Dr Antoine Le Riche

This paper analyzes the interaction between monetary policy rule and distortionary balanced-budget tax policy rules on the stability properties of a one-sector Ramsey economy. The demand of money is motivated by a fractional cash-in-advance constraint on consumption expenditures. The monetary authority pegs the money growth factor while the fiscal authority uses a distortionary income tax or a distortionary consumption tax to balances its budget. Without or with distortionary taxes, we find a unique steady state and characterize its stability. The local stability of the unique steady state, when without distortionary taxes, depends on the interplay between the share of the liquidity constraint and the intertemporal elasticity of substitution of consumption. Regardless of the distortionary tax’s implementation, we demonstrate that the introduction of a balanced-budget rule, could promote or reduce self-fulfilling expectations, which depends on the amplitude of the liquidity constraint and the slope of the tax schedule. Monetary variables tend to reduce the likelihood of local indeterminacy while fiscal instruments tend to increase it when the slope of the tax schedule is positive. Finally, based on plausible empirical values, we present a simple numerical example considering countercyclical tax rates and show that, for both income and consumption tax rates, the introduction of balanced-budget fiscal rules could be stabilizing.

We introduce taste for variety in a one-sector model of differentiated products with productive labor externalities, considering two OLG countries, one with wage rigidity and the other with full employment. After opening the borders to capital mobility and intra-industry trade, steady state output and real wages improve in the full employment country and the saddle path stability, characterizing this country under autarky, will prevail in the globalized world if this economy is big enough. Unemployment increases in the country with wage rigidity and, for intermediate plausible values of both the current propensity to consume and of the labor externality, indeterminacy, which emerges in the rigid wage economy in autarky, will be exported to the world if this country is relatively big. Finally, we show that globalization leads to the appearance of stable deterministic cycles in activity, employment and the trade account, both through flip and Hopf bifurcations, when the world steady state is locally determinate, for empirically plausible low degrees of labor externalities. This implies that trade cycles occur in the absence of shocks to fundamentals, and even without uncertainty in expectations.

We analyze sunspot-driven fluctuations in a standard neoclassical growth model with money holdings and public spending. In our economy, money is needed for transaction purpose, while public spending is financed through a flat income tax. Public spending includes an incompressible component and a variable part, and the latter exerts positive externalities on private utility or production. Our theoretical results show that the composition of public spending and externalities have important effects on local stability properties. First, in the absence of externalities, there is a unique steady state, and local indeterminacy depends on the interplay between the share of the cash-in-advance constraint and the intertemporal elasticity of substitution of consumption. Second, in the presence of externalities, multiple equilibria might emerge under weak enough production externality, while uniqueness of the steady state prevails under strong production or under consumption externality. We further show that weak production/consumption externality or strong consumption externality could generate local (in)determinacy of the steady state depending on the share of the cash-in-advance constraint while strong production externality generates local determinacy of the steady state. Finally, based on numerical examples, we show that an increase in the variable public spending and the income tax rate exert a local stabilizing effect while externalities promote locally the likelihood of local indeterminacy.

This paper analyzes the impact of trade on the stability properties of trading countries and on stationary welfare. We consider a two-country two-good two-factor overlapping generations model where countries differ in terms of their technology. In the autarky equilibrium and the free-trade equilibrium, indeterminacy relies, under dynamic efficiency, on a capital intensive consumption good and intermediate values of the elasticity of intertemporal substitution in consumption. Opening the borders to trade can be a source of a global destabilizing effect. Indeed, considering a free-trade equilibrium in which one country is an exporter of the consumption good and the other country is an exporter of the investment good, indeterminacy can occur with trade even though the two countries are determinate in autarky. Finally, opening to trade increases the stationary welfare of the country that exports the investment good and deteriorates the one of the other country.

We introduce Bayesian learning and technology selection into a two-sector endogenous growth model with physical and human capital and study their impact on steady state welfare and stability properties. We show that there are two balanced growth paths that are locally determinate: one corresponding to the good new technology selection, the other sticking to the old technology selection. The equilibrium selection is driven by Bayesian learning and the true quality of the new technology could remain unlearned with a positive probability. We establish that, at steady state, the rate of achieving a high Total Factor Productivity (TFP) in the good new technology has a positive impact on the growth rate of the economy, the GDP and the physical to human capital ratio.

