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Joseph Zeira

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I am a professor of economics in the Hebrew University of Jerusalem. I am a Macroeconomist and specialize in economic growth, inequality, technology, inflation, and the Israeli Economy. I am also active in the Aix Group, Israelis and Palestinians who study the economics of the conflict and the Peace Process.

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Papers by Joseph Zeira

Informational Overshooting, Booms, and Crashes

Social Science Research Network, Apr 11, 2001

This paper offers an informational explanation to stock markets' booms and crashes. This explanat... more This paper offers an informational explanation to stock markets' booms and crashes. This explanation builds on the idea of 'informational overshooting': if market fundamentals change for an unknown period of time, prices experience a boom, which ends in a crash, due to informational dynamics. The paper then shows that 'informational overshooting' occurs when the market expands to a new capacity, which is unknown until it is reached. The paper presents two examples for such expansions, one due to increased productivity and one due to entry of new investors to the stock market. One implication is that financial liberalizations tend to be followed by booms and crashes.

Capital-Skill Complementarity, Inequality and Development

Some recent growth models emphasize the role of technology—skill com- plementarity in explaining ... more Some recent growth models emphasize the role of technology—skill com- plementarity in explaining empirical regularities about wage inequality. This paper presents an alternative explanation, based on capital—skill com- plementarity and endogenous accumulation of physical and human capital in a credit constraint environment. We explain how the proportion of educated workers can increase monotonically while the premium to edu- cation may increase, decrease or display cyclical dynamics, depending on the initial wealth distribution in the economy.

Bruno, Michael (1932–1996)

Palgrave Macmillan UK eBooks, 2008

Commodity Money Inflation: Theory and Evidence from France in 1350-1436

The views expressed in the KSG Faculty Research Working Paper Series are those of the author(s) a... more The views expressed in the KSG Faculty Research Working Paper Series are those of the author(s) and do not necessarily reflect those of the John F. Kennedy School of Government or Harvard University. All works posted here are owned and copyrighted by the author(s). Papers may be downloaded for personal use only.

Informational overshooting, booms and crashes

RePEc: Research Papers in Economics, Sep 1, 1993

This paper offers an informational explanation to stock markets' booms and crashes. This explanat... more This paper offers an informational explanation to stock markets' booms and crashes. This explanation builds on the idea of 'informational overshooting': if market fundamentals change for an unknown period of time, prices experience a boom, which ends in a crash, due to informational dynamics. The paper then shows that 'informational overshooting' occurs when the market expands to a new capacity, which is unknown until it is reached. The paper presents two examples for such expansions, one due to increased productivity and one due to entry of new investors to the stock market. One implication is that financial liberalizations tend to be followed by booms and crashes.

Workers, Machines and Economic Growth

Quarterly Journal of Economics, Mar 1, 1998

This paper models technology adoption as replacing workers by machines, which perform the same jo... more This paper models technology adoption as replacing workers by machines, which perform the same job in the production process. The paper shows that such modelling of technology adoption affects significantly the analysis of economic growth. This model can explain large and persistent international differences in output levels and growth rates, caused by small differences in underlying parameters.

Israel 1983: A Bout of Unpleasant Monetarist Arithmetic

RePEc: Research Papers in Economics, Apr 1, 2008

From 1970 to 1985, Israel experienced high inflation. It rose in three jumps to new plateaus and ... more From 1970 to 1985, Israel experienced high inflation. It rose in three jumps to new plateaus and eventually exceeded 400% per annum. This paper claims that anticipated monetary and fiscal effects of a massive government bailout of owners of fallen bank shares caused the last big jump in inflation that occurred in October 1983. Bank shares had just collapsed after a scandal in which it was revealed that banks had long manipulated their share prices. The government promised to reimburse innocent owners for the diminished value of their bank shares, but only after four or five years. The public believed that promise and public debt therefore implicitly increased by a large amount. That implied future monetary expansions. Because that was foreseen, inflation immediately rose as predicted by the unpleasant monetarist arithmetic of Sargent and Wallace (1981).

