Inflation, growth, and financial intermediation - commentary

Inflation (Finance)

Consumption Over the Life Cycle: The Role of Annuities

We explore the quantitative implications of uncertainty about the length of life and a lack of annuity markets for life cycle consumption in a general equilibrium overlapping generations model in which markets are otherwise complete. Empirical studies find that consumption tends to rise early in life, peak around age 45-55, and to decline after that. Our calibrated model exhibits life cycle consumption that is consistent with this pattern. This follows from the fact that, due to a lack of annuity markets, households discount the future more heavily as they age and their probability of survival falls. Once an unfunded social security system is introduced, the profile is still hump shaped, but the decline in consumption does not begin until after retirement in our base case. Adding a bequest motive causes this decline to begin at a younger age.

Business Cycle Fluctuations and the Life Cycle: How Important is On-The-Job Skill Accumulation?

We study the effects of on-the-job skill accumulation on average hours worked by age and the volatility of hours over the life cycle in a calibrated general equilibrium model. Two forms of skill accumulation are considered: learning by doing and on-the-job training. In our economy with learning by doing, individuals supply more labor early in the life cycle and less as they approach retirement than they do in an economy without this feature. The impact of this feature on the volatility of hours over the life cycle depends on the value of the intertemporal elasticity of labor supply. When individuals accumulate skills by on-the-job training, there are only weak effects on both the steady-state labor supply and its volatility over the life cycle.

The labor market in real business cycle theory

The standard real business cycle model fails to adequately account for two facts found in the U.S. data: the fact that hours worked fluctuate considerably more than productivity and the fact that the correlation between hours worked and productivity is close to zero. In this paper, in a unified framework, the authors describe and analyze four extensions of the standard model, by introducing nonseparable leisure, indivisible labor, government spending, and household production.Business cycles ; Labor market

Unanticipated Money

The role of unanticipated changes in money growth for aggregate fluctuations is reexamined using the methods of quantitative equilibrium business cycle theory. A stochastic growth model with money is constructed that has the feature, following Lucas (1972, 1975), that production and trade take place in spatially separated markets (islands). Individuals must infer changes in the aggregate price level from observing local relative prices. This causes individuals to react to changes in the average price level, due to unanticipated changes in the aggregate money supply, as though they were changes in market specific relative prices. We show that this mechanism can lead to quantitatively large fluctuations in real economic activity. The statistical properties of these fluctuations, however, are quite different from the properties of fluctuations observed in the U.S. economy.Business Cycles, Monetary Policy, Aggregate Fluctuations, Real Business Cycles

"Rain Follows the Plow" and Dryfarming Doctrine: The Climate Information Problem and Homestead Failure in the Upper Great Plains, 1890-1925.

In the late 19th and early 20th centuries, the North American agricultural frontier moved into semi-arid regions of the Great Plains where farming was vulnerable to drought. Farmers who migrated to the region had to adapt their crops, techniques, and farm sizes to better fit the environment. But there was very incomplete information for making these adjustments, and ultimately they were insufficient: too many small, dry-land wheat farms were founded, only to be abandoned in the midst of drought. Two episodes of homestead settlement and collapse in western Kansas in 1893-94 and in eastern Montana in 1917-21 are examined. We go beyond the existing literature by explicitly detailing the weather information problem facing settlers and showing precisely why widespread homestead failure occurred. We present a Bayesian learning model to indicate how new climate information was incrementally incorporated to revise views of agricultural prospects. Primary data are used to show the lagged response of homesteaders to new drought information and to illustrate the differential impact of drought on small farms. Dryfarming doctrine arose as a solution to the problems faced by farmers in the region. Despite its optimistic claims, it was an imperfect response to drought. Indeed, some dryfarming practices increased the likelihood of homestead failure. "No one need be in doubt about the sharp change in climate that occurs somewhere between the 96th and 100th meridians. It can be felt on the lips and skin, observed in the characteristic plant and animal life, seen in the clarity and/or dustiness of the atmosphere, determined by measurements of rainfall and evaporation, tested by attempts at unaided agriculture. Practically every western traveler in the early years remarked the facts of aridity, though not all used the word 'desert'.." Stegner (1954, 399) "Dame Nature of the West holds out most alluring charms, and those who woo and win her smile reap a reward beyond compare. The one thing most needed is correct and accurate information."Buffin (1909, 16) "That dry-farming is a system of agricultural practice which requires the application of high skill and intelligence is admitted; that it is precarious is denied. The year of drought is ordinarily the year in which the man failed to do properly his share of the work." Widtsoe (1911, 412).