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Report
Growth cycles and market crashes
Market booms are often followed by dramatic falls. To explain this requires an asymmetry in the underlying shocks. A straightforward model of technological progress generates asymmetries that are also the source of growth cycles. Assuming a representative consumer, we show that the stock market generally rises, punctuated by occasional dramatic falls. With high risk aversion, bad news causes dramatic increases in prices. Bad news does not correspond to a contraction of existing production possibilities, but to a slowdown in their rate of expansion. This economy provides a model of endogenous ...
Report
Habit persistence, asset returns and the business cycle
We introduce two modifications into the standard real business cycle model: habit persistence preferences and limitations on intersectoral factor mobility. The resulting model is consistent with the observed mean equity premium, mean risk free rate and Sharpe ratio on equity. The model does roughly as well as the standard real business cycle model with respect to standard measures. On four other dimensions its business cycle implications represent a substantial improvement. It accounts for (i) persistence in output, (ii) the observation that employment across different sectors moves together ...
Journal Article
Reconstructing the Great Recession
This article uses dynamic equilibrium input-output models to evaluate the contribution of the construction sector to the Great Recession and the expansion preceeding it. Through production interlinkages and demand complementarities, shifts in housing demand can propagate to other economic sectors and generate a large and sustained aggregate cycle.
Report
Perfectly competitive innovation
We construct a competitive model of innovation and growth under constant returns to scale. Previous models of growth under constant returns cannot model technological innovation. Current models of endogenous innovation rely on the interplay between increasing returns and monopolistic markets. In fact, established wisdom claims monopoly power to be instrumental for innovation and sees the nonrivalrous nature of ideas as a natural conduit to increasing returns. The results here challenge the positive description of previous models and the normative conclusion that monopoly through copyright and ...
Journal Article
What happened to the U.S. stock market? accounting for the past 50 years
The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that in the long run the market reverts to well-established fundamentals. The authors' research suggests this belief should be questioned. First, they show actual dividends cannot account for the secular trends of stock market values. They then consider a more comprehensive measure of capital income, which displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, ...
Working Paper
Asset pricing lessons for modeling business cycles
Working Paper
The case against patents
The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity. There is strong evidence, instead, that patents have many negative consequences.
Report
IER Lawrence Klein Lecture: the case against intellectual monopoly
In the modern theory of growth, monopoly plays a crucial role both as a cause and an effect of innovation. Innovative firms, it is argued, would have insufficient incentive to innovate should the prospect of monopoly power not be present. This theme of monopoly runs throughout the theory of growth, international trade, and industrial organization. We argue that monopoly is neither needed for, nor a necessary consequence of, innovation. In particular, intellectual property is not necessary for, and may hurt more than help, innovation and growth. We argue that, as a practical matter, it is more ...
Report
Factor saving innovation
We study a simple model of factor saving technological innovation in a concave framework. Capital can be used either to reproduce itself or, at additional cost, to produce a higher quality of capital that requires less labor input. If higher quality capital can be produced quickly, we get a model of exogenous balanced growth as a special case. If, however, higher quality capital can be produced slowly, we get a model of endogenous growth in which the growth rate of the economy and the rate of adoption of new technologies are determined by preferences, technology, and initial conditions. ...
Working Paper
What happened to the US stock market? Accounting for the last 50 years
The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that, in the long run, the market reverts to well understood fundamentals. Our work suggests this belief should be questioned as well. First, we show actual dividends cannot account for the secular trends of stock market values. We then consider a more comprehensive measure of capital income. This measure displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, ...