Macroeconomic Literature Research Articles

Internal rates of return for public R&D from VECM estimates for 17 OECD Countries

Public R&D stimulates domestic private and foreign private and public R&D, together enhancing technical change and thereby GDP. In this paper, we evaluate vector-error-correction model (VECM) estimations and simulations of a companion paper in regard to internal rates of return (and related aspects) to additional public R&D of OECD countries and compare them to the macroeconomic literature. We show (i) internal rates of return to public R&D shocks, and (ii) the related payback periods, gain/GDP ratios, and sums of discounted (at 4%) gains. Fourteen of 17 countries show high internal rates of return, short payback periods, and high gains/GDP ratios from positive public R&D shocks if projects are stopped when gains get negative. Three countries show crowding-out effects and require (initial) reductions of public R&D before showing positive results.

Phillips meets Beveridge

The Phillips curve plays a central role in the macroeconomics literature. However, there is little consensus on the forcing variable that drives inflation in the model, i.e., on the appropriate measure of “slack” in the economy. In this work, we systematically assess the ability of variables commonly used in the literature to (i) predict and (ii) explain inflation fluctuations over time and across U.S. metropolitan areas. In particular, we exploit a newly constructed panel dataset with job openings and vacancy filling cost proxies covering 1982–2022. We find that the vacancy-unemployment (V/U) ratio and vacancy filling cost proxies outperform other slack measures, in particular the unemployment rate. Beveridge curve shifts—notably, movements in matching efficiency—are responsible for the superior performance of the V/U ratio over unemployment.

Global Perspectives on Fiscal Policy and Labor Income-Leisure Choices: Theoretical and Practical Insights

In macroeconomic literature, fiscal policy is considered a powerful tool to achieve sustainable development, full employment, and social well-being in developed and developing societies. For this, public authority uses expansionary and contractionary tax policies to achieve stable growth and employment environment for the stable labor market. This study theoretically and empirically investigates the problem of inference on income-leisure labor preference. Also, it considers the impact of tax and expenditure structure on labor choices regarding working hours under the assumption of neoclassical theory. We use quantile regression analysis to investigate the data set for worldwide, high, and low-income countries from 2000 to 2022, for the macro-level analysis based on the empirical investigation of 123 countries cross-section panel. The outcomes show that when the fiscal authorities impose a regressive form of taxes, it may hurt the labor wages and distribution of income-leisure preferences or the welfare of labor. Similarly, non-labor income hurts labor utility through a large volume of non-development expenditure. However, when the progressive form of taxes is imposed, it may improve the labor utility. At the same time, on the other side, when fiscal authority disburses the development expenditure, it may support the non-labor income through the provision of public goods and services. For practice, the empirical results of quantile regression show that government expenditure has a positive while tax hurts labor supply. Fiscal policy in low-income countries has provided an alternative outcome

Uncertainty shocks and monetary policy rules in a small open economy

Abstract Post the great financial crisis (GFC) of 2008–2009, there has been a surge in the macroeconomics literature on aggregate uncertainty. Although the recent literature has recognized the adverse real effects of global uncertainty shocks in emerging market economies (EMEs), the role of monetary policy in offsetting these adverse effects and their link with the exchange rates is not explored in the literature. We find that the currently followed interest rate rules (IRRs) under a flexible inflation-targeting regime are ineffective in stabilizing the domestic economy during periods of high global uncertainty in the EMEs. Using a small open economy new Keynesian DSGE model with Epstein–Zin preferences and second-moment demand shocks, we compare and propose alternate monetary policy rules that significantly reduce welfare losses. We find that the best monetary policy rule in terms of welfare depends on the nature of shock that is, first-moment or second-moment shock.

