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Abstract This paper studies asset returns in different versions of the one-sector real business cycle model. We show that a model with habit formation preferences and capital adjustment costs can explain the historical equity premium and the average risk-free return while replicating the salient business cycle properties. The paper also applies a solution technique that combines loglinear methods with lognormal asset pricing formulae. 1998 Elsevier Science B.V. All rights reserved. JEL classification: G12; C63; E22

Abstract We establish five facts about prices in the U.S. economy: 1) The median frequency of nonsale price change is 9-12% per month, roughly half of what it is including sales. This implies an uncensored median duration of regular prices of 8-11 months. Product turnover plays an important role in truncating price spells in durable goods. The median frequency of price change for finished goods producer prices is roughly 11% per month. 2) One-third of regular price changes are price decreases. 3) The frequency of price increases covaries strongly with inflation while the frequency of price decreases and the size of price increases and price decreases do not. 4) The frequency of price change is highly seasonal: It is highest in the 1st quarter and lowest in the 4th quarter. 5) The hazard function of price changes for individual consumer and producer goods is downward sloping for the first few months and then flat (except for a large spike at 12 months in consumer services and all producer prices). These facts are based on CPI microdata and a new comprehensive data set of microdata on producer prices that we construct from raw production files underlying the PPI. We show that the 1st, 2nd and 3rd facts are consistent with a benchmark menu-cost model, while the 4th and 5th facts are not.

This paper applies simulated method of moments to a dynamic structural model to infer the magnitude of external financing costs. The model features endogenous investment, cash distributions, leverage, and default. The corporation faces taxation, costly bankruptcy, and linear-quadratic equity flotation costs. For large firms, parameter estimates imply marginal equity flotation costs starting at 5.0%, and bankruptcy costs equal to 8.4 % of capital. For small firms, marginal equity flotation costs start at 10.7%, and bankruptcy costs equal 15.1 % of capital. Estimated financing frictions are also higher for low-dividend firms and those identified as constrained by the Cleary and Whited-Wu indexes. In simulated data many commonly used proxies for financing constraints decrease when we increase financing cost parameters.

This paper studies the nature of capital adjustment at the plant-level. We use an indirect inference procedure to estimate the structural parameters of a rich specification of capital adjustment costs. In effect, the parameters are optimally chosen to reproduce

At the aggregate level, the labor-supply elasticity depends on the reservation-wage distribution. We present a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks. The model economy exhibits the cross-sectional earnings and wealth distributions that are comparable to those in the micro data. We find that the aggregate labor-supply elasticity of such an economy is around 1, greater than a typical micro estimate. Keywords:

This paper compares solution methods for dynamic equilibrium economies. We compute and simulate the stochastic neoclassical growth model with leisure choice using Undetermined Coefficients in levels and in logs, Finite Elements, Chebyshev Polynomials, Second and Fifth Order Perturbations and Value Function Iteration for several calibrations. We document the performance of the methods in terms of computing time, implementation complexity and accuracy and we present some conclusions about our preferred approaches based on the reported evidence.

Recent empirical studies show that the intergenerational persistence of economic status in the U.S. is much higher than previously thought. We develop a quantitative theory of inequality and intergenerational transmission of human capital where parents invest in early and college education of their children subject to borrowing constraints. Children differ exogenously in innate abilities, which can be correlated with their parent’s innate ability. An important feature of the environment is that the quality of early education determines the probability of college completion. We calibrate a stationary equilibrium of this economy to relevant statistics in aggregate U.S. data, and use it to investigate the sources of inequality and persistence in earnings. In our benchmark model, about half of the intergenerational persistence and one fourth of the inequality in earnings are accounted for by endogenous investments in education. We find that early investments in education account for most of the endogenous persistence in earnings, while college education generates most of the endogenous inequality in earnings. Our theory is suited to study the effect of educational policies on the persistence of inequality. We show that public resources devoted to early education have the largest impact on earnings mobility. Moreover, non-progressive college subsidies generate more intergenerational persistence of earnings.

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An overlapping generations model of marriage and divorce is constructed to analyze family structure and intergenernational mobility. Agents differ by sex, marital status, and human capital. Single agents meet in a marriage market and decide whether to accept or reject proposals to wed. Married couples must decide whether to separate or not. Parents invest in their children depending on their wherewithal. A simulated version of the theoretical prototype can generate an equilibrium with a significant number of female-headed households and a high degree of persistence in income across generations. To illustrate the model's mechanics, the effects of two antipoverty policies, namely child support and welfare, are investigated