Abstract Should an economy implement reforms during a deep crisis? A vast body of literature has evolved around this question. Early studies, based on standard New Keynesian models, suggested that reforms can be harmful when an economy is constrained by the zero lower bound. More recent research uses complex models to show which model assumptions influence this conclusion. In contrast, we take a simple model and show that two seemingly trivial assumptions significantly affect the result: the returns to labor in the production function and the presence of trend inflation. While trend inflation alone dampens the negative effect of the reforms, decreasing returns to labor can entirely reverse their short-run impact.
Public infrastructure investment plays a pivotal role in fostering economic development, yet low-income countries characterized by high informality make limited investments. The literature underscores that informality induces maintaining tax rates low, depleting the already limited funds available for public infrastructure. Within a framework that accounts for heterogeneous labor, we study the optimal labor-income taxation aimed at financing infrastructure. We develop the analysis with and without the presence of a binding legal minimum wage. Our findings reveal that the minimum wage increases the optimal tax rate, raises the income (and income share) of low-skilled workers, and induces higher infrastructure investments for a wide range of parameter settings. Furthermore, we show that in the presence of minimum wage, no clear relationship emerges between the beneficial impact of infrastructure on informal sector productivity and the share of the informal economy.
This paper investigates how oil price uncertainty shocks affect the U.S. economy asymmetrically during recessions and expansions, using quarterly data from 1969:Q1-2024:Q2. Using a Smooth-Transition Local Projections framework, we find robust evidence that uncertainty shocks significantly reduce output, raise unemployment, and dampen inflation more during recessions. In contrast, non-recessionary periods exhibit muted and shorter-lived effects. Monetary policy responds more aggressively when the economy is already weak, cutting interest rates further. Mechanism analysis reveals that these asymmetries operate through aggregate demand sensitivity, financial constraints, cost pass-through dynamics, and inflation expectations. These findings highlight the importance of accounting for state-dependent mechanisms when designing policies to mitigate the adverse impacts of oil price uncertainty shocks.
Conflicts between the US and China have significant consequences for Global Value Chains (GVCs) by causing greater uncertainties and disruptions in supply chains. This study examines the causal relationship between political conflicts between the US and China and the level of investment of Korean firms involved in GVCs from 2008 to 2021 using data at the firm level in the manufacturing sector. In particular, we examine the investment of firms that transition from being non-GVC participants to GVC participants. The findings indicate that political tensions between the US and China cause increased investment for GVC firms relative to non-GVC firms. However, firms that switch to exporting or importing exclusively undergo a reduction in their levels of investment. These results suggest that political tensions without violence can negatively affect Korean firms, with the effects varying depending on the firms' GVC status.
This study investigates whether automation drives economic growth in an overlapping generations (OLG) model with bequests. We revisit whether income transfers from parents to children through bequests can boost economic growth even when automation reduces labor income. We incorporate bequests into an OLG model under four main bequest motives - namely, intergenerational altruism, the warm glow of giving, unintended bequests, and strategic bequests. Focusing on the interior equilibrium in which both traditional and automation capitals are utilized for all periods, we derive the following results. First, when bequest motives are non-strategic, whether long-run economic growth occurs depends heavily on the level of total factor productivity (TFP). If TFP falls below a certain threshold, the economy cannot sustain long-run growth even in the presence of bequests. However, when TFP exceeds this threshold, the economy with bequests can achieve sustained economic growth. Second, when the motive is strategic bequests, economic growth never occurs.
This paper is a theoretical attempt to explore economic foundation of autocracy, whereby oligarchy and corruption are essential elements. We show that, in our setup, the rise of an autocratic political system crucially depends on an oligarchic economic system which in turn is influenced by corruption costs stemming from anti-corruption institutions. We also use our model to study the effects of smart international sanctions. We derive conditions under which smart international sanctions would be effective in moderating the behavior of an autocrat. Moreover, we study the micro structure of the oligarchy market.
This paper investigates how climate shocks affect consumer price inflation in a broad range of countries over a period of five decades, using local projection methods. Climate change is likely to lead to more frequent and more severe supply and demand shocks that will present a challenge to monetary policy formulation. The analysis finds that the impact of climate shocks on inflation depends on the type and intensity of shocks, as well as the country's income level. While adverse climate shocks resemble negative supply-side shocks and exert inflationary pressures in the short term, their impact on the demand side can sometimes dominate over the medium term and reduce inflation. Droughts tend to have the highest positive impact on inflation overall, primarily reflecting rising food prices. Interestingly, floods tend to exert a dampening impact on inflation, resembling Keynesian supply shocks. Over the long run, the dominant monetary policy paradigm of flexible inflation targeting, when faced with supply-induced climate shocks may become increasingly ineffective, especially in LIDCs. Further research is needed to identify viable alternative monetary policy frameworks.