The Fiscal Reaction Function and the Transmission Mechanism for Pakistan

Modern macroeconomics literature emphasises both the short run and long run objectives of fiscal policy [Romer (2006)]. In the short run it can be used to counter output cyclicality and/or stabilise volatility in macro variables, which is descriptively same as of effects of the short run monetary policy. Further for the long-run, fiscal policy can also affect both the demand and supply side of the economy. But in most traditional analyses it is assumed that fiscal policy would adjust to ensure the intertemporal budget constraint to be satisfied, while monetary policy is free to adjust its instruments [‘Ricardian Regime’ by Sargent (1982)] such as stock of money supply or the nominal interest rate [Walsh (2003)]. The debt financing methods, expenditure and tax powers of fiscal authorities i.e. the fiscal policy has also been seen as to affect both the supply and demand side of the economy. As noted by Baxter and King (1993), the initial Real Business Cycle models had only the supply side effects of the fiscal policy, where these were transmitted through the wealth effect and labourleisure choices of the household. Recently also New-Keynesian type models with micro-foundations and sticky prices argue that still through the supply side fiscal policy management could be accorded for stabilisation [Linnemann and Schabert (2003)]. The demand side effects of the fiscal policy could also be found only with more imperfections such as ‘Rule of Thumb’ consumers or those with liquidity constraints, which lead to exclusion of Ricardian equivalence [Gali, et al. (2005)]. But all that depends on the structure of the economy, as Blanchard and Perotti (2002) stated:

From coordination devices to coordination failures: on the changing epistemology of sunspots since the 1970s

The widespread adoption of the rational expectations hypothesis in macroeconomic literature from the 1970s onwards has often overlooked the issue of coordinating individual decisions, particularly regarding expectations. How is common knowledge, essential for rational expectations equilibrium, established? When common knowledge supports multiple equilibria, how do expectations converge to a specific one? These pivotal questions have always been at the core of sunspot literature, which emerged at the turn of the 1980s, albeit sometimes implicitly. While unspots were initially regarded by pioneers David Cass and Karl Shell as essential coordination devices, their epistemological status evolved with the introduction of competing models in ndogenous fluctuations (chaos, bifurcations, deterministic cycles) and the transition from the overlapping generations to the infinitely lived agent framework. Ultimately identified as anticipation shocks, sunspots were portrayed as instability triggers and markers of coordination failures. However, recent advancements in sunspot theory, especially in the areas of financial crises and experimental economics, have started to rehabilitate the original interpretation of sunspots as coordination mechanisms. This article maps out the historical development, shedding light on the evolving concepts surrounding sunspots.

Product Space Clustering with Graph Learning for Diversifying Industrial Production

During economic crises, diversifying industrial production emerges as a critical strategy to address societal challenges. The Product Space, a graph representing industrial knowledge proximity, acts as a valuable tool for recommending diversified product offerings. These recommendations rely on the edges of the graph to identify suitable products. They can be improved by grouping similar products together, which results in more precise suggestions. Unlike the topology, the textual data in nodes of the Product Space graph are typically unutilized in graph clustering methods. In this context, we propose a novel approach for economic graph learning that incorporates learning node data alongside network topology. By applying this method to the Product Space dataset, we demonstrate how recommendations have been improved by presenting real-life applications. Our research employing a graph neural network demonstrates superior performance compared to methods like Louvain and I-Louvain. Our contribution introduces a node data-based deep graph clustering graph neural network that significantly advances the macroeconomic literature and addresses the imperative of diversifying industrial production. We discuss both the advantages and limitations of deep graph learning models in economics, laying the groundwork for future research.

Analysis of Macroeconomic Variables on the Existence of Inflation in Indonesia Using the Vector Error Correction Model Approach

This research investigates the impact of macroeconomic variables, namely money supply, exchange rate, interest rate, and the joint stock index, on inflation in Indonesia. Employing the Vector Error Correction Model (VECM) dynamic model approach, the study reveals a long-term relationship among each variable (Inflation Rate, Jakarta Composite Index, Interest Rate, Exchange Rate, and Money Supply). Granger Causality Test results indicate a unidirectional relationship of interest rate and money supply variables to inflation, interest rate to Jakarta Composite Index, and money supply to the exchange rate. Conversely, there is a bidirectional relationship between exchange rate and inflation variables. In the short term, Interest Rate significantly and positively influences inflation, whereas, in the long term, it exhibits a negative and insignificant effect. Money supply, in the long run, significantly and positively affects the inflation rate. This study stands out in the macroeconomic literature due to its distinctive choice of variables and the dynamic model employed

Assessing the role of green investment in energy efficiency: Does digital economy matter?

Energy efficiency is crucial for achieving a balance between economic growth and sustainable development. As carbon-neutral targets continue to gain momentum, green investments are becoming increasingly important. Therefore, it is critical to investigate the relationship between green investment and energy efficiency. This paper aims to fill a gap in the macroeconomic literature by using a generalized method of moments (GMM) technique based on panel data from 30 provinces in China from 2006 to 2019. The econometric results indicate that green investment is positively associated with energy efficiency. Additionally, green investment indirectly promotes energy efficiency by fostering technology innovation and research and development (R&D) intensity. The results also suggest that more advanced digital development is linked to improvements in energy efficiency. Furthermore, regions characterized by higher levels of digital economy exhibit a more pronounced contribution of green investment to energy efficiency. Based on these findings, this paper provides valuable insights for Chinese policymakers on green investment and low-carbon development.