Wage inequality, technology, and trade

Journal of Economic Theory, Nov 1, 2007

The recent widening of the wage gap between skilled and unskilled workers has been attributed eit... more The recent widening of the wage gap between skilled and unskilled workers has been attributed either to skill-biased technical progress or to trade liberalization. In this paper both effects are studied in a unified model. Technical progress is modeled as innovations which replace unskilled by skilled workers and trade liberalization is modeled as an increase in the set of tradable goods. We derive two main results. The first is that technical progress increases the wage gap in developed and in less developed countries, while trade liberalization increases the wage gap in developed countries but reduces it in less developed countries. The second result is that while trade liberalization increases trade in all countries, technical progress does not increase trade everywhere. These two results indicate that the recent increase in wage inequality is a combined result of both technical progress and trade liberalization, and cannot be attributed to one factor only.

The Timing of Purchases and Aggregate Fluctuations

Social Science Research Network, Apr 1, 2000

for helpful discussions. Leahy thanks the NSF and the Sloan Foundation for financial support, and... more

Inflationary inertia in a wage-price spiral model

European Economic Review, Oct 1, 1989

This paper examines theoretical issues of inflationary inertia by use of a wage-price spiral mode... more This paper examines theoretical issues of inflationary inertia by use of a wage-price spiral model, in which wage and price decisions are staggered, It is shown that within such a framework inflation is inertial in the following sense: a monetary disinflation cannot immediately succeed and the rate of inflation declines gradually. It is also shown that from another aspect of inflationary inertia, which is the effect of cost shocks, inflation is less inertial even in a wageprice spiral model: a temporary cost shock has no continuing effect on the rate of inflation. Only permanent changes in costs have an inertial effect and they raise the rate of inflation in consecutive periods as well. *I am deeply indebted to Elhanan Helpman, Nissan Liviatan, Oren Sussman and two anonymous referees for helpful comments on former drafts. Remaining errors are of course all mine. 'Many empirical studies have found that the rate of inflation depends, among other variables, on former periods' rates of inflation. Such are the findings of Taylor (1979b), Sachs (1980), Gordon (1985) and many others. 'One example of this phenomenon has been the prolonged inflationary etTect of the 1973 OPEC price shocks on western economies. Other examples have emerged during recent inflations in Israel and Latin American countries, where devaluations or massive subsidy reductions were believed to have an accelerating effect on the rate of inflation. See Liviatan and Piterman (1986) for an example.

Why and How Education Affects Economic Growth

Review of International Economics, Aug 1, 2009

This paper suggests an additional channel through which education affects economic growth. If gro... more This paper suggests an additional channel through which education affects economic growth. If growth is driven by industrialization of production, where machines replace labor in a growing number of tasks, then operating these machines requires workers who are educated, namely literate and know arithmetic, whose human capital is less specific and more general.As a result, technology adoption depends negatively on wages of educated workers. Hence, economic growth depends negatively on the cost of education or on the barriers to acquire education. The model shows that if the cost of education is high, economic growth might be slow and even stop completely, creating a development trap.

Inequality and Public Policy

RePEc: Research Papers in Economics, 2018

This paper addresses a set of interrelated questions about inequality: why public policy should b... more This paper addresses a set of interrelated questions about inequality: why public policy should be concerned with inequality, how differences across countries in the extent and nature of income inequality can be explained, how Ireland's ranking in those terms can best be characterised and explained. It then seeks to draw out implications for public policy and how it is debated and framed. It concludes that modest reductions in income inequality are achievable within the framework of Ireland's current socioeconomic model. However, achieving a level of income inequality much below the (EU or OECD) average, much less one close to the levels of the best performers, would require such a significant enhancement in the Irish Welfare State, and its corollary of substantially higher taxation, as to represent a radical departure from our current socioeconomic model. Recent events in the financial markets and the extremely challenging economic environment to be faced over the next few years provide an opportunity to debate fundamental questions about the role of the State, in particular the extent and nature of social provision and its financing. 1 This paper was presented as an Inaugural Lecture in October 2008.

