We study a model where limited enforcement permits bank owners to shift the risk of their asset p... more We study a model where limited enforcement permits bank owners to shift the risk of their asset portfolios to the depositors. Incentive compatible equilibria require the franchise value of the bank to exceed the value that the bank owners can obtain by undertaking excessively risky investments and defaulting on deposits when investment returns are low. Our model generates multiple stationary equilibria as well as chaotic equilibria that can lead to coordination failures, making bank runs, bank defaults, and banking crises more likely. We suggest that banking regulations, including leverage limits, restrictions on bank asset portfolios,central bank credit policies, as well as restrictions on bank size and deposit rate ceilings can be instituted not only to enhance stable franchise values and sound asset porfolios, but also to eliminate multiple and complex equilibria that may result in bank insolvency and moral hazard.
We consider an overlapping generations model with environment and an elastic labor supply. In thi... more We consider an overlapping generations model with environment and an elastic labor supply. In this framework, consumers have to choose between consumption, environmental quality, and leisure. We show the existence of both deterministic cycles and indeterminacy. In contrast to previous results, the emergence of endogenous uctuations does not require a high emission rate of pollution.
We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of ... more We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual°uctuations that standard RBC models predict fairly well, but also aspects of actual°uctuations 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. Indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale.
Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic se... more Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions within an OLG structure. Our paper further shows that the existence of sentiment-driven equilibria is robust in a standard infinite-period model as long as the pricing kernel is affected by the asset price. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
where x denotes the household's income measured in units of the composite good, which consists of... more where x denotes the household's income measured in units of the composite good, which consists of profits from ownership of shares in firms. The household chooses sequences for c, m np , and a so as to maximize (48) subject to (49) and the no-Ponzi-game borrowing constraint (26), taking as given a(0) and the time paths of τ , R, x, and π. The first-order conditions associated with the household's optimization problem are (28), (29), and (31) and (26) holding with equality. Combining (28), (29), and (11) yields c = c(λ, π); c λ < 0, c π u cm ≤ 0 (50)
... Page 7. For Madeline, Michael, and Nicki Page 8. ... Feedback Between R&amp;amp;amp;D and... more ... Page 7. For Madeline, Michael, and Nicki Page 8. ... Feedback Between R&amp;amp;amp;D and Productivity Growth: A Chaos Model William J. Baumol and Edward N. Wolff 355 18. Is the Business Cycle Characterized by Deterministic Chaos? William A. Brock and Chera L. Sayers 374 19. ...
We study the dynamics of the distribution of wealth in an overlapping generation economy with fin... more We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth-of wealth inequality in particular-on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.
Once the zero bound on nominal interest rates is taken into account, Taylor-type interest-rate fe... more Once the zero bound on nominal interest rates is taken into account, Taylor-type interest-rate feedback rules give rise to unintended self-fulfilling decelerating inflation paths and aggregate fluctuations driven by arbitrary revisions in expectations. These undesirable equilibria exhibit the essential features of liquidity traps, as monetary pol- icy is ineffective in bringing about the government&amp;amp;amp;#x27;s goals regarding the stability of output
and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies. Th... more and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies. Th... more and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
We analyze how the dynamic behavior of an endogenous growth model depends on the degree of return... more We analyze how the dynamic behavior of an endogenous growth model depends on the degree of returns to scale in production. We study a simple model of inventive activity and demonstrate that the case of constant returns to the set of reproducible factors of production (the most commonly studied case in the literature on endogenous growth) is a bifurcation point in parameter space. This bifurcation occurs on the boundary of the state space, making it di¢cult to analyze formally. For a special case of the model, we provide a transformation that allows us to classify the bifurcation as transcritical using standard methods. We discuss the types of new methods that will be needed to formally classify this bifurcation in a broader class of models.
We analyze how the dynamic behavior of an endogenous growth model depends on the degree of return... more We analyze how the dynamic behavior of an endogenous growth model depends on the degree of returns to scale in production. We study a simple model of inventive activity and demonstrate that the case of constant returns to the set of reproducible factors of production (the most commonly studied case in the literature on endogenous growth) is a bifurcation point in parameter space. This bifurcation occurs on the boundary of the state space, making it di¢cult to analyze formally. For a special case of the model, we provide a transformation that allows us to classify the bifurcation as transcritical using standard methods. We discuss the types of new methods that will be needed to formally classify this bifurcation in a broader class of models.