Linear quadratic approximation of rationally inattentive control problems

AbstractThis paper proposes a linear quadratic approximation approach to dynamic nonlinear rationally inattentive control problems with multiple states and multiple controls. An efficient toolbox to implement this approach is provided. Applying this toolbox to five economic examples demonstrates that rational inattention can help explain the comovement puzzle in the macroeconomics literature.

Analysis of non-linear effects of international financial systemic financial risk on macroeconomic impact

Abstract This paper first analyzes the international financial systemic risk transmission mechanism in the big data environment, constructs an international financial systemic risk index system, and measures the index based on principal component analysis. Then, the existing international financial and macroeconomic literature is sorted out, a macroeconomic resilience index system is constructed, and the index is measured using the entropy value method. Finally, MS-VAR and TVP-VAR models are constructed based on the VAR model to analyze the non-linear effects of international financial systemic financial risks on macroeconomic impacts. The results show that a shock of 1 unit of CFSI causes a positive response of MR of about 0.23 in the long run, and CFSI all produce a negative shock to MI until this negative shock reaches a maximum of -0.023 in the 5th period.

Open Economy Neoclassical Growth Models and the Role of Life Expectancy

AbstractThis paper applies the Ramsey–Cass–Koopmans (RCK) growth model to an open economy so that, when calibrated with standard parameter values that are commonly used in the small open economy macroeconomic literature, the time paths of the model variables and the speeds of convergence implied by the model conform with empirical evidence. Open-economy versions of the RCK growth model lead to several counterfactual conclusions including: infinite speeds of convergence for physical capital and output; and unbalanced consumption and asset growth. We avoid these undesired results by extending the baseline model with human capital, international credit constraints, and finite horizons. Given its finite-horizons feature, our model allows us to study the growth implications of changes in life expectancy from the perspective of an open economy, as most of the existing theoretical-quantitative literature that focus on the relationship assumes a closed economy. The model predicts that increased life expectancy has positive but diminishing marginal effect on long-run output per capita. We find that, between 1960 and 2018, improvements in average life expectancy at birth raised long-run output per capita in sub-Saharan Africa, the OECD region, and Canada by an estimated 57.49 %, 14.94 %, and 11.58 %, respectively. In addition, if average life expectancy at birth in sub-Saharan African countries converges from its current level to the level in their OECD counterparts, the region’s long-run output per capita will increase by an estimated 22.89 %.

Exchange rates and monetary policy when tradable and nontradable goods are complements

This paper examines the implications of complementarity between tradable and nontradable goods for exchange rates and monetary policy in a two-country general equilibrium model. In doing so, it revisits well-known findings in the New Open Economy Macroeconomics literature that exchange rates are proportional to relative national money supplies and that optimal monetary policies respond only to domestic shocks. These results depend on a number of simplifying assumptions, including a unitary elasticity of substitution between tradable and nontradable goods. When this assumption is replaced by a more-realistic one of complementarity, exchange rates depend on relative productivity in addition to money supplies when prices are flexible. When prices are sticky, complementarity amplifies the effect of changes in relative money supplies on the exchange rate and creates additional spillover effects from changes in the foreign money supply to domestic consumption. With complementarity, optimal monetary policies respond to external as well as internal shocks.

The asymmetric nexus of energy-growth and CO2 emissions: An empirical evidence based on hidden cointegration analysis

Noting the significance of asymmetries in macroeconomic literature, this study aimed to estimate the asymmetric linkages between energy growth and the environment for BRICST countries between 1990 & 2017. For this purpose, this study applied hidden cointegration, panel NARDL, and asymmetric causality tests between the variables. In the first step, the results supported the existence of hidden cointegration between the variables. In the next step, empirical results obtained from panel NARDL results explained that the chosen variables have asymmetric relationships and are highly responsive to macroeconomic shocks. Initially, the positive shocks of energy consumption positively respond to environmental degradation; similarly, the negative shocks also correspond positively to CO2 emissions. In the economic expansion phase, the positive shocks of growth have insignificant, and adverse shocks negatively respond to CO2 emissions in BRICST countries. The results of individual countries along BRICST differ at various levels in response to asymmetric shocks. Different asymmetric causalities between the chosen dimension of variables are explored. From the asymmetric associations between the variables, the study proposes to forecast the energy demand and explore alternative ways to energy resources to shift their fossil energy bases to renewable systems. Similarly, adopting ICT products could make energy efficiency in these countries more productive towards improving environmental quality.

