Topics in dynamic macroeconomic theory: on the causes and consequences of income growth and uncertainty

The thesis presents several theoretical models on the causes and consequences of income growth and uncertainty.Part I deals with international trade as a major source of aggregate productivity. It presents the Melitz (2003) model and develops an integrated model of intra-industry trade and endogenous growth. It also contains an explicit solution to the Melitz (2003) model, in the special case where firms' productivities are drawn from a Pareto distribution.Part II highlights profit-driven innovations as an important determinant of income growth. It reviews the canonical Grossman-Helpman (1991, ch. 3) increasing variety endogenous growth model and highlights its welfare properties. The subsequent chapter departs with perfect patent protection and examines the impact of imitation and product market competition on growth and welfare. It is shown that a "no-growth trap" exists in economies with a sufficiently low resource endowment, such that, in these cases, too much initial competition leads to stagnation in the long-run. It is also shown that monopoly pricing generates price distortions that are sufficiently large to offset the benefits of growth in economies with small growth rates. The decentral allocation may thus be characterized by too much growth. The "no-growth trap" in the autarky version of the model may also be an equilibrium in the open economy variant of the model, where countries engage in international trade with each other.Part III of the thesis turns to the consequences of income uncertainty. A first chapter shows how utility maximizing individuals behave optimally when they move back and forth between employment and unemployment, so that their labor income fluctuates stochastically due to job separation and matching at the labor market. This baseline model of matching and saving explains the existence of threshold values in the individuals' asset holdings that imply qualitatively different optimal behavior of "rich" individuals (i.e. individuals with asset holdings larger than the threshold) and poor" individuals (i.e. individuals with asset holdings lower than the threshold). It is further shown how an individual's wealth affects her decision to accept job offers when the corresponding wages are drawn from a distribution. After presenting the Shimer and Werning (2008) model, which argues for constant benefits across the unemployment spell if individuals have access to the capital market, this framework is used to prove that the presence of borrowing constraints is sufficient for an individual's reservation wage to increase in her asset holdings. The final chapter shows how the optimal amount of saving is affected by the degree of risk aversion and prudence of the underlying utility function. Since there exists no systematic relationship between risk aversion and prudence for general utility functions, this chapter contributes substantially to the theory of optimal saving under uncertainty. It is proven that a simultaneous increase in risk aversion and prudence is often not sufficient for an increase in savings. Depending on the relative size of the subjective discount rate and the interest rate, an increase in savings requires a higher degree of prudence and a lower degree of risk aversion. These results have important implications for questions of intergenerational distribution, which play a key role in, e.g., the ongoing debate on global warming. A thorough introduction and references to the most important papers in the field eliminates prerequisites as far as possible and relates the models in each chapter to the literature.