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This paper analyzes the impact of the interaction between monetary policy and fiscal policy on the stability of an one-sector AK economy. The monetary authority pegs the money growth factor while the fiscal authority implements a progressive consumption tax. The demand of money is motivated by a fractional liquidity constraint on consumption expenditures. When only the monetary authority operates, the unique steady state is locally indeterminate if the intertemporal elasticity of substitution in consumption is low enough. When the fiscal authority is introduced, the interaction of fiscal policy and monetary policy modifies significantly the stability properties. In particular, the fiscal authority could either stabilize or destabilize the economy depending on the tax progressivity, the strength of the liquidity constraint and the intertemporal elasticity of substitution. Our numerical examples further verify those theoretical results.

Reports of the literature documenting the declining labor share of income have increased greatly in the past few years, which is opposed to one of the famous “Kaldor's stylized facts” of growth. The declining labor income share has been observed since the 1980s in a number of countries, and especially in the United States. Recent studies have revealed the following five major driving forces of the declining labor share: (i) supercycles and boom-busts, (ii) rising and faster depreciation, (iii) superstar effects and consolidation, (iv) capital substitution and automation, and (v) globalization and labor bargaining power. We set up a two-sector optimal growth model with the R&D intermediate sectors producing intangible capital. By integrating driving factors (ii) through (iv) above into the model, we demonstrate the long-run decline of the aggregated labor income share.

We study the balanced growth paths and their stability features of a monetary two-sector endogenous growth model with physical capital and human capital accumulation. The demand of money is motivated on the ground of a fractional cash-in-advance constraint on consumption expenditures and on those in the investment in physical capital. We consider, in sequence, two monetary rules implemented by the Central Bank. First, we assume that the latter pegs the money growth rate and then the nominal interest rate according to a Taylor feedback rule. When the Central Bank pegs the money growth rate, there emerges a unique balanced growth path which turns out to be indeterminate for a low amplitude of the liquidity constraint and/or for a low enough intertemporal elasticity of substitution in consumption even under the hypothesis that the cash-in-advance constraint applies uniquely on consumption expenditures. On the other hand, when the monetary policy is implemented according to a Taylor feedback rule, an unintended liquidity trap equilibrium may coexist with multiple interior Taylor equilibria. If, on the one hand, the liquidity trap equilibrium is bound to be locally determinate; on the other hand, the Taylor interior equilibrium may become locally indeterminate provided the cash-in-advance constraint applies also on the investment in physical capital good and under a physical capital intensive human capital good. A global analysis is performed in which we show that the Taylor equilibrium and the liquidity trap one are connected through a heteroclinic orbit.

This paper analyzes the effect of free-trade integration on the dynamical properties of economies. We formulate a two-country, two-good, two-factor overlapping generations model where countries only differ with respect to their discount rate. The main contribution of this paper is to show that opening up to international trade may have a destabilizing effect. In particular, we prove that, under perfect mobility of labor and capital between countries, sunspot cycles can occur in the trade regime although one country is characterized by saddle-point stability in the autarky regime.

We study a productive economy with fractional cash-in-advance constraint on consumption expenditures. Government issues safe bonds and levies taxes to finance public expenditures, while the Central Bank follows a feedback Taylor rules by pegging the nominal interest rate. We show that when the nominal interest rate is bound to be non-negative, under active policy rules a Liquidity Trap steady state does emerge besides the Leeper (1991) equilibrium. The stability of the two steady states depends, in turn, upon the amplitude of the liquidity constraint. When the share of consumption to be paid cash is set lower than one half, the Liquidity Trap equilibrium is indeterminate. The stability of the Leeper equilibrium too depends dramatically upon the amplitude of the liquidity constraint: for low amplitudes of the latter, the Leeper equilibrium can be indeed stable. Policy and Taylor rules are thus theoretically rehabilitated since their targets, by contrast with a vast literature, may be reached for infinitely many agents’ beliefs. We also show that a relaxation of the liquidity constraint is Pareto-improving and that the Liquidity Trap equilibrium Pareto-dominates the Leeper one, in view of the zero cost of money.

We study an infinite horizon economy with a representative agent whose utility function includes consumption, real balances and leisure. Real balances enter the utility function pre-multiplied by a parameter reflecting the inverse of the degree of financial market imperfection, i.e. the inverse of the transaction costs justifying a positively valued fiat money. Indeterminacy arises both through a transcritical and a flip bifurcation: somewhat paradoxically, the amplitude of the indeterminacy region improves as soon as the degree of market imperfection is set lower and lower. Such results are robust with respect to the choice for the elasticity of the labor supply, both when the latter is set close to zero and to infinite. We also provide conditions for the existence, uniqueness and multiplicity of the steady states and finally, we asses the impact of the degree of market imperfection on the occurrence of such phenomena