343 research outputs found
Are Bubbles Bad? Is a higher debt target for the Euro-zone desirable?
Bubbles are usually viewed as a threat to financial stability. This paper takes a more nuanced view. The world economy is going through an episode of Secular Stagnation, where the equilibrium rate of return on capital r is below the growth rate of the economy g. As is well known, rational bubbles are sustainable when r?g in a steady state equilibrium. Bubbles can then implement a dynamically efficient equilibrium. We show that from a structural point of view, bubbles, Pay-As-You-Go (PAYG) pensions and sovereign debt are perfect substitutes. However, when dealing with unexpected short run fluctuations in investment, sovereign debt is far more efficient than bubbles in shifting consumption over time and in risk sharing between generations. An increase in sovereign debt is therefore an efficient response to Secular Stagnation. Instead, the current Stability and Growth Pact for the Euro-zone embarks on an opposite course
Secular Stagnation, Rational Bubbles, and Fiscal Policy
It is well known that rational bubbles can be sustained in balanced growth path of a deterministic economy when the return to capital r is equal to the growth rate g. When there is a lack of stores of value, bubbles can implement an efficient allocation. This paper considers a world where r fluctuates over time due to shocks to the marginal productivity of capital. Then, bubbles further efficiency, though they cannot implement first best. While bubbles can only be sustained when r = g in a deterministic economy, r > g "on average" in a stochastic economy. Fiscal policy improves welfare by adding an extra asset. Where only the elderly contribute to shifting resources between investment and consumption in a bubbly economy, fiscal policy allows part of that burden to be shifted to the young. Contrary to common wisdom, trade in bubbly assets implements intergenerational transfers, while fiscal policy implements intragenerational transfers. Hence, while bubbles and fiscal policy are perfect substitutes in the deterministic economy, fiscal policy dominates bubbles in a stochastic economy. For plausible parameter values, a higher degree of dynamic inefficiency should lead to a higher sovereign debt
Returns to Tenure or Seniority
This study documents two empirical facts using matched employer-employee data for Denmark and Portugal. First, workers who are hired last, are the first to leave the firm. Second, workers' wages rise with seniority (= a worker's tenure relative to the tenure of her colleagues). The identification problems for the wage return to tenure are shown not to apply to the return to seniority because seniority is not a deterministic function of time. Controlling for tenure, the probability of leaving the firm decreases with seniority. The increase in expected seniority with tenure explains a large part of the negative duration dependence of the hazard. Using a variety of estimation methods, we show that a 10% increase in seniority raises your wage by 0.1-0.2%, depending on the country and the method applied. Conditional on ten years of tenure, one standard deviation of seniority raises your wage by 0.5 to 1.6 percent. Forthcoming in Econometrica
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Falling Real Interest Rates, House Prices, and the Introduction of the Pill
The past 30 years has witnessed a worldwide decrease in real interest rates. Simultaneously over this period house prices have grown in real terms. We demonstrate that these trends can be explained by changes in demographic structure associated with the introduction of the pill in the early 1970s. Following this, most of the western world, Japan and China saw similar reductions in fertility rates, though timing and magnitude differ among countries. In the long-run this leads to lower population growth. In the short-run the cohort born just before the introduction of the pill are disproportionally larger than cohorts born before and after. As this large cohort accumulates assets for retirement, aggregate savings supply increases which results in falling real interest rates and rising house prices. We find that an increase in house prices over the past decades was likely an efficient outcome that aided efficiency in the transition towards the new balanced growth path. However, housing's appreciation is a feature that can't be easily explained in a rational framework. Our model predicts that real interest rates will continue to fall, overshooting the new balanced growth path level until hitting a trough at around the year 2035
Normal Utilization as the Adjusting Variable in Neo-Kaleckian Growth Models: A Critique
As well-known, the canonical Neo-Kaleckian growth model fails to reconcile actual and normal rates of utilization in equilibrium. Some recent contributions revive an old proposal for solving this problem – making the normal rate of utilization an endogenous variable that converges to the actual utilization rate – justifying it with new, micro-founded premises. We argue that these new justifications for the convergence of normal to actual utilization do not stand closer scrutiny. First, the proposed microeconomic model relies on various restrictive assumptions, some of which are mutually inconsistent. Second, the derivation of the macroeconomic adjustment mechanism from the microeconomic analysis involves a logical leap, that can be justified only by a very arbitrary assumption with little economic justification. Finally, we discuss the way in which this mechanism has been incorporated into the Neo-Kaleckian growth model by proposers of this approach. We show that, even if one puts aside, for the sake of argument, the first two points, the existence of autonomous components of demand is sufficient to invalidate the resulting macroeconomic model
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