Using U.S. data from 1929 to 2013, we show that elevated credit-market sentiment in year t-2 is associated with a decline in economic activity in years t through t+2. Underlying this result is the existence of predictable mean reversion in credit-market conditions. That is, when our sentiment...

Macroeconomists have long recognized that activity-gap measures are unreliable in real time and that this can present serious difficulties for stabilization policy. This paper investigates whether the credit-to-GDP ratio gap, which has been proposed as a reference point for accumulating...

In this article, we provide an overview of the key mechanisms by which sectoral disturbances affect aggregate economic activity. We describe how the distribution of sectoral shares influences each sector's contribution to the variation in aggregate output. We also illustrate different aspects of...

Foreign investment is typically considered an important source of growth for developing countries. This article describes the legal protection granted to foreign investors and its enforcement mechanisms. Governments have signed international investment agreements intended to protect foreign...

We first study growth and risk sharing in a stochastic growth model with preference shocks and two risk-averse agents. In periods in which one of the agents needs extra consumption (insurance), it is socially optimal to reduce the consumption of the other agent (redistribution) and also to...

In this article I provide a perspective on the current state of modern business cycle theory. This theory has developed from an application of the Arrow-Debreu general equilibrium framework to the neoclassical growth model. On the positive side, this approach is able to accommodate various...

There are large differences in welfare—measured as gross domestic product (GDP) per capita—across nations. Over time, there are numerous country experiences in relative income of catch-up, collapse, and catch-up followed by a decline. What explains why some countries are rich and others...

The key ideas for adding financial market frictions in general equilibrium models are not new in macroeconomics. However, it is only with the recent crisis that the profession has fully recognized the importance of financial markets for business cycle fluctuations. In this article I review some...