The balance of payments and borrowing constraints: an alternative view of the Mexican crisis
In this paper we develop a model in which a country faces a balance of payments crisis if constraints on its international borrowing bind. We use the model to describe the dynamics of the trade balance, capital account, and balance of payments of a country that borrows to finance consumption following sweeping macroeconomic and structural reforms and then hits constraints on its international borrowing. We compare the predictions of this theoretical example with events in Mexico from 1987 through 1995.
Optimal Age-Based Vaccination and Economic Mitigation Policies for the Second Phase of the COVID-19 Pandemic
In this paper we ask how to best allocate a given time-varying supply of vaccines during the second phase of the Covid-19 pandemic across individuals of different ages. Building on the heterogeneous household model of optimal economic mitigation and redistribution developed by Glover et al. (2021), we contrast the actual vaccine deployment path that prioritized older individuals with one that first vaccinates younger workers. Vaccinating older adults first saves more lives but slows the economic recovery relative to inoculating younger adults first. Vaccines carry large welfare benefits in ...
Health versus Wealth: On the Distributional Effects of Controlling a Pandemic
To slow the spread of COVID-19, many countries are shutting down nonessential sectors of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have the most to lose. In this paper, we build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young and retired), by sector (basic and luxury), and by health status. Disease transmission occurs in the workplace, in consumption activities, at home, and in hospitals. We study the optimal economic mitigation policy of a ...
Understanding the U.S. distribution of wealth
This article describes the current state of economic theory intended to explain the unequal distribution of wealth among U.S. households. The models reviewed are heterogeneous agent versions of standard neoclassical growth models with uninsurable idiosyncratic shocks to earnings. The models endogenously generate differences in asset holdings as a result of the household's desire to smooth consumption while earnings fluctuate. Both of the dominant types of models--dynastic and life cycle models--reproduce the U.S. wealth distribution poorly. The article describes several features recently ...
Marital risk and capital accumulation
Between the sixties and the late eighties the percentages of low-saving single-parent households and people living alone have grown dramatically at the expense of high-saving married households, while the household saving rate has declined equally dramatically. A preliminary analysis of population composition and savings by household type seems to indicate that about half of the decline in savings is due to demographic change. We construct a model with agents changing marital status, but where the saving behavior of the households can adjust to the properties of the demographic process. We ...
Capital-skill complementarity and inequality: a macroeconomic analysis
The notion of skilled-biased technological change is often held responsible for the recent behavior of the U.S. skill premium, or the ratio between the wages of skilled and unskilled labor. This paper develops a framework for understanding this notion in terms of observable variables and uses the framework to evaluate the fraction of the skill premium's variation that is caused by changes in observables. A version of the neoclassical growth model is used in which the key feature of aggregate technology is capital-skill complementarity: the elasticity of substitution is higher between capital ...
Engineering a paradox of thrift recession
We build a variation of the neoclassical growth model in which financial shocks to households or wealth shocks (in the sense of wealth destruction) generate recessions. Two standard ingredients that are necessary are (1) the existence of adjustment costs that make the expansion of the tradable goods sector difficult and (2) the existence of some frictions in the labor market that prevent enormous reductions in real wages (Nash bargaining in Mortensen-Pissarides labor markets is enough). We pose a new ingredient that greatly magnifies the recession: a reduction in consumption expenditures ...
Realistic neoclassical multiplier
Standard neoclassical models are unable to generate large values for the fiscal multiplier, the aggregate economic response to increased government spending. Empirical estimates place the multiplier between 0.7 and 1.0. Standard models deliver figures close to zero. In an earlier policy paper, we modified the standard model, with features of demand-based productivity. These modifications raised the figure to just 0.17, still very far from the range found in the empirical literature.
Methods versus substance: measuring the effects of technology shocks on hours
In this paper, we employ both calibration and modern (Bayesian) estimation methods to assess the role of neutral and investment-specific technology shocks in generating fluctuations in hours. Using a neoclassical stochastic growth model, we show how answers are shaped by the identification strategies and not by the statistical approaches. The crucial parameter is the labor supply elasticity. Both a calibration procedure that uses modern assessments of the Frisch elasticity and the estimation procedures result in technology shocks accounting for 2% to 9% of the variation in hours worked in the ...
Unemployment spells and income distribution dynamics