This is a quantitative investigation of the importance of technological change specific to new investment goods for postwar US aggregate fluctuations. A growth model that incorporates this form of technological change is calibrated to US data and simulated, using the relative price of new equipment to identify the process driving investment-specific technology shocks. The analysis suggests that this form of technological change is the source of about 30% of output fluctuations.

We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents- shareholders, bondholders and workers- that differ in participation in the capital market and in attitude towards risk and intertemporal substitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. Based on the empirical estimates for the two sources of real macroeconomic risk, the model generates signi…cant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession.

A tax-distorted real-business-cycle model is parameterized, calibrated, and solved numerically in an attempt to measure the size of Harberger Triangles relative to Okun Gaps. In particular, the model constructed is used to study, quantitatively, the impact of various distortional government tax and subsidy schemes. It is shown that the government can use tax policy to stabilize cyclical fluctuations, and this is done for the economy being studied. The benefits of implementing such a stabilization policy are calculated and compared with the size of the welfare gains realized from reducing various tax distortions. ‘It takes a heap of Harberger Triangles to fill an Okun Gap.’ Tobin (1977, p. 468) ‘Our task as I see it. _ _ is to write a FORTRAN program that will accept specific economic policy rules as ‘input ’ and will generate as ‘output ’ statistics describing the operating characteristics these policies.’ of time series we care about, which are predicted to result from Lucas (1980, pp. 709-710) *This work was initiated while the second author was a visiting scholar at the Federal Reserve Bank of Kansas City. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve Bank of Kansas City, or

Significant nonlinearities are found in several cyclical components macroeconomic time series across countries. Standard equilibrium models of business cycles successfully explain most first and second moments of these time series. However, this paper shows that a model of this class cannot replicate nonlinear features of the data. Applying the Efficient Method of Moments methodology to build an algorithm that searches over the models parameter space establishes the parameterization that best allows replication of all statistical properties of the data. The results show that this parameterization captures nonlinearities in investment but fails to account for observed properties of consumption.

We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard RBC models predict fairly well, but also aspects of actual fluctuations that standard RBC models cannot explain, such as the hump-shaped, trend reverting impulse responses to transitory shocks found in US output (Cogley and Nason, AER, 1995); the large forecastable movements and comovements of output, consumption and hours (Rotemberg and Woodford, AER, 1996); and the fact that consumption appears to lead output and investment over the business cycle.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper studies overborrowing, financial crises and macro-prudential policy in an equilibrium model of business cycles and asset prices with collateral constraints. Agents in a decentralized competitive equilibrium do not internalize the negative effects of asset fire-sales on the value of other agents ' assets and hence they borrow too much " ex ante, compared with a constrained social planner who internalizes these effects. Average debt and leverage ratios are slightly larger in the competitive equilibrium, but the incidence and magnitude of financial crises are much larger. Excess asset returns, Sharpe ratios and the market price of risk are also much larger. State-contigent taxes on debt and dividends of about 1 and-0.5 percent on average respectively support the planner’s allocations as a competitive equilibrium and increase

A wide range of international macroeconomic models link the real exchange rate to a ratio of marginal utilities. These include models based on non-traded goods, and those with a variety of frictions including trading costs and pricing to market. We examine this link empirically, while allowing the marginal utility of consumption to depend on government expenditure, leisure, real money balances, or external habit. We also consider two environments with incomplete asset markets; one with exogenously missing markets but an endogenous discount rate that anchors the distribution of wealth and one with endogenous market segmentation. Although none of these satisfies theoretical and over-identifying restrictions for every country, utility with external habit persistence provides the best match with real exchange rates for OECD countries between 1961 and 2001.

We investigate the welfare implications of changing the mix between capital and labor taxes for a model economy in which heterogeneous households face uninsurable labor income risk. The stochastic process for labor earnings we construct is consistent with empirical estimates of earnings risk, and also implies a distribution of asset holdings across households closely resembling that in the United States. We find that a vast majority of households prefers the status quo to eliminating capital taxes. This finding is interesting in light of the fact that this reform would be optimal if we abstracted from heterogeneity and assumed a representative agent. A second finding is that a utilitarian government prefers the current calibrated U.S. capital income tax rate (39.7 percent) to any change in the capital tax rate.

In this paper an AK growth model is fully analyzed under the time to build assumption. The existence and uniqueness of the balance growth path and the oscillatory convergence of detrended capital while detrended consumption is constant over time is proved. Moreover the role of transversality conditions and the assumption of capital utilization, make these results hold for any value of the delay.

The question of the existence of a stationary equilibrium for distorted versions of the standard neoclassical growth model is addressed in this paper. The conditions presented guaranteeing the existence of nontrivial equilibrium for the class of economies under study are simple and intuitively appealing, while the existence proof developed is elementary. Examples are given illustrating that economies with distortional taxation, endogenous growth with externalities, and monopolistic competition can all fit into the framework developed. Journal of Economic Literature Classification Numbers C62, E30, E60 .