Most macroeconomic models assume that aggregate output is generated by a specification for the production function with total physical capital as a key input. Implicitly this assumes that private and public capital stocks are perfect substitutes. In this paper we test this assumption by...

It has been shown that under perfect competition and a Cobb-Douglas production function, a basic real business cycle model may exhibit indeterminacy and sunspot fluctuations when income tax rates are determined by a balanced-budget rule. This paper introduces in an otherwise standard real...

In most macroeconomic models, the substitutability between domestic and foreign goods is calibrated using aggregated data. This imposes homogeneous elasticities across goods, and the calibration is only valid under this assumption. If elasticities are heterogeneous, the aggregate...

The real effective exchange rate is an aggregation of several bilateral real exchange rates with respect to other countries. The aggregation is usually done under the assumption of constant elasticity of substitution (CES) between products from different countries. We investigate the validity of...

Effective public investment requires governments to address the "recurrent cost problem" to ensure operations and maintenance (O&M) expenditures are sufficient to sustain the flow of productive public capital services to private factors of production. Building on the model of Buffie et al...

We create a network of bilateral correlations of changes in sovereign bond yields and individual bank equity price changes since 2000. We extract some stylized facts from this network of asset price correlations and document the clear differences in asset price correlations between safe havens...

We consider a moral hazard economy in banks and production to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium may not be optimal and...

The paper examines the joint impact of inflation targeting (IT) and fiscal rules (FR) on fiscal behavior and inflation in a broad panel of advanced and developing economies over the period 1990-2009. The main contribution of the paper is to show that, as suggested by the theoretical literature,...