Effective demand, wages and prices, and the multiplier

The calculation of multipliers is the core of impact analysis with input–output (IO) models. Given this focus of IO modeling on the multiplier, it is remarkable that IO analysis has not contributed to the recent macroeconomic debate on fiscal multiplier heterogeneity. This heterogeneity stems from differences in consumption reactions to income shocks and from downward wage rigidity. Both features are absent in most IO models. In this paper, a macroeconomic IO model with a wage function is set up, where at high unemployment rates, downward wage rigidity allows for large real income and multiplier effects. At full employment, demand shocks mainly induce price adjustments. The model reveals GDP multiplier heterogeneity in line with the recent macroeconomic literature, ranging from 0.3 (boom) to 1.4 (recession). The GDP multiplier result of the standard type II model even outperforms the multiplier in the recession case and therefore is most probably biased.

Noncompliant behaviors in general equilibrium: A survey

AbstractThis paper reviews the literature on dynamic general equilibrium models that incorporate noncompliant behaviors. It organizes contributions according to selected dimensions that denote important pillars of the macroeconomic literature and that are relevant to explaining the nature and role of non‐compliant behaviors. These pillars are business cycles, macroeconomic policies, labor markets, income inequality, and financial factors. Starting with studies from the early 2000s, when general equilibrium models first began to include noncompliant behaviors, our study provides a temporal excursus on the evolution of the phenomenon in this literature.

Macro uncertainty in the long run

The relationship between uncertainty and economic activity has attracted substantial interest in recent macroeconomics literature. Empirical work has mostly focused on short-run effects of uncertainty. However, there are many mechanisms that may cause non zero responses at longer horizons, e.g. the “real option” or the “growth option” channels. This paper explores the consequences of Macro uncertainty shocks at very long horizons using models with dynamic specifications rich enough to allow the effects of uncertainty to propagate far in the future. We find that uncertainty shocks produce two waves of reduction in output: one at short horizons, and another which reaches its trough after eight years from the shock.

Energy Efficiency and Directed Technical Change: Implications for Climate Change Mitigation

Abstract I develop a directed technical change model of economic growth and energy efficiency in order to study the impact of climate change mitigation policies on energy use. I show that the standard Cobb–Douglas production function used in the environmental macroeconomics literature overstates the reduction in cumulative energy use that can be achieved with a given path of energy taxes. I also show that, in the model, the government combines energy taxes with research and development (R&D) policy that favors output-increasing technology—rather than energy efficiency technology—to maximize welfare subject to a constraint on cumulative energy use. In addition, I study energy use dynamics following sudden improvements in energy efficiency. Exogenous shocks that increase energy efficiency also decrease the incentive for subsequent energy efficiency R&D and increase long-run energy use relative to a world without the original shock. Subsidies for energy efficiency R&D, however, permanently alter R&D incentives and decrease long-run energy use.

The information in joint term structures of bond yields

While the open-economy macroeconomics literature amply demonstrates the importance of allowing for trade and financial linkages between countries, the finance literature on the term structure of interest rates has largely adopted a “closed-economy” setting in which yields in one country depend only on their own lagged values. This paper examines whether it is in fact necessary to jointly model yields in multiple countries, as proposed by a handful of recent studies. We show that there is little convincing evidence that would point to such a need. The reason is that bond yields are forward-looking variables: any relevant information about foreign countries is likely to be already reflected in today’s domestic yield curve.

Post-growth transition, working time reduction, and the question of profits

The ecological macroeconomics literature has developed models, which outline the transition from today's growth-dependent economies to post-growth systems where output can be stabilized to limit resource consumption while good living conditions and high employment are ensured. Working time reduction plays a pivotal role in those transitional strategies to relax the trade-off between economic growth and unemployment. This analysis contributes to the research by developing a macroeconomic model where, in contrast to the existing models, a sufficient profit rate is the precondition of any private-sector economic activity. It is shown that under such assumptions working time reduction is not enough to stabilize output but is a threat to macroeconomic stability. To make the post-growth transition successful, working time reduction must go along with supporting economic policies and macroeconomic governance including public investment, which controls the private-sector profit rate to avoid instability and unemployment.