the prisoner's dilemma

Why is good good and bad bad? Kant's categorical imperative (KCI) and instrumental rationality are analyzed under the game-theoretical framework of the folk theorem. Prescribing different courses of action under the one-shot game, Kant's categorical imperative emerges as instrumentally rational provided that the conditions of the folk theorem are observed and the norms and values underlying KCI are presented as selective advantages of the group of reference in which the individual belongs. Norms and values are argued to be instrumental in nature and KCI and instrumental rationality become two faces of the same coin

Business Cycle Accounting: what have we learned so far?

What drives recessions and expansions? Since it was introduced in 2007, there have been hundreds of business cycle accounting (BCA) exercises, a procedure aimed at identifying classes of models that hold quantitative promise to explain a certain period of economic fluctuations. First, we exemplify the procedure by studying the U.S. recessions in 1973 and 1990 using and reflect upon the critiques BCA has been subject to. Second, we look into the many equivalence theorems that the literature has produced and that allow BCA practitioners to identify the theories that are quantitatively relevant for the economic period under study. Third, we describe the methodological extensions that have been brought forth since BCA’s original inception. We end by providing some broad conclusions regarding the relative contribution of each wedge: GDP and aggregate investment are usually driven by an efficiency wedge, hours of work are closely related to the labor wedge and, in an open economy, the investment wedge helps to explain country risk spreads on international bonds. Larger changes in interest rates and currency crises are usually associated with the investment and/or the labor wedge. Finally, we contribute with a graphical user interface that allows practitioners to perform business cycle accounting exercises with minimal effort

Business Cycle Accounting: what have we learned so far?

What drives recessions and expansions? Since it was introduced in 2007, there have been hundreds of business cycle accounting (BCA) exercises, a procedure aimed at identifying classes of models that hold quantitative promise to explain a certain period of economic fluctuations. First, we exemplify the procedure by studying the U.S. recessions in 1973 and 1990 using and reflect upon the critiques BCA has been subject to. Second, we look into the many equivalence theorems that the literature has produced and that allow BCA practitioners to identify the theories that are quantitatively relevant for the economic period under study. Third, we describe the methodological extensions that have been brought forth since BCA’s original inception. We end by providing some broad conclusions regarding the relative contribution of each wedge: GDP and aggregate investment are usually driven by an efficiency wedge, hours of work are closely related to the labor wedge and, in an open economy, the investment wedge helps to explain country risk spreads on international bonds. Larger changes in interest rates and currency crises are usually associated with the investment and/or the labor wedge. Finally, we contribute with a graphical user interface that allows practitioners to perform business cycle accounting exercises with minimal effort

Climate Policy in an Unequal World: Assessing the Cost of Risk on Vulnerable Households

Policy makers concerned with setting optimal values for carbon instruments to address climate change externalities often employ integrated assessment models (IAMs). While these models differ on their assumptions of climate damage impacts, discounting and technology, they conform on their assumption of complete markets and a representative household. In the face of global inequality and significant vulnerability of asset poor households, we relax the complete markets assumption and introduce a realistic degree of global household inequality. In contrast to the representative agent framework, we find that a household’s position on the global wealth distribution predicts the identity of their most-preferred carbon price. Specifically, poor agents prefer strong public action against climate change to mitigate the risk for which they are implicitly more vulnerable. We find the carbon tax fills the role of insurance, reducing the volatility of future welfare. It is this role that drives the wedge between rich and poor households’ policy preferences, even in the absence of redistribution. Taking into account the risk channel, we find an optimal tax value four times larger than standard estimates from representative agent models