Public and private saving and investment

We decompose aggregate saving and investment into its publicand private components and then document a variety of ``stylized facts''associated with saving and investment rates for a sample of15 countries over the period 1975--1989. In order to seewhether these empirical relationships are consistent with aworld of perfect capital mobility we develop a multi--countrymodel with free trade in a riskfree bond and calibrate it tothe fifteen OECD countries. We pay special attential tomodeling the fiscal policy rules. The model performsremarkably well in accounting for a wide variety of timeseries relationships. Nonetheless the model is not able to capture the crosssectional aspect of the data. In particular, the model cannot accountfor both the large cross country correlation between aggregate saving and investmentrates and the very negative cross country relationship between the public andprivate saving minus investment gaps.

Financing Constraints, Irreversibility, and Investment Dynamics

We develop a model of an industry with many heterogeneous firms that face both financing constraints and irreversibility constraints. The financing constraint implies that firms cannot borrow unless the debt is secured by collateral; the irreversibility constraint that they can only sell their fixed capital by selling their business. We use this model to examine the cyclical behavior of aggregate fixed investment, variable capital investment, and output in the presence of persistent idiosyncratic and aggregate shocks. Our model yields three main results. First, the effect of the irreversibility constraint on fixed capital investment is reinforced by the financing constraint. Second, the effect of the financing constraint on variable capital investment is reinforced by the irreversibility constraint. Finally, the interaction between the two constraints is key for explaining why input inventories and material deliveries of US manufacturing firms are so volatile and procyclical, and also why they are highly asymmetrical over the business cycle.

Economic growth and investment in the Arab world

This paper analyses the economic growth performance in the Arab world overthe last forty years. The Arab world has managed to reduce povertyperformance despite its relatively disappointing growth performance. Werelate this poor performance of both oil and non-oil producers toinvestment. Contrary to widespread belief, we do not find evidence that lowquantity of investment is the main of low growth. The decline in theinvestment rate followed rather than preceded the reduction in the aggregategrowth rate. We conclude that the low quality of investment projects is thekey determinant of growth. The excessive reliance on public investment, thelow quality of financial institutions, the bad business environment (due topolitical and social instability and to excessive public intervention andoverregulation) and the low quality of human capital are importantdeterminants of systematically unproductive investment decisions and, thus,low economic growth.

Financing constraints, irreversibility and investment dynamics

We develop a model of an industry with many heterogeneous firms that face both financingconstraints and irreversibility constraints. The financing constraint implies that firmscannot borrow unless the debt is secured by collateral; the irreversibility constraint thatthey can only sell their fixed capital by selling their business. We use this model to examinethe cyclical behavior of aggregate fixed investment, variable capital investment, and outputin the presence of persistent idiosyncratic and aggregate shocks. Our model yields threemain results. First, the effect of the irreversibility constraint on fixed capital investmentis reinforced by the financing constraint. Second, the effect of the financing constraint onvariable capital investment is reinforced by the irreversibility constraint. Finally, the interactionbetween the two constraints is key for explaining why input inventories and materialdeliveries of US manufacturing firms are so volatile and procyclical, and also why they arehighly asymmetrical over the business cycle.

Pitfalls in the modeling of forward-looking price setting and investment decisions

The present paper makes progress in explaining the role of capital for inflation and output dynamics. We followWoodford (2003, Ch. 5) in assuming Calvo pricing combined with a convex capital adjustment cost at the firm level. Our main result is that capital accumulation affects inflation dynamics primarily through its impact on the marginal cost. This mechanism is much simpler than the one implied by the analysis in Woodford's text. The reason is that his analysis suffers from a conceptual mistake, as we show. The latter obscures the economic mechanism through which capital affects inflation and output dynamics in the Calvo model, as discussed in Woodford (2004).

Centrality and investment strategies at the beginning of industrialisation in mid-nineteenth-century Catalonia

We apply social networks analysis to the study of an important database on investment and companies" share in the Catalonia (Spain) of the nineteenth century. In contrast with most of the existing related literature, usually addressing power relationships across administration boards, we focus on the structure of interactions among individual investors and firms. Centrality analysis uncovers interesting roles played by certain economic sectors (e.g. textile and financial). Furthermore, the diverse composition (in terms of economic activity) of communities in the network (subgroups more densely connected internally than with the rest of the network) reveals a high investment diversification, which nicely agrees with a known characteristic of traditional Catalan business strategies.

Testing calibrated general equilibrium models

This paper illustrates the philosophy which forms the basis of calibrationexercises in general equilibrium macroeconomic models and the details of theprocedure, the advantages and the disadvantages of the approach, with particularreference to the issue of testing ``false'' economic models. We provide anoverview of the most recent simulation--based approaches to the testing problemand compare them to standard econometric methods used to test the fit of non--lineardynamic general equilibrium models. We illustrate how simulation--based techniques can be used to formally evaluate the fit of a calibrated modelto the data and obtain ideas on how to improve the model design using a standardproblem in the international real business cycle literature, i.e. whether amodel with complete financial markets and no restrictions to capital mobility is able to reproduce the second order properties of aggregate savingand aggregate investment in an open economy.

