Abstract This paper develops an endogenous growth model featuring income-dependent risk preferences to explain the emergence and evolution of buyout funds. We propose a novel preference structure where high-income agents derive utility from the thrill of entrepreneurial risk-taking, leading them to acquire business ideas from capital-constrained innovators. The model demonstrates that buyout funds emerge as equilibrium contracts when income inequality exceeds a critical threshold, with wealthy investors paying premiums to participate in ventures. Conversely, in more equal economies, buyout funds serve as transitional institutions. Initial inequality enables the acquisition of ideas, but subsequent growth allows the original idea holders to become independent entrepreneurs, leading to the fund’s eventual decline. Our framework provides microfoundations for understanding how income distribution shapes financial intermediation patterns and their growth consequences, offering new insights into the relationship between inequality, entrepreneurial spawning, and innovation-driven growth.
Abstract Using the Gordon growth model, this paper investigates monthly fluctuations in the US housing market. The investigation is based on a vector autoregressive model with fixed coefficients that can explain the broad movements in housing volatility at the zip code level. The corresponding variance decomposition analysis further shows that the housing premium is the main driver of housing market fluctuations. Motivated by previous studies and using impulse response functions, it is also investigated how different components of the housing market respond over time to a shock in the interest rate in zip codes with different levels of income or demographics. The corresponding results reveal that the rent growth channel of monetary policy is effectively blocked in zip codes with lower income, higher female or minority populations, or lower education, while remaining functional in less vulnerable areas. These findings lead to important policy suggestions for targeted interventions.
Abstract Despite accelerating debt levels, the real yield on U.S. Treasuries remains low due to investors’ desire for their extreme safety and liquidity services. The convenience premium on Treasuries allows fiscal policy to pursue profligate budget plans without imposing inflationary threats on a low-interest-rate monetary policy. Using a change-point vector autoregression model, I estimate the time-varying properties of U.S. inflation and fiscal stance that characterize long-term debt cycles. An archetypal debt cycle consists of alternating phases of persistent deficits and surpluses in tandem with alternating patterns of inflation and fiscal stance. I present a simple analytical model based on the fiscal theory of the price level where households have a preference for holding government bonds. When the real interest rate falls below the economy’s growth rate, permanent fiscal deficits can be sustained under passive monetary and active fiscal policy. I estimate an extended dynamic stochastic general equilibrium model and find strong negative correlations between fiscal policy and bond preference shocks across all subsamples. This suggests that flight-to-safety episodes may have systematically dampened fiscal inflation over the past two decades.
Abstract This paper explores the dynamic effects of labor unions on economic growth and income inequality in a Schumpeterian growth model with heterogeneous households and endogenous market structure. Income inequality arises from an unequal distribution of wealth and heterogeneous labor productivity. In the short run, increasing union bargaining power reduces both growth and inequality when the union is wage-oriented. In the long run, stronger unions continue to lower inequality without affecting the steady-state growth rate. The model identifies the channels through which unions shape inequality: an income-share shift from asset income to labor income, wage compression, and changes in the wealth-wage correlation. Calibrating the model to U.S. data, we find that increasing union bargaining power significantly reduces long-run income inequality.
Abstract We study real and monetary growth models with households endowed with limited foresight and planning only for a finite number of periods, despite being infinitely lived (myopia). In the real model, there emerges a unique Balanced Growth Path ( upper B upper G upper P B G P $BGP$ ) characterized by sub-optimal capital accumulation. However, by relaxing myopia, it converges to the upper B upper G upper P B G P $BGP$ of the economy with perfect foresight. We then prove the existence of equilibria where money, even in absence of financial frictions or liquidity constraints, is positively valued and non-neutral, in contrast to usual results in infinite horizon. Specifically, there arise two monetary upper B upper G upper P s B G P s $BGPs$ , where money is non-neutral along the first one and neutral along the second one. Eventually, we perform a global stability analysis and identify the optimal monetary policy maximizing welfare.
Abstract This study examines the relationship between sovereign spreads and bank shares in terms of risk transmission, using a sample of the largest Italian banks over the period 2003–2023. Our objective is to quantify and compare volatility spillovers and to investigate whether bank-specific characteristics help to explain them. We perform a dynamic connectedness analysis based on the Bayesian estimation of a vector autoregression with time-varying parameters. Our results suggest that, with the exception of the period of the euro area debt crisis, banks tend to transmit more spillovers than they absorb. Moreover, these spillovers are related to factors such as capital adequacy and the composition of banks’ portfolios.
