Essays on dynamic macroeconomics.

Abstract

This dissertation, titled ”Essays on Dynamic Macroeconomics” is comprised of three papers which share the common ground of employing tools of modern dynamic macroeconomics. All the three papers apply modern technical tools of macroeconomics in dynamic environments to different macroeconomic problems and observations, develop mechanisms and models to account for these observations and finally test explanatory powers of the provided mechanisms. The first paper, titled ”Political Turnover, Taxes, and the Shadow Economy” is motivated from several cross-section empirical studies which argue that a higher tax burden or different indicators of statutory tax rates are associated with a smaller informal economy. In the paper I show that the turnover of governments provides the key to understanding this relation. To this end, I present evidence that once political turnover is controlled for, the data shows no association between the tax burden and the size of the informal economy. This result is empirically robust in a panel data consisting of 80 countries and 5 years. To account for this observation, I develop a dynamic political economy model with two political parties alternating in office. In equilibrium, if the incumbent party faces a higher probability of staying in office, it sets a higher tax rate to invest more in productive public capital, while spending less for current office rent. I argue that public capital is mainly utilized by the formal sector and this implies that countries in which incumbent parties are more likely to stay in power, have a higher tax burden but a smaller informal sector. Finally, I compare the model against the data and present evidence that my theory is consistent with empirical observations.In the second paper, titled ”A Theory of Economic Development with Endogenous Fertility”, I integrate two existing theories of economic development to account for the time-series evolution of output, fertility and population in transition through the industrialization of an economy. Specifically, I extend a standard two-sector overlapping generations model with endogenous fertility and human capital decisions. Initially, the aggregate human capital and return to education are low and parents invest in quantity of children. Once sufficient human capital is accumulated, with the activation of the modern human capital intensive sector, parents start to invest in quality of their children. The simulation of the model economy successfully captures the evolution of fertility, population and GDP of the British economy between 1750 and 2000. Finally, in the third chapter, titled ”Not-Quite-Great Depressions of Turkey”, which is based on a paper written together with my coauthor Deniz C¸ i¸cek, following the great depressions methodology we use growth accounting and perfect foresight dynamic general equilibrium models to study growth performance of Turkey from 1968 to 2004. We calculate the total factor productivity from the growth accounting exercise and obtain the consumption tax rate and the effective marginal tax rates on labor and capital income from the data and feed them into our model. Our benchmark model without any frictions and taxes accounts for 86% of the observed change in the growth rate of GDP per-working age person from 1968 to 2004 and once we extend the model with taxes and capital adjustment costs it accounts for 60% of the observed reduction in hours worked per-working age person and 35% of the change in the growth rate of capital-output ratio from 1968 to 2004. Also, we identify that the Turkish economy experienced a depression from 1976 to 1984 and the extended model performs remarkably well to account for the observed change in GDP per-working age person, capitaloutput ratio and hours worked during this depression period. Our findings generally suggest that rigidities affecting capital accumulation and government policies using distortionary taxes have a crucial role in explaining the evolution of the selected variables of the Turkish economy.