Machines as Engines of Growth

DEGIT Conference Papers, 2006

This paper builds a model of growth through industrialization, where machines replace workers in ... more This paper builds a model of growth through industrialization, where machines replace workers in a growing number of tasks. This enables the economy to experience long-run growth, as machines become servants of humans, and as their number grows unboundedly. The mechanism that drives growth is feedback between industrialization and wages. High wages provide incentives to use machines, while industrialization raises wages. The model shows that industrialization and growth take off only if the economy is productive enough. It also shows that monopoly power can stifle growth, as it lowers wages. Hence, a one-time increase in productivity, or a reduction of monopoly power can push economies from stagnation to industrialization.

Technical Progress and Early Retirement

This paper claims that technical progress induces early retirement of older workers. Technical pr... more This paper claims that technical progress induces early retirement of older workers. Technical progress erodes technology specific human capital. Since older workers have shorter career horizons, there is less incentive for them or for their employers to invest in learning how to use the new technologies. Consequently, they are more likely to stop working. We call this effect the erosion effect. Since technical progress also raises wages in the economy as a whole and since technical progress is positively correlated across sectors, this presents an opposite effect of technical progress, which we call the wage effect. Using individual and sector data, we separate the two effects and find support for our theory.

Labor Productivity in Israel

Cost uncertainty and the rate of investment

Journal of Economic Dynamics and Control, Feb 1, 1990

This paper examines the effect of cost and price uncertainty on the optimal rate of investment by... more This paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework. Former works which have studied this issue like Hartman (1972) and Abel (1983Abel ( .1984Abel ( .1985) ) have come to the conclusion that this effect is positive. since increased price uncertainty raises expected profitability. But these studies assume a fixed discount rate. which is equivalent to assuming that consumers are risk-neutral. This paper shows that if consumers are risk-averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased. ' Zeira (1987,19%X) presents two examples where increasing risk reduces capital accumulation in general equilibrium models, 0165-1889/90/$3.50~1990, Elsevier Science Publishers B.V. (North-Holland) 'Indeed, Craine (19X9) has conducted independently and virtually simultaneously a research along this line. The two papers. though. are quite different. 4Analysia of this model in case of adjustment costs can be found in Zeira (1989).

Informational overshooting, booms, and crashes

Journal of Monetary Economics, Feb 1, 1999

This paper offers an informational explanation to stock markets' booms and crashes. This explanat... more This paper offers an informational explanation to stock markets' booms and crashes. This explanation builds on the idea of 'informational overshooting': if market fundamentals change for an unknown period of time, prices experience a boom, which ends in a crash, due to informational dynamics. The paper then shows that 'informational overshooting' occurs when the market expands to a new capacity, which is unknown until it is reached. The paper presents two examples for such expansions, one due to increased productivity and one due to entry of new investors to the stock market. One implication is that financial liberalizations tend to be followed by booms and crashes.

Convergence and Divergence: A New Approach, New Data, and New Results

Macroeconomic Dynamics, Sep 24, 2020

Recently, Penn World Tables include new data that enable calculation of total factor productivity... more Recently, Penn World Tables include new data that enable calculation of total factor productivity in addition to output for a large set of countries. We use these new data to examine convergence and divergence across countries by applying a new approach, which differentiates between the dynamics of output and of productivity. Our empirical results lead to two main new contributions to the literature. The first is on the interpretation of “β-convergence” in “growth regressions.” It means that output per worker in each country converges to productivity but does not imply convergence across countries, since productivity tends to diverge from the global frontier. The second contribution is to the literature, which finds that income gaps across countries are due mainly to differential technology adoption. This paper shows that the gaps in technology are not only large but keep growing over time.

