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Pedro Garcia Duarte and Gilberto Tadeu Lima

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Microfoundations Reconsidered

The Relationship of Micro and Macroeconomics in Historical Perspective

Pedro Garcia Duarte and Gilberto Tadeu Lima

The highly regarded contributors to the book argue that the standard narrative of microfoundations is likely to be unreliable. They therefore re-examine the history of the relationship of microeconomics and macroeconomics, starting from their emergence as self-consciously distinct fields within economics in the early 1930s. They seek to go beyond the conventional history that is often told and written by practicing economists. From different perspectives they challenge the association of microfoundations with Robert Lucas and rational expectations and offer both a more complete and a deeper reading of the relationship between micro and macroeconomics.
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Gilberto Tadeu Lima and Jaylson Jair da Silveira

This paper investigates the impact on capacity utilization and economic growth as variables driven by effective demand of income distribution featuring the possibility of profit-sharing with workers. Firms choose to compensate workers with either a base wage or a share of profits on top of this base wage. In accordance with robust empirical evidence, workers in sharing firms have higher productivity than workers in non-sharing firms. The distribution of employee compensation strategies and labor productivity across firms is evolutionarily time-varying. Two major results carrying relevant theoretical and policy implications are obtained. First, heterogeneity in employee compensation strategies across firms (and therefore earnings inequality across workers) may emerge as a long-run equilibrium outcome. Second, beyond the short run, a higher fraction of profit-sharing firms may result in either higher or lower rates of capacity utilization and economic growth.

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Gilberto Tadeu Lima, Mark Setterfield and Jaylson Jair da Silveira

Conventional wisdom suggests that the Great Moderation was caused by either good policy, good luck (favourable shocks), more efficient private-sector behaviour (such as better inventory management), or more effective financial innovations. This chapter shows that it may, instead, have originated from the complementarity of an erroneous reading of the economy by central bankers and evolutionarily time-varying heterogeneity in inflation-expectations formation within the private sector. One general finding of the authors’ analysis is that seemingly inadequate stabilization policies may, in fact, work. They comment on the broader ramifications for stabilization policy of this finding.

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Gilberto Tadeu Lima, Laura Carvalho and Gustavo Pereira Serra

This paper incorporates human capital accumulation through provision of universal public education by a balanced-budget government to a demand-driven analytical framework of functional distribution and growth of income. Human capital accumulation positively impacts on workers’ productivity in production and their bargaining power in wage negotiations. In the long-run equilibrium, a rise in the tax rate (which also denotes the share of output spent in human capital formation) lowers the pre- and after-tax wage share and physical capital utilization, and thus raises (lowers) the output growth rate when the latter is profit-led (wage-led). The impact of a higher tax rate on the employment rate (which also measures human capital utilization) in the long-run equilibrium is negative (ambiguous) when output growth is wage-led (profit-led). In any case, the supply of higher-skilled workers does not automatically create its own demand.