We study a model where limited enforcement permits bank owners to shift the risk of their asset p... more We study a model where limited enforcement permits bank owners to shift the risk of their asset portfolios to the depositors. Incentive compatible equilibria require the franchise value of the bank to exceed the value that the bank owners can obtain by undertaking excessively risky investments and defaulting on deposits when investment returns are low. Our model generates multiple stationary equilibria as well as chaotic equilibria that can lead to coordination failures, making bank runs, bank defaults, and banking crises more likely. We suggest that banking regulations, including leverage limits, restrictions on bank asset portfolios,central bank credit policies, as well as restrictions on bank size and deposit rate ceilings can be instituted not only to enhance stable franchise values and sound asset porfolios, but also to eliminate multiple and complex equilibria that may result in bank insolvency and moral hazard.
We consider an overlapping generations model with environment and an elastic labor supply. In thi... more We consider an overlapping generations model with environment and an elastic labor supply. In this framework, consumers have to choose between consumption, environmental quality, and leisure. We show the existence of both deterministic cycles and indeterminacy. In contrast to previous results, the emergence of endogenous uctuations does not require a high emission rate of pollution.
We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of ... more We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual°uctuations that standard RBC models predict fairly well, but also aspects of actual°uctuations 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. Indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale.
Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic se... more Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions within an OLG structure. Our paper further shows that the existence of sentiment-driven equilibria is robust in a standard infinite-period model as long as the pricing kernel is affected by the asset price. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
where x denotes the household's income measured in units of the composite good, which consists of... more where x denotes the household's income measured in units of the composite good, which consists of profits from ownership of shares in firms. The household chooses sequences for c, m np , and a so as to maximize (48) subject to (49) and the no-Ponzi-game borrowing constraint (26), taking as given a(0) and the time paths of τ , R, x, and π. The first-order conditions associated with the household's optimization problem are (28), (29), and (31) and (26) holding with equality. Combining (28), (29), and (11) yields c = c(λ, π); c λ < 0, c π u cm ≤ 0 (50)
... Page 7. For Madeline, Michael, and Nicki Page 8. ... Feedback Between R&amp;amp;amp;D and... more ... Page 7. For Madeline, Michael, and Nicki Page 8. ... Feedback Between R&amp;amp;amp;D and Productivity Growth: A Chaos Model William J. Baumol and Edward N. Wolff 355 18. Is the Business Cycle Characterized by Deterministic Chaos? William A. Brock and Chera L. Sayers 374 19. ...
We study the dynamics of the distribution of wealth in an overlapping generation economy with fin... more We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth-of wealth inequality in particular-on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.
Once the zero bound on nominal interest rates is taken into account, Taylor-type interest-rate fe... more Once the zero bound on nominal interest rates is taken into account, Taylor-type interest-rate feedback rules give rise to unintended self-fulfilling decelerating inflation paths and aggregate fluctuations driven by arbitrary revisions in expectations. These undesirable equilibria exhibit the essential features of liquidity traps, as monetary pol- icy is ineffective in bringing about the government&amp;amp;amp;#x27;s goals regarding the stability of output
and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies. Th... more and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies. Th... more and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
We analyze how the dynamic behavior of an endogenous growth model depends on the degree of return... more We analyze how the dynamic behavior of an endogenous growth model depends on the degree of returns to scale in production. We study a simple model of inventive activity and demonstrate that the case of constant returns to the set of reproducible factors of production (the most commonly studied case in the literature on endogenous growth) is a bifurcation point in parameter space. This bifurcation occurs on the boundary of the state space, making it di¢cult to analyze formally. For a special case of the model, we provide a transformation that allows us to classify the bifurcation as transcritical using standard methods. We discuss the types of new methods that will be needed to formally classify this bifurcation in a broader class of models.
We analyze how the dynamic behavior of an endogenous growth model depends on the degree of return... more We analyze how the dynamic behavior of an endogenous growth model depends on the degree of returns to scale in production. We study a simple model of inventive activity and demonstrate that the case of constant returns to the set of reproducible factors of production (the most commonly studied case in the literature on endogenous growth) is a bifurcation point in parameter space. This bifurcation occurs on the boundary of the state space, making it di¢cult to analyze formally. For a special case of the model, we provide a transformation that allows us to classify the bifurcation as transcritical using standard methods. We discuss the types of new methods that will be needed to formally classify this bifurcation in a broader class of models.
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