At the microeconomic level, durable purchases are often discontinuous and relatively large. This feature has the potential to explain why aggregate expenditure on durables responds only slowly (relative to the frictionless permanent income model) to wealth and other aggregate innovations. In this paper I develop new results on the problem of dynamic aggregation of stochastically heterogeneous units, which help to characterize the connection between microeconomic behavior and aggregate dynamics in the presence of nonconvex adjustment costs. Using these results and splitting postwar U.S. aggregate durable purchases into different subcategories and time periods, I provide further support for the view that lumpy microeconomic purchases play an important role in explaining the time-series behavior of aggregate expenditure on durable goods.

At the microeconomic level, durable purchases are often discontinuous and relatively large. This feature has the potential to explain why aggregate expenditure on durables responds only slowly (relative to the frictionless permanent income model) to wealth and other aggregate innovations. In this paper I develop new results on the problem of dynamic aggregation of stochastically heterogeneous units, which help to characterize the connection between microeconomic behavior and aggregate dynamics in the presence of nonconvex adjustment costs. Using these results and splitting postwar U.S. aggregate durable purchases into different subcategories and time periods, I provide further support for the view that lumpy microeconomic purchases play an important role in explaining the time-series behavior of aggregate expenditure on durable goods.

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 flow to capital‐scarce countries. In this paper we show that in a world with heterogeneous financial development, a very different conclusion emerges. In particular, in less financially developed economies (South), trade and capital mobility are complements in the sense that trade integration increases the return to capital and thus the incentives for capital to flow to South. This interaction implies that deepening trade integration in South raises net capital inflows (or reduces net capital outflows). It also implies that, at the global level, protectionism may backfire if the goal is to rebalance capital flows.

Specific quasi rents arise in a variety of economic relationships and are exposed to opportunism unless fully protected by contract. Rent appropriation has important macroeconomic consequences. Resources are underutilized, factor markets are segmented, production suffers from technological “sclerosis,” job creation and destruction are unbalanced, recessions are excessively sharp, and expansions run into bottlenecks. While, depending on the shock, expansions may require reinforcement or stabilization, recessions should typically be softened. In the long run, institutions may evolve to alleviate the problem by balancing appropriation. Technology choice will also be affected, with the appropriated factor partially “excluding” the other from production to reduce appropriation.

We develop a model of gross capital flows and analyze their role in global financial stability. In our model, consistent with the data, when a country experiences asset fire sales, foreign investments exit (fickleness), while domestic investments abroad return home (retrenchment). When countries have symmetric expected returns and financial development, the benefits of retrenchment dominate the costs of fickleness and gross flows increase fire-sale prices. Fickleness, however, creates a coordination problem since it encourages local policy makers to restrict capital inflows. When countries are asymmetric, capital flows are driven by additional mechanisms—reach for safety and reach for yield—that can destabilize the receiving country.