Workers, Machines, and Economic Growth

Quarterly Journal of Economics, Nov 1, 1998

This paper analyzes a model of economic growth, with technological innovations that reduce labor ... more This paper analyzes a model of economic growth, with technological innovations that reduce labor requirements but raise capital requirements. The paper has two main results. The first is that such technological innovations are not everywhere adopted, but only in countries with high productivity. The second result is that technology adoption significantly amplifies differences in productivity between countries. This paper can,

Credit Rationing in an Open Economy

International Economic Review, Nov 1, 1991

... I also wish to thank Reuben Gronau, Paul Krugman, Nissan Liviatan, Assaf Razin, Oren Sussman,... more

Informational Overshooting, Booms, and Crashes

Social Science Research Network, Apr 11, 2001

This paper offers an informational explanation to stock markets' booms and crashes. This explanat... more This paper offers an informational explanation to stock markets' booms and crashes. This explanation builds on the idea of 'informational overshooting': if market fundamentals change for an unknown period of time, prices experience a boom, which ends in a crash, due to informational dynamics. The paper then shows that 'informational overshooting' occurs when the market expands to a new capacity, which is unknown until it is reached. The paper presents two examples for such expansions, one due to increased productivity and one due to entry of new investors to the stock market. One implication is that financial liberalizations tend to be followed by booms and crashes.

Capital-Skill Complementarity, Inequality and Development

Some recent growth models emphasize the role of technology—skill com- plementarity in explaining ... more Some recent growth models emphasize the role of technology—skill com- plementarity in explaining empirical regularities about wage inequality. This paper presents an alternative explanation, based on capital—skill com- plementarity and endogenous accumulation of physical and human capital in a credit constraint environment. We explain how the proportion of educated workers can increase monotonically while the premium to edu- cation may increase, decrease or display cyclical dynamics, depending on the initial wealth distribution in the economy.

Bruno, Michael (1932–1996)

Palgrave Macmillan UK eBooks, 2008

Commodity Money Inflation: Theory and Evidence from France in 1350-1436

The views expressed in the KSG Faculty Research Working Paper Series are those of the author(s) a... more The views expressed in the KSG Faculty Research Working Paper Series are those of the author(s) and do not necessarily reflect those of the John F. Kennedy School of Government or Harvard University. All works posted here are owned and copyrighted by the author(s). Papers may be downloaded for personal use only.

Informational overshooting, booms and crashes

RePEc: Research Papers in Economics, Sep 1, 1993

This paper offers an informational explanation to stock markets' booms and crashes. This explanat... more This paper offers an informational explanation to stock markets' booms and crashes. This explanation builds on the idea of 'informational overshooting': if market fundamentals change for an unknown period of time, prices experience a boom, which ends in a crash, due to informational dynamics. The paper then shows that 'informational overshooting' occurs when the market expands to a new capacity, which is unknown until it is reached. The paper presents two examples for such expansions, one due to increased productivity and one due to entry of new investors to the stock market. One implication is that financial liberalizations tend to be followed by booms and crashes.

Workers, Machines and Economic Growth

Quarterly Journal of Economics, Mar 1, 1998

This paper models technology adoption as replacing workers by machines, which perform the same jo... more This paper models technology adoption as replacing workers by machines, which perform the same job in the production process. The paper shows that such modelling of technology adoption affects significantly the analysis of economic growth. This model can explain large and persistent international differences in output levels and growth rates, caused by small differences in underlying parameters.

Israel 1983: A Bout of Unpleasant Monetarist Arithmetic

RePEc: Research Papers in Economics, Apr 1, 2008

From 1970 to 1985, Israel experienced high inflation. It rose in three jumps to new plateaus and ... more From 1970 to 1985, Israel experienced high inflation. It rose in three jumps to new plateaus and eventually exceeded 400% per annum. This paper claims that anticipated monetary and fiscal effects of a massive government bailout of owners of fallen bank shares caused the last big jump in inflation that occurred in October 1983. Bank shares had just collapsed after a scandal in which it was revealed that banks had long manipulated their share prices. The government promised to reimburse innocent owners for the diminished value of their bank shares, but only after four or five years. The public believed that promise and public debt therefore implicitly increased by a large amount. That implied future monetary expansions. Because that was foreseen, inflation immediately rose as predicted by the unpleasant monetarist arithmetic of Sargent and Wallace (1981).

Wage inequality, technology, and trade

Journal of Economic Theory, Nov 1, 