War and political regime are fundamentally linked. From Athen’s democratic empire in the 5th Century BCE, through the industrialization of war in the 19th and 20th centuries to today’s nuclear powers, all forms of political regimes have been involved in war. Very few macroeconomic models have accounted for the costs and benefits of war. We develop a macrodynamic model of war in order to address Kant’s notion of democratic perpetual peace. We enrich macroeconomics by introducing regime-specific sensitivity to human loss, which affects the desirability of war. Our model, based on a dynamics à la Solow, can account for multiple wars throughout history.
This study investigates the industry effects of monetary policy in Korea by analyzing the role of sectoral heterogeneity regarding price stickiness and inter-industry relations. I extend a standard sticky-price Dynamic Stochastic General Equilibrium (DSGE) model into a model with heterogeneous production sectors, where each industry sector is allowed to have distinct price stickiness and inter-industry production linkages. Input-Output matrices are utilized to construct the inter-industry linkages, which reflect the use of final products from other sectors as material inputs or investment goods. Sectoral price stickiness and other model parameters are estimated using a Bayesian approach. From the estimated model, the asymmetric impact of monetary policy across sectors is investigated. Simulated impulse responses suggest that sectoral variables exhibit clear comovements in response to monetary policy shocks while the magnitudes of the responses differ considerably across sectors, which can be attributed to the differences in price rigidities and production linkages. Compared to the results from a standard single-sector model, the output response is more pronounced, while the inflation response diminishes. The results indicate that ignoring sectoral heterogeneities could bias estimates of monetary policy effects.
We develop a novel dynamic stochastic general equilibrium model with loan-loss provisions (LLPs) and unsecured-collateralized loan choice, the latter being endogenously determined due to enterprises having heterogeneous production capacity. Further, due to the presence of a second source of production uncertainty, which is only observed ex-post to loan contracting, type-specific aggregate default rates are endogenously determined too, which results in a model economy whose cyclicality can be driven significantly by LLP adjustment shocks. We estimate the model using actual Chinese data from 2004Q4 to 2020Q4. Our estimated model is able to generate co-movement between LLPs and the unsecured-collateralized loan ratio, a feature of the Chinese banking system that is consistent with empirical evidence. We also find that banks' LLPs are countercyclical, despite the overall LLP regime still remaining relatively backwards-looking, indicating that the present Chinese banking regulations can be overly prudent.
In the literature on secular stagnation, demographic aging is widely blamed for lowering the IS curve of aggregate demand and therefore the natural interest rate. However, little is known about the impact of workforce aging on long-term aggregate supply, or so-called potential GDP. To fill this gap, this study delves into the effects of workforce aging on two key components of the remarkably sluggish potential GDP growth of developed countries: hours worked and labour productivity. First, using a novel macro-accounting decomposition of EU-KLEMS data, we find that old-labour input has the highest contribution to growth, through both increased hours worked and shifts in labour composition in the EU, US and Japan. Second, we use panel stochastic frontier models highlighting that, however, old workers have an adverse effect on labour productivity growth frontier - though increasing technical efficiency, i.e., reducing the distance to this frontier.
This paper examines the impact of fiscal rules on inflation across 79 countries from 1985 to 2021, employing entropy balancing as the methodology. Adopting this approach, the study addresses potential endogeneity concerns and considers variations among different country groups, including advanced economies, emerging markets, developing economies, and low-income countries. The primary outcome derived from the analysis indicates a negative relationship between fiscal rules and inflation in emerging and low-income countries. Moreover, this effect is observed for moderate and high inflation rates. These results are robust to different specifications.
This paper evaluates the significance of different channels through which oil price fluctuations affect US inflation. Using monthly data from 1983 to 2024, we find that, when the underlying causes of oil price increases are not distinguished, production costs constitute a key channel amplifying the impact of oil price shocks. Wage growth and inflation expectations also contribute to the pass-through, whereas the role of monetary policy appears comparatively limited. However, further investigation into various oil price shocks reveals that the production cost channel plays a significant role only in the case of oil-specific demand shocks, whereas wage growth amplifies the transmission of both aggregate demand and oil-specific demand shocks into inflation.
