Increasing returns and optimal oscillating labor supply

Models featuring increasing returns to scale in at least one factor of production have been used to study two separate phenomena: (1) multiplicity of self-fulfilling rational expectations equilibria (i.e. sunspots), and (2) production schedules that optimally feature bunching. We show in a continuous-time model with increasing returns to labor (IRL) that if the economy features multiple competitive equilibria, the optimal path of investment, employment and consumption cannot be constant, or even smoothly-varying. Any macroeconomic policies that shielded the economy from sunspot fluctuations would necessarily not be optimal. We then characterize the optimal allocation (the solution to the planner's problem) in a discrete time version of the model. We find that the optimal investment, employment and consumption policies under increasing returns can feature (1) discontinuous jumps, (2) endogenous cycles (with time-varying cycle limits) and (3) stochastic controls (lotteries). Our discrete-time model is very close to that studied by Christiano and Harrison (1999); they, however find that fluctuations are not optimal. We show that this difference is driven by their assumption that production is linear in capital.Econometric models ; Labor supply

Monetary Policy, Endogenous Inattention and the Volatility Trade-off

This article considers the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimising a loss function that depends on expected forecast errors and information costs. "Endogenous inattention" is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.