We develop a framework for non-parametrically identifying optimization frictions and structural elasticities using notches–discontinuities in the choice sets of agents–introduced by for example tax and transfer policies. Notches create excess bunching on the low-tax side and missing mass on the high-tax side of a cutoff, and they are often associated with a region of strictly dominated choice t...

Estimated dynamic models of business cycles in emerging markets deliver counterfactual predictions for the country risk premium. In particular, the country interest rate predicted by these models is acyclical or procyclical, whereas it is countercyclical in the data. This paper proposes and estimates a small open economy model of the emerging-market business cycle in which a time-varying countr...

Previous literature has shown that missing credit or insurance markets do not necessarily provide an efficiency-based argument for educational subsidies, starting with a laissez faire competitive equilibrium. We show that they do, provided learning abilities vary idiosyncratically. In an OLG economy with ability heterogeneity and missing financial markets, we prove: (a) every competitive equili...

The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market, including se...

The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes, in the sense that trade integration reduces the incentives for capital to ‡ow to capital-scarce countries. In this paper we show that in a world with heterogeneous …nancial development, the classic conclusion does not hold. In particular, in less …nancially developed economies (South), trade a...

Schumpeter (1939) proposes that recessions have virtue in promoting growth-enhancing activities. However, this view is often at odds with data, as many innovative activities appear pro-cyclical. We revisit the “virtue of bad times”theoretically and empirically. Our theory suggests that recessions have such virtue only when the cyclicality of innovation’s marginal opportunity cost dominates that...

Frictions are introduced in the information structure of a cash-in-advance dynamic stochastic general equilibrium model with the interest of studying the impact of serially correlated monetary shocks on the variability of velocity. Possessing no analytical solution this dynamic environment, a projection method which parameterizes expectations and employs finite elements in the approximation of ...

The direction of causality between financial intermediation and real economic progress has been a source of discussion over long periods of time. Instead of exogenously siding with one particular direction a priori, this paper provides a different treatment on this debate by considering the interaction between financial and real sectors to be not just a question of causality, but an issue of co...