Pietro Reichlin

Equilibrium cycles in an overlapping generations economy with production

Abstract Perfect foresight equilibrium trajectories of an overlapping generations model with production may include stable or unstable invariant closed curves. These orbits are detected using the Hopf bifurcation theorem, where the parameter of bifurcation is purely technological. The paper also proves that there is a stabilization policy that completely eliminates the cycle. Finally, using a C.E.S. production function, it is shown that the range of values of the elasticity of substitution between capital and labor for which cycles may exist is bounded above.

Increasing returns and crowding out

Abstract This paper explores how public debt interferes with the accumulation of physical capital when the technology displays a production externality of the Arrow-Romer type. We identify conditions under which a small positive amount of debt will prevent the economy from ever approaching the stock of capital that it would achieve if public debt were zero. We also show that the interaction of debt and production externalities may produce bounded (possibly cycling) capital stock sequences in economies where sustained growth rates are possible with zero national debt. Finally, welfare issues concerning the relation between static and dynamic inefficiencies are discussed.

Asset Prices, Debt Constraints and Inefficiency

In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained inefficiency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass (1972)) completely characterizes constrained inefficiency. This criterion involves only observable prices and requires low interest rates in the long-run, exactly as in economies with overlapping generations. In addition, when quantitative limits to liabilities arise from participation constraints, a feasible welfare improvement, subject to participation, coincides with the introduced notion of constrained inefficiency.

Endogenous Cycles in Competitive Models: An Overview

It is a common assertion that, in a world with perfect markets and rational expectations, endogenous cycles could only arise under very unrealistic assumptions. This paper offers a short discussion on this claim and a review of the relevant contributions to the literature on deterministic fluctuations in competitive models. It is argued that these types of fluctuations are more easily obtained when agents are assumed to be heterogeneous and when the production side of the economy is considered. The paper also discusses the existence of endogenous cycles in models with financial market imperfections and nonconvex technologies.

Output-inflation cycles in an economy with staggered wage setting

Abstract The question whether increased price flexibility is stabilizing in macromodels of the business cycle has been recently questioned by De Long and Summers (1986). The present paper is an attempt to reconsider the question by applying some methods from the theory of nonlinear dynamics, especially bifurcation theory, to the analysis of a dynamic model with sluggish price adjustment. It is argued that, when inflation plays a destabilizing role through the Mundell effect, a stable closed orbit representing the perfect-foresight dynamics of the output-inflation pair may appear in the vicinity of a stationary state. Moreover, bifurcation theory is applied to find analytical results about the relation between the amplitude of the cycles and the ‘degree’ of flexibility of prices. This relation is shown to be positive in a variety of cases.

The role of social security in an economy with asymmetric information and financial intermediaries

Abstract We study an overlapping generations model with production, asymmetric information and competitive financial intermediaries. Social security may be beneficial even when it should not be used under full information, unless credit rationing emerges with pooling contracts. In this case social security could be welfare reducing even when the safe rate of return falls short of population growth. We provide a full characterization of ‘constrained Pareto efficient’ allocations and prove that, when the expected marginal product exceeds population growth and high-risk firms have a low probability of default, no tax-transfer policy can support these allocations as competitive equilibria. When equilibria are constrained inefficient, optimal contracts are pooling and the optimal stock market value is zero.

An Obtrusive Remark on Capital and Comparative Statics

We present a simple comparative statics analysis of steady-state equilibria in overlapping generations economies with capital accumulation. We regard comparative statics as paradoxical whenever an exogenous increase in saving propensity induces a decrease (an increase) in consumption at the steady state when interest rate is positive (negative). It is shown that there is an exact relation between paradoxical comparative statics and a perverse intersection of properly identified curves of demand for and supply of capital in value. The demand curve for capital in value coincides with that of neo-Ricardian analysis. We relate our conclusions to some old and recent issues in capital theory.

Social Security and Old-Age Unemployment Risk with Efficient Wage Bargaining

I analyze an overlapping generations model with old age productivity risk where wages, employment and severance payments are set through efficient bargaining between risk averse unions and risk neutral firms. Equilibrium allocations with limited union membership are second-best inefficient as they generate too little labor supply in young age, too much consumption before retirement age, too little employment of older workers (early retirement) and too little insurance against old age unemployment. Public transfers to early retirees may produce efficiency gains even if they have a negative effect on old age employment. Layoff taxes may increase old age employment but they may come at the cost of lower insurance against the risk of early retirement.

Le conseguenze economiche della mobilità del lavoro

La mobilita del lavoro e fortemente aumentata negli ultimi vent’anni. Questo fenomeno e destinato a persistere sia perche i differenziali salariali tra le nazioni sono eleva- ti, sia perche una gran parte dei paesi sviluppati e caratterizzata da declino demografico ed invecchiamento della popolazione. Le migrazioni sono vantaggiose sia per i paesi di origine che quelli di destinazione, perche incrementano l’efficienza produttiva e diminuiscono le disuguaglianze. Tuttavia, possono anche avere effetti indesiderati: una riduzione dei salari dei lavoratori poco qualificati dei paesi di destinazione degli immigrati e un aumento degli oneri fiscali. Le analisi empiriche prodotte in questi ultimi anni hanno, tuttavia, mostrato che questi effetti sono generalmente trascurabili. La fuga dei cervelli contribuisce al progresso tecnologico nei paesi avanzati, ma puo avere effetti positivi anche sui paesi di origine.