We analyze an overlapping-generations framework that accommodates two observations: (i) the interest rate on consumption loans exceeds the rate of return to savings, and (ii) private intergenerational transfers primarily occur early in the life cycle. Assuming altruistically motivated transfers in at least some family lines and other plausible conditions, we prove the invariance of capital's steady-state marginal product to government debt, government expenditures, and the tax rates on labor and capital income. We show that the tax treatment of household interest payments has powerful effects on capital intensity and aggregate savings in life-cycle and, especially, altruistic linkage models.

We analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare. Our empirical work draws on the best available cross-sectional data sets to construct synthetic panel data on U.S. consumption, labor supply, and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pretax hourly wages among men drove large changes in the distribution of household consumption. The results constitute a spectacular failure of between-group consumption insurance, a failure not explained by existing theories of informationally constrained optimal consumption behavior. A welfare analysis indicates that the cost of between-group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude.

chanted, albeit in varying degree, with business cycle theories that either posit unexplained nominal wage and price rigidities or rely on misperceptions about nominal variables as a key driving force. One response to this disenchantment has been a concentration of research effort on business cycle theories. Aside from dissatisfaction with competitor theories, the very visible oil price shock episodes of the 1970's lent plausibility to the view that exogenous real disturbances cause large fluctuations in aggregate economic activity. This essay on business cycle theory considers the role of disturbances in aggregate economic fluctuations when human and physical capital are specialized. By allocative disturbances, I mean events that impinge on the economy by inducing a costly, time-consuming reallocation of specialized resources. At least since the publication of Ricardo's Principles in 1817, economists have recognized some of the potentially important aggregate consequences of disturbances. Ricardo writes:

The mandate of the American Economic Journal: Macroeconomics (AEJ: Macro) is to publish "studies of aggregate fluctuations and growth, and the role of policy in that context."The mandate also recognizes that research in macroeconomics interacts closely

There is considerable evidence that American workers face lower risks of job loss in recent years than 10, 20, or 30 years earlier. I summarize some of the evidence for this claim and explain why the decline of job loss matters. My attention centers on “unwelcome” job loss: employer-initiated separations that lead to unemployment, temporary or persistent drops in earnings, and other significant costs for job losers. Since there is no fully satisfactory statistic for the incidence of job loss, I consider several measures and data sources.

We construct a life cycle model that delivers realistic behavior for both equity holdings and borrowing. The key model ingredient is a wedge between the cost of borrowing and the risk-free investment return. Borrowing can either raise or lower equity demand, depending on the cost of borrowing. A borrowing rate equal to the expected return on equity—which we show roughly matches the data—minimizes the demand for equity. Alternative models with no borrowing or limited borrowing at the risk-free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings.

Theory restricts short-run job creation and destruction responses and cumulative employment and job reallocation responses to allocative and aggregate shocks. We formulate these restrictions and implement them for postwar data on U.S. manufacturing. Allocative shocks are the main driving force behind cyclical movements in job reallocation, but their contribution to employment fluctuations varies greatly across alternative identification assumptions. Also, the data compel one or both of the following inferences: aggregate shocks greatly alter the shape and not just the mean of the cross-sectional density of employment growth rates; allocative shocks cause short-run reductions in aggregate employment. (JEL C32, E32, J63)