After a period of stable prices in advanced economies, inflation surged in 2022, largely driven by substantial increases in international food and energy prices. Using electronic payments data to estimate a demand system, we derive expenditure and price elasticities and evaluate the welfare effects of these relative price changes for Portuguese consumers. Our results indicate an average welfare loss of approximately 10% of total expenditure, disproportionately affecting lower-spending consumers. Furthermore, we observe that lower-expenditure consumers generally have larger price elasticities than their higher-spending counterparts. These results reinforce the evidence of the unequal welfare costs of inflation on consumers.
We examine how a more hawkish policy stance - defined as an above-median long-run inflation semi-elasticity of the policy rate - affects economic growth in 37 inflation-targeting (IT) countries. To this end, we estimate time-varying, bias-corrected forward-looking Taylor rules for all IT countries for which the data permit such estimation. Our results point to sizable growth effects, exceeding 0.8% annually, for countries with a more hawkish policy stance. This suggests that the growth benefits reported in the previous literature on inflation targeting are primarily driven by a small subset of countries that react more forcefully to inflation.
We investigate the aggregate effects of household debt on a monetary policy easing shock using a smooth transition vector autoregression model. Using generalized impulse response functions, we measure whether the effect of a reduction in interest rate on output is conditioned by different levels of household debt in Australia, Sweden and Norway, three developed economies with high levels of household indebtedness, and in the world's seven largest economies. Our findings show that the short-term effects of a reduction in interest rates are generally stronger during periods of high household debt. On average, the monetary stimulus (on impact) is 0.06% (percent of GDP) larger in Norway and the United States during periods of high household debt. Our findings also suggest high levels of household debt may diminish the persistence of monetary policy shocks in the medium term (4-8 quarters).
Abstract I use a combination of a structural dynamic factor model and quantile regressions to study how monetary policy shocks affect the predicted distributions of GDP growth and inflation in the US. Contractionary monetary policy shocks shift the expected distribution of GDP growth to the left and deepen its two modes. The expected distribution of inflation is spread out and retains significant probability mass for inflation increases.
This paper revisits the relationship between population growth and economic performance by extending the Solow framework to include land as a fixed factor in a two-sector economy and migration as an endogenous adjustment. Because only agriculture uses land, effective land intensity becomes endogenous to structural transformation, declining as economies diversify. The impact of population growth therefore depends on land scarcity but is mitigated by sectoral reallocation and migration. Using a panel of 152 countries over 1960-2023 and both fixed-effects and system- Generalized Method of Moments (GMM) estimators, we show that the effect of natural population growth on per-capita income growth is highly conditional. Population growth becomes growth-reducing in agriculture-dependent and land-scarce economies, but this effect is attenuated by lower agricultural shares and land-saving technological progress. Migration further alleviates demographic pressure by reallocating labor away from land-intensive production.
To understand the international nature of the macroprudential policy and the potential cross-border regulatory leakages these imply, we develop a three-country center-periphery framework with financial frictions and limited financial intermediation in emerging economies. Each country has a macroprudential instrument to smooth credit spread distortions; however, the banking regulations can leak to other economies and be subject to costs. Our results show the presence of cross-border regulation spillovers that increase with the extent of financial frictions, which are driven by the capacity of the regulation to limit aggregate intermediation, and that can be magnified if policymakers are forward-looking. We discuss the policy implications of the resulting macroprudential interdependence and the potential scope for policy design that improves the management of the trade-off between mitigating the financial frictions and curtailing intermediation.
During the COVID-19 pandemic, many governments recommended quarantine to those who had close contact with infected individuals. We conducted a large-scale retrospective survey to study the consequences of such quarantine for labor outcomes. A sizable fraction of quarantined workers experienced reductions in hours worked and earnings, not only during quarantine but also after quarantine. Even uninfected workers experienced negative labor impacts, likely capturing the pure effects of quarantine independent of the effects of COVID-19 symptoms. Non-regular workers and workers without remote work options were more negatively affected by quarantine. We estimate that the quarantine resulted in a large reduction in the aggregate hours and that the reduction is mainly due to the scarring effects.
This paper examines the impact of low-carbon transition risks on sovereign borrowing costs. Using two unbalanced panel datasets covering 125 countries from 1995 to 2019, we estimate extended models of the macroeconomic determinants of short- and long-term sovereign debt costs. We include key indicators capturing exposure to transition risks, such as fossil resource abundance, the carbon intensity of GDP, and the share of renewable energy in total energy consumption. Results show that fossil resource abundance and a higher renewable energy share are associated with lower borrowing costs, whereas greater carbon intensity raises sovereign debt costs. Financial markets therefore appear to reward fossil resource endowments while penalizing carbon-intensive uses of these resources. This reveals a contradictory signal: fossil resource wealth lowers the cost of public borrowing, as it is perceived as a form of implicit collateral, while the actual use of these resources increases borrowing costs, reflecting a carbon risk premium.