On the relation between tax rates and evasion in a multi-period economy

We extend the basic tax evasion model to a multi-period economy exhibiting sustained growth. When individuals conceal part of their true income from the tax authority, they face the risk of being audited and hence of paying the corresponding fine. Both taxes and fines determine individual saving and the rate of capital accumulation. In this context we show that the sign of the relation between the level of the tax rate and the amount of evaded income is the same as that obtained in static setups. Moreover, high tax rates on income are typically associated with low growth rates as occurs in standard growth models that disregard the tax evasion phenomenon.

Fiscal foresight and the effects of government spending

We study the effects of government spending by using a structural, large dimensional, dynamic factor model. We find that the government spending shock is non-fundamental for the variables commonly used in the structural VAR literature, so that its impulse response functions cannot be consistently estimated by means of a VAR. Government spending raises both consumption and investment, with no evidence of crowding out. The impact multiplier is 1.7 and the long run multiplier is 0.6.

Growth, selection and appropriate contracts

We study a dynamic model where growth requires both long-term investment and the selection of talented managers. When ability is not ex-ante observable and contracts are incomplete, managerial selection imposes a cost, as managers facing the risk of being replaced tend to choose a sub-optimally low level of long-term investment. This generates a trade-off between selection and investment that has implications for the choice of contractual relationships. Our analysis shows that rigid long-term contracts sacrificing managerial selection may be optimal at early stages of economic development and when access to information is limited. As the economy grows, however, knowledge accumulation increases the return to talent and makes it optimal to adopt flexible contractual relationships, where managerial selection is implemented even at the cost of lower investment. Better institutions, in the form of a richer contracting environment and less severe informational frictions, speed up the transition to short-term relationships.

Children in the welfare state. A social investment approach

Children occupy centre-stage in any new welfare equilibrium. Failure to support families may produce either of two undesirable scenarios. We shall see a society without children if motherhood remains incompatible with work. A new family policy needs to recognize that children are a collective asset and that the cost of having children is rising. The double challenge is to eliminate the constraints on having children in the first place, and to ensure that the children we have are ensured optimal opportunities. The simple reason why a new social contract is called for is that fertility and child quality combine both private utility and societal gains. And like no other epoch in the past, the societal gains are mounting all-the-while that families’ ability to produce these social gains is weakening.In the following 1 analyze the twin challenges of fertility and child development. I then examine which kind of policy mix will ensure both the socially desired level of fertility and investment in our children? The task is to identify a Paretian optimum that will maximize efficiency gains and social equity simultaneously.

The Ins and Outs of Unemployment: A Conditional Analysis

We analyze how unemployment, job finding and job separation rates react to neutral and investment-specific technology shocks. Neutral shocks increase unemployment and explain a substantial portion of unemployment volatility; investment-specific shocks expand employment and hours worked and mostly contribute to hours worked volatility. Movements in the job separation rates are responsible for the impact response of unemployment while job finding rates for movements along its adjustment path. Our evidence qualifies the conclusions by Hall (2005) and Shimer (2007) and warns against using search models with exogenous separation rates to analyze the effects of technology shocks.

Social capital, government expenditures, and growth

Countries with greater social capital have higher economic growth. We show that socialcapital is also highly positively correlated across countries with government expenditureon education. We develop an infinite-horizon model of public spending and endogenousstochastic growth that explains both facts through frictions in political agency whenvoters have imperfect information. In our model, the government provides servicesthat yield immediate utility, and investment that raises future productivity. Voters aremore likely to observe public services, so politicians have electoral incentives to underprovidepublic investment. Social capital increases voters' awareness of all governmentactivity. As a consequence, both politicians' incentives and their selection improve.In the dynamic equilibrium, both the amount and the efficiency of public investmentincrease, permanently raising the growth rate.

The ins and outs of unemployment: An analysis conditional on technology shocks

We analyze how unemployment, job finding and job separation rates reactto neutral and investment-specific technology shocks. Neutral shocks increaseunemployment and explain a substantial portion of it volatility; investment-specificshocks expand employment and hours worked and contribute to hoursworked volatility. Movements in the job separation rates are responsible for theimpact response of unemployment while job finding rates for movements alongits adjustment path. The evidence warns against using models with exogenousseparation rates and challenges the conventional way of modelling technologyshocks in search and sticky price models.

Pay-as-you-go social security and the distribution of bequests

This paper studies the impact of an unfunded social security system on the distribution of bequests in a framework where savings are due both by life cycle and by random altruistic motivations. We show that the impact of social security on the distribution of bequests depends crucially on the importance of the bequest motive in explaining savings behavior. If the bequest motive is strong, then an increase in the social security tax raises the bequests left by altruistic parents. On the other hand, when the importance of bequests in motivating savings is sufficiently low, theincrease in the social security tax could result in a reduction of the bequests left by altruistic parents under some conditions on the attitude of individuals toward risk and on the relative returns associated with private saving and social security. Some implications concerning the transitional effects of introducing an unfunded social security scheme are also discussed.