This study investigates the labor market dynamics and distributional consequences of the transition to a net-zero economy, with a particular focus on heterogeneity across worker types differentiated by skill level and sectoral employment. We employ a Dynamic Stochastic General Equilibrium (DSGE) model with search-and-matching (SAM) frictions in the labor market, incorporating three dimensions of heterogeneity: (i) differentiation between low-skilled and high-skilled workers; (ii) distinctions among employed, unemployed, and inactive individuals; and (iii) employment distributions across green and dirty sectors. Our main findings are threefold. First, in the short term, the adjustment to higher carbon taxes leads to a reduction in employment and a decline in skill wage premiums. Second, the green transition intensifies inequality in the long run by favoring high-skilled workers, assuming the share of low-skilled labor in the green sector remains persistently limited. Third, we assess the effectiveness of different carbon revenue recycling schemes, including progressive and uniform labor tax cuts and unemployment benefits. We find that aggregate welfare gains are higher when revenues are used to cut labor income taxes for low-skilled workers, and that unemployment benefits generate greater welfare gains than a uniform labor tax cut in the medium to long run.
This paper investigates the asymmetric transmission of monetary policy across business cycles in Korea during the period following the global financial crisis. Utilizing a smooth transition-local projection regression method, we explore the asymmetric responses of output and prices to monetary policy shocks during economic booms and recessions. Monetary policy innovations are identified by orthogonalizing changes in the policy rate with respect to economic forecast information that policymakers consider in their decision-making processes. Our findings reveal that the impact of monetary policy on output and prices is substantial during recessions, whereas it is minimal and statistically insignificant during booms. By examining asymmetries arising from both business conditions and monetary policy stance, we show that the pronounced transmission effects during recessions are primarily driven by tightening monetary policy, while expansionary measures during recessions have limited effectiveness. These results suggest the need to reevaluate previous empirical findings which do not simultaneously consider the possibility of asymmetric transmission stemming from both business cycles and monetary policy stance.
Empirical evidence shows that real wages are procyclical and the labor share is countercyclical conditional on monetary policy shocks, a pattern that the standard New Keynesian model fails to capture. This study addresses this inconsistency by developing a quantitative heterogeneous-agent New Keynesian model with sticky wages. I demonstrate that incorporating household heterogeneity resolves this discrepancy. The model successfully generates procyclical real average hourly earnings and a countercyclical labor share, while maintaining countercyclical real wages per efficiency unit of labor. These findings underscore the importance of accurately defining real wages in empirical data to ensure alignment with theoretical models.
In this paper, we demonstrate a forecastable approach to revisions in the BLS’s monthly Employment Situation report using a Bayesian hierarchical model. By incorporating labor market and economic activity measures, our model accurately predicts both the level and sign of data revisions. Enhancing the ability to forecast data revisions can significantly improve financial market efficiency and support better policy decisions by government and central bank officials, who often depend on initial employment estimates or endure time-consuming revisions to achieve a more accurate understanding of the labor market.
I develop a two-asset heterogeneous-agent New Keynesian model with search and matching frictions in the labor market, which extends the transmission mechanism of monetary policy to household consumption. Uninsurable countercyclical unemployment risk plays a crucial role in the transmission of monetary shocks to consumption through a novel channel driven by countercyclical precautionary saving motives. Following an increase in the real interest rate, unconstrained households raise their liquid savings and reduce current consumption to insure against the risk of lower future individual labor income, resulting from longer expected unemployment durations. This mechanism accounts for 16 % of the total decline in consumption in a model calibrated to a realistic wealth distribution. The strength of the countercyclical precautionary saving motive depends on the degree of wage rigidity and the fiscal policy rule in general equilibrium. Additionally, I extend the sequence-space Jacobian algorithm to a continuous-time framework, where the efficiency of constructing partial equilibrium Jacobians is enhanced by a generalized approach to handling a large number of income grid points in the heterogeneous-agent block.
By introducing automation development into a Ramsey–Cass–Koopmans model, this paper shows that the phenomenon of the skill premium will appear when firms use automation to replace labor. As automation becomes more important to production, capital share, including capital rental and profit shares, will rise, while labor share will fall. Meanwhile, the income inequality of unskilled labor relative to other income earners will increase. When households have endogenous occupational choices, the results still hold. Although the government’s policy of subsidizing people’s learning costs helps to reduce the wage gap between skilled and unskilled labor, it does not stop the decline in the labor share regardless of whether the government subsidy is financed by lump-sum taxes or the taxes on earnings generated from assets.
In this paper, we build a simple overlapping generations model with endogenous fertility and a PAYG pension system. Children are costly, but healthy grandparents can reduce this cost by providing grandparental care. However, if grandparents are unhealthy, their adult children have to spend time caring for them. The results show how longevity and grandparenting affect equilibrium fertility and pensions, depending on the elderly’s health, thus adding two important dimensions – grandparenting and elderly health – to the stylized textbook OLG model with longevity and endogenous fertility.
