1. Bhattacharya, J., M. Guzman., E. Huybens., and B. Smith, "Monetary, Fiscal, and Reserve Requirement Policy in a Simple Monetary Growth Model," International Economic Review, 38 (1997): 321-350.
We consider an otherwise conventional monetary growth model in which spatial separation and limited communication create a transactions role for currency and stochastic relocation gives rise to financial intermediaries. In this framework we consider how changes in fiscal and monetary policy, and in reserve requirements, affect inflation, capital formation, and nominal interest rates. There is also considerable scope for multiple equilibria; we show how reserve requirements that never bind along actual equilibrium paths can play an important role in avoiding undesirable equilibria. Finally, we demonstrate that changes in (apparently) nonbinding reserve requirements can have significant real effects.
2. Bona, J., and M. Santos, "On the Role of Computation in Economic Theory,"Journal of Economic Theory, 72 (1997): 241-281.
This essay is concerned with computation as a tool for the analysis of mathematical models in economics. It is our contention that the use of high-performance computers is likely to play the substantial role in providing understanding of economic models that it does with regard to models in the physical and biological sciences. The main thrust of our commentary is that numerical simulations of mathematical models are in certain respects like experiments performed in a laboratory, and that this view imposes conditions on the way they are carried out and reported. JEL Classification: 63, C68.
3. Huggett, M., "The One-Sector Growth Model with Idiosyncratic Shocks: Steady States and Dynamics," Journal of Monetary Economics, 39 (1997): 385-403.
This paper investigates the one-sector growth model where agents receive idiosyncratic labor endowment shocks and face a borrowing constraint. It is shown that any steady-state capital stock lies strictly above the steady state in the model without idiosyncratic shocks. In addition, the capital stock increases monotonically when it is sufficiently far below a steady state. However, near a steady state there can be non-monotonic economic dynamics. JEL Classification: E13, 041.
4. Ladrón de Guevara, A., S. Ortigueira., and M. Santos, "Equilibrium Dynamics in Two-Sector Models of Endogenous Growth,"Journal of Economic Dynamics and Control, 21 (1997): 115-145.
This paper considers two extensions of the Uzawa - Lucas framework. In our first extension, physical capital is included as an input of the educational sector. In our second extension, leisure considerations are assumed to play a positive role in agents' welfare. The case with physical capital in the production of education features (under standard conditions) a unique steady state, and thus the dynamics are qualitatively similar to those of the original Uzawa-Lucas framework. In our second model with leisure there could be a multiplicity of steady states with different rates of growth. What determines here the chosen rate of growth is the initial relative amount of physical and human capital. Our results therefore illustrate that in a world without externalities there could coexist different long-term growth rates. JEL Classification: D51, D91, O41.
5. Ortigueira, S., and M. Santos, "On the Speed of Convergence in Endogenous Growth Models,"American Economic Review,87 (1997): 383-399.
In this paper we analyze the speed of convergence to a balanced path in a class of endogenous growth models with physical and human capital. We show that such rate depends locally on the technological parameters of the model, but does not depend on preferences parameters. This result stands in sharp contrast with that of the one-sector neoclassical growth model, where both preferences and technologies determine the speed of convergence to a steady-state growth path. JEL Classification: E13, J24, O41.
6. Santos, M., and M. Woodford, "Rational Asset Pricing Bubbles," Econometrica, 65 (1997): 19-57.
We analyze an election in which voters are uncertain about which of two alternatives is better for them. Voters can acquire some costly information about the alternatives. In agreement with Downs's rational ignorance hypothesis, as the number of voters increases, individual investment in political information declines to zero. However, if the marginal cost of information acquisition approaches zero as the information acquired becomes nearly irrelevant, there is a sequence of equilibria such that the election outcome is likely to correspond to the interests of the majority. Under certain conditions, the election outcome corresponds to the interests of the majority with probability approaching one. Thus, "rationally ignorant" voters are consistent with a well-informed electorate.
7. Sundaresan, S., and F. Zapatero, "Valuation, Optimal Asset Allocation and Retirement Incentives of Pension Plans," Review of Financial Studies, 10 (1997): 631-660.
We provide a framework in which we link the valuation and asset allocation policies of defined benefits plans with the lifetime marginal productivity schedule of the worker and the pension plan formula. In turn, we examine the retirement policies that are implied by the primitives of the model and the value of pension obligations. Our model provides an explicit valuation formula for a stylized defined benefits plan. The optimal asset allocation policies consists of the replicating portfolio of the pension liabilities and the growth optimum portfolio independent of the pension liabilities. We show that the worker will retire when the ratio of pension benefits to current wages reaches a critical value which depends on the parameters of the pension plan and the discount rate. Using numerical techniques we analyze the feedback effect of retirement policies on the valuation of plans and on the asset allocation decisions.