This paper investigates the empirical implications of the broadest Divisia-type monetary aggregates. We first analyze the simple causal relationship between real economic variables and a range of monetary aggregates, then estimate both a traditional recursive VAR model and a non-recursive VAR model. By examining impulse responses and the equational forms of underlying economic shocks, we gain insights into the implications of various monetary aggregates. Our findings indicate that the broadest Divisia-type monetary aggregates exhibit strong causality with various real economic variables. Furthermore, the structural equations obtained from non-recursive VAR estimation suggest that the Money-interest rate rule, centered on money as a primary policy instrument, yields results precisely consistent with the benchmark across almost all ranges of credit-card-augmented Divisia monetary aggregates. Under this rule, the broadest credit-card-augmented Divisia monetary aggregate enhances the precision of tracking contemporary economic conditions and mitigates common anomalies, such as puzzle problems.
We assume that some monetary assets are unobserved and that the demand for them affects the demand for observed assets. We develop a model of the demand for both observed and unobserved assets based on the normalized quadratic flexible functional form and augment the Divisia monetary aggregates with unobserved assets. We construct a new set of Divisia aggregates and argue that they are more accurate measures of money in terms of capturing the relationship between velocity and the opportunity cost of holding money, a relationship that has been a major concern in monetary economics for more than half a century.
We construct an R&D-based growth model in which the government can reduce income taxes using seigniorage, that is, revenue from issuing new money. Using this model, we analytically derive the growth rate of the nominal money stock that maximizes welfare and show explicitly how the welfare-maximizing money growth rate depends on the parameters of the economy. In particular, the results show that stronger patent protection lowers the welfare-maximizing money growth rate. Therefore, lower inflation is preferred in countries with stronger patent protection. This theoretical result is consistent with the observed tendency for the inflation rates to be lower in developed countries, where patent protection is stronger than in developing countries.
Macroeconomic models often have multiple equilibria. Nonetheless, a popular view on inflation targeting posits that this policy helps to coordinate agents' expectations and actions. This paper provides a rationalization for this notion. I consider an infinitely repeated game, built on the Barro-Gordon model, in which the central bank incurs a fixed penalty whenever the actual inflation rate differs from the announced target and study how changes in the penalty impact its equilibria. I conclude that, in consonance with the aforementioned view, an inflation-targeting policy lessens the problem of equilibrium multiplicity. However, by itself, it is unlikely to achieve uniqueness.
The macroeconomic literature assumes that sectoral labor income shares and output per person are uncorrelated across countries. This paper shows that the data reject this assumption for a large set of countries. The labor shares of the manufacturing and market services sectors systematically increase with output per person relative to those of other sectors, leading to a shift of labor income across sectors with economic development. The empirical evidence suggests that capital deepening and cross-sector differences in the degree of capital-labor substitutability may be important for understanding these patterns. Researchers can directly use the provided dataset of labor shares to calibrate macroeconomic models.
The European Union has placed the Circular Economy (CE) as a central strategy to advance fair and sustainable GDP growth. Yet, the mechanisms through which CE could decouple growth from social and environmental harms remain underexplored. This study assesses the macroeconomic, social, and ecological implications of CE policies in France by applying an extended version of the EUROGREEN model. The model is grounded in Ecological Macroeconomics, calibrated on historical data, and simulated over the period 2014-2050 under a business-as-usual (BAU) baseline. A "sequential scenario" methodology is adopted to evaluate alternative CE pathways: (i) a Techno-Optimistic Circularity (TOC) scenario featuring substantial improvements in material efficiency and recycling; (ii) two socially-oriented circularity scenarios that combine moderate technological progress with innovative social policies like reduced working time (C2C) and a Job Guarantee(JG) financed through a wealth tax (SEC); and (iii) a Post-Growth scenario (SCD) characterised by lower consumption and material throughput, supported by a Piketty-style financial wealth tax. Simulation results reveal persistent trade-offs between economic growth, social equity, and environmental sustainability. Growth-centred technological and social circularity scenarios do not achieve sufficient levels of decoupling between economic activity and material use, whereas post-growth pathways deliver balanced outcomes across material extraction, employment, and inequality. Overall, simulation outcomes reveal that growth-oriented circularity strategies cannot combine social equity and long-term sustainability goals. Instead, it seems that integrated policy packages combining technological innovation, social policies, and consumption reduction can reconcile CE ambitions with the pursuit of well-being within planetary boundaries.
