American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article Front Matter i ii http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.i 10.1257/mac.2.3.i American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article Amplification Mechanisms in Liquidity Crises ArvindKrishnamurthyNorthwestern U 1 30 I describe two amplifications mechanisms that operate during crises and discuss the benefits of policy given each mechanism. The first mechanism involves asset prices and balance sheets. A negative shock to agents' balance sheets causes them to liquidate assets, lowering prices, further deteriorating balance sheets and amplifying the shock. The second mechanism involves investors' Knightian uncertainty. Unusual shocks to untested financial innovations increase agents' uncertainty about their investments, causing them to disengage from markets and amplifying the crisis. Liquidity provision by the central bank alleviates the crisis in both mechanisms. Ex ante policies such as liquidity/capital requirements may also be beneficial. (JEL E32, E44, G01, G21, G32) http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.1 10.1257/mac.2.3.1 American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article The Effect of Corporate Taxes on Investment and Entrepreneurship SimeonDjankovWorld Bank TimGanserHarvard U CaraleeMcLieshWorld Bank RitaRamalhoWorld Bank AndreiShleiferHarvard U 31 64 We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on "the same" standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. Corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy. The results are robust to the inclusion of many controls. (JEL E22, F23, G31, H25, H32, L26) http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.31 10.1257/mac.2.3.31 http://www.aeaweb.org/aej/mac/data/2008-0004_data.zip http://www.aeaweb.org/aej/mac/app/2008-0004_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article Was the Wealth of Nations Determined in 1000 BC? DiegoCominHarvard U WilliamEasterlyNYU ErickGongU CA, Berkeley 65 97 We assemble a dataset on technology adoption in 1000 bc, 0 ad, and 1500 AD for the predecessors to today's nation states. Technological differences are surprisingly persistent over long periods of time. Our most interesting, strong, and robust results are for the association of 1500 AD technology with per capita income and technology adoption today. We also find robust and significant technological persistence from 1000 BC to 0 AD, and from 0 AD to 1500 AD. The evidence is consistent with a model where the cost of adopting new technologies declines sufficiently with the current level of adoption. (JEL N10, O33, O47) http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.65 10.1257/mac.2.3.65 http://www.aeaweb.org/aej/mac/data/2008-0131_data.zip http://www.aeaweb.org/aej/mac/app/2008-0131_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article Labor Contracts, Equal Treatment, and Wage-Unemployment Dynamics AndySnellU Edinburgh Jonathan P.ThomasU Edinburgh 98 127 This paper analyses a model in which firms cannot pay discriminate based on year of entry. It is assumed that workers can costlessly quit at any time, while firms are committed to contracts. We solve for the dynamics of wages and unemployment, and show that real wages display a degree of downward rigidity and do not necessarily clear the labor market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match the actual unemployment series. We also show that equal treatment follows from the assumption of at-will employment contracting in our model. (JEL E24, E32, J31, J41) http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.98 10.1257/mac.2.3.98 http://www.aeaweb.org/aej/mac/data/2008-0021_data.zip American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article Relative Goods' Prices, Pure Inflation, and the Phillips Correlation RicardoReisColumbia U Mark W.WatsonPrinceton U 128 57 This paper uses a dynamic factor model for the quarterly changes in consumption goods' prices in the United States since 1959 to separate them into three independent components: idiosyncratic relative-price changes, a low-dimensional index of aggregate relative-price changes, and an index of equiproportional changes in all inflation rates that we label "pure" inflation. We use the estimates to answer two questions. First, what share of the variability of inflation is associated with each component, and how are they related to conventional measures of monetary policy and relative-price shocks? Second, what drives the Phillips correlation between inflation and measures of real activity? (JEL E21, E23, E31, E52) http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.128 10.1257/mac.2.3.128 http://www.aeaweb.org/aej/mac/data/2009-0013_data.zip http://www.aeaweb.org/aej/mac/app/2008-0016_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article Financiers versus Engineers: Should the Financial Sector Be Taxed or Subsidized? ThomasPhilipponNYU 158 82 I study the allocation of human capital in an economy with production externalities, financial constraints, and career choices. Agents choose to become entrepreneurs, workers, or financiers. Entrepreneurship has positive externalities but requires the services of financiers. In the second best solution, the financial sector should be taxed in exactly the same way as the nonfinancial sector. When direct subsidies to investment and scientific education are not feasible, subsidizing the financial sector increases growth if externalities are driven by physical capital as in Paul M. Romer (1986), and decreases growth if externalities are driven by human capital as in Robert E. Lucas, Jr. (1988). (JEL E44, H21, H25, L26, O41) http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.158 10.1257/mac.2.3.158 http://www.aeaweb.org/aej/mac/data/2008-0022_data.zip American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article Do Expectations Matter? The Great Moderation Revisited FabioCanovaU Pompeu Fabra and U Autonoma de Barcelona LucaGambettiU Pompeu Fabra and U Autonoma de Barcelona 183 205 We examine the role of expectations in the Great Moderation episode. We derive theoretical restrictions in a New-Keynesian model and test them using measures of expectations obtained from survey data, the Greenbook and bond markets. Expectations explain the dynamics of inflation and interest rates but their importance is roughly unchanged over time. Systems with and without expectations display similar reduced form characteristics. Results are robust to changes in the structure of the empirical model. (JEL E23, E24, E31, E32) http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.183 10.1257/mac.2.3.183 http://www.aeaweb.org/aej/mac/data/2009-0051_data.zip http://www.aeaweb.org/aej/mac/app/2009-0051_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article Confucianism and the East Asian Miracle Ming-YihLiangNational Taiwan U 206 34 We examine two behavioral traits essential to Confucianism, and put forward hypotheses as to whether these behavioral traits impede or are conducive to "leading" or "follower" mode growth. A dynamic leader-follower general equilibrium model with appropriately specified "Confucian" parameters is shown to generate results that correspond to some of the main features of East Asian economies: their miracle growths, subsequent slowdowns, trade surpluses, and persistent accumulations of foreign exchange reserves. We calibrate the model to assess the quantitative importance of these cultural effects and examine their implications for future evolution of these economies. (JEL E23, O17, O41, O47, P24, Z12, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.206 10.1257/mac.2.3.206 http://www.aeaweb.org/aej/mac/data/2007-0015_data.zip http://www.aeaweb.org/aej/mac/app/2007-0015_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 2 3 July 2010 http://www.aeaweb.org/issue.php?journal=MAC&volume=2&issue=3 Journal Article Central Bank Communication and Expectations Stabilization StefanoEusepiFederal Reserve Bank of New York BrucePrestonColumbia U and Centre of Applied Macroeconomic Analysis, Australian National U 235 71 The value of communication is analyzed in a model in which agents' expectations need not be consistent with central bank policy. Without communication, the Taylor principle is not sufficient for macroeconomic stability: divergent learning dynamics are possible. Three communication strategies are contemplated to ensure consistency between private forecasts and monetary policy strategy: communicating the precise details of policy; communicating only the variables on which policy decisions are conditioned; and communicating the inflation target. The former strategies restore the Taylor principle as a sufficient condition for anchoring expectations. The latter strategy, in general, fails to protect against expectations-driven fluctuations. (JEL E32, E43, E52, E58) http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.235 10.1257/mac.2.3.235 http://www.aeaweb.org/aej/mac/app/2008-0124_app.pdf