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Series:Staff Report  Bank:Federal Reserve Bank of Minneapolis 

Aggregate implications of innovation policy
In this paper we present a tractable model of innovating firms and the aggregate economy that we use to assess quantitatively the link between the responses of firms to changes in innovation policy and the impact of those policy changes on aggregate output and welfare. We show that, to a first-order approximation, a wide range of policy changes have a long-run impact in direct proportion to the fiscal expenditures on those policies, and that to evaluate the aggregate impact of a policy change, there is no need to calculate changes in firms' decisions in response to these policy changes. ; We use these results to compare the relative magnitudes of the impact on aggregates in the long run of three innovation policies in the United States: the Research and Experimentation Tax Credit, federal expenditure on R&D, and the corporate profits tax. We argue that the corporate profits tax is a relatively important policy through its negative effects on innovation and physical capital accumulation. We also use a calibrated version of our model to examine the absolute magnitude of the impact of these policies on aggregates. We show that, depending on the magnitude of spillovers, it is possible for changes in innovation policies to have very large impact on aggregates in the long run. However, over a 15-year horizon, the impact of changes in innovation policies on aggregate output is not very sensitive to the magnitude of spillovers. ; On the basis of these results we conclude that, while it is possible to make comparisons about the relative importance of different policies and sharp predictions about their aggregate impact in the medium term, it is very difficult to shed much light on the implications of innovation policies for long-run aggregate outcomes and welfare in the absence of direct quantitative evidence on the magnitude of spillovers.
AUTHORS: Atkeson, Andrew; Burstein, Ariel
DATE: 2011

Gambling for redemption and self-fulfilling debt crises
We develop a model for analyzing the sovereign debt crises of 2010?2012 in the Eurozone. The government sets its expenditure-debt policy optimally. The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal revenues, the government may optimally choose to ?gamble for redemption,? running deficits and increasing its debt, thereby increasing its vulnerability to crises.
AUTHORS: Kehoe, Timothy J.; Conesa, Juan Carlos
DATE: 2012

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 patent is socially beneficial.
AUTHORS: Levine, David K.; Boldrin, Michele
DATE: 2002

Why are married women working so much?
We study the large observed changes in labor supply by married women in the United States over 1950-1990, a period when labor supply by single women has hardly changed at all. We investigate the effects of changes in the gender wage gap, technological improvements in the production of nonmarket goods and potential inferiority of these goods on understanding this change. We find that small decreases in the gender wage gap can explain simultaneously the significant increases in the average hours worked by married women and the relative constancy in the hours worked by single women, and single and married men. We also find that technological improvements in the household have-for realistic values-too small an impact on married female hours and the relative wage of females to males. Some specifications of the inferiority of home goods match the hours patterns, but have counterfactual predictions for wages and expenditure patterns.
AUTHORS: Manuelli, Rodolfo E.; McGrattan, Ellen R.; Jones, Larry E.
DATE: 2003

Heterogeneity in expected longevities
We develop a new methodology to compute differences in the expected longevity of individuals who are in different socioeconomic groups at age 50. We deal with two main problems associated with the standard use of life expectancy: that people?s socioeconomic characteristics evolve over time and that there is a time trend that reduces mortality over time. Using HRS data for individuals from different cohorts, we estimate a hazard model for survival with time-varying stochastic endogenous covariates that yields the desired expected durations. We uncover an enormous amount of heterogeneity in expected longevities between individuals in different socioeconomic groups, albeit less than implied by a naive (static) use of socioeconomic characteristics. Our analysis allows us to decompose the longevity differentials into differences in health at age 50, differences in mortality conditional on health, and differences in the evolution of health with age. Remarkably, it is the latter that is the most important for most socioeconomic characteristics. For instance, education and wealth are health protecting but have little impact on two-year mortality rates conditional on health. Finally, we document an increasing time trend of all these differentials in the period 1992?2008, and a likely increase in the socioeconomic gradient in mortality rates in the near future. The mortality differences that we find have huge welfare implications that dwarf the differences in consumption accruing to people in different socioeconomic groups.
AUTHORS: Pijoan-Mas, Josep; Rios-Rull, Jose-Victor
DATE: 2012

The permanent income hypothesis revisited
Measured aggregate U.S. consumption does not behave like a martingale. This paper develops and tests two variants of the permanent income model that are consistent with this fact. In both variants, we assume agents make decisions on a continuous time basis. According to the first variant, the martingale hypothesis holds in continuous time and serial persistence in measured consumption reflects only the effects of time aggregation. We investigate this variant using both structural and atheoretical econometric models. The evidence against these models is far from overwhelming. This suggests that the martingale hypothesis may yet be a useful way to conceptualize the relationship between aggregate quarterly U.S. consumption and income. According to the second variant of the permanent income model, serial persistence in measured consumption reflects the effects of exogenous technology shocks and time aggression. In this model, continuous time consumption does not behave like a martingale. We find little evidence against this variance of the permanent income model. It is difficult, on the basis of aggregate quarterly U.S. data, to convincingly distinguish between the different continuous time models considered in the paper.
AUTHORS: Christiano, Lawrence J.; Eichenbaum, Martin; Marshall, David A.
DATE: 1990

A method for estimating the timing interval in a linear econometric model, with an application to Taylor's model of staggered contracts
This paper describes and implements a procedure for estimating the timing interval in any linear econometric model. The procedure is applied to Taylor?s model of staggered contracts using annual averaged price and output data. The fit of the version of Taylor?s model with serially uncorrelated disturbances improves as the timing interval of the model is reduced.
AUTHORS: Christiano, Lawrence J.
DATE: 1985

Time consistency and policy
AUTHORS: Prescott, Edward C.; Kehoe, Patrick J.; Chari, V. V.
DATE: 1988

Systematically missing data in econometric models
AUTHORS: Skoog, Gary R.
DATE: 1976

Appendix for How Exporters Grow
No abstract
AUTHORS: Yedid-Levi, Yaniv; Fitzgerald, Doireann; Haller, Stephanie
DATE: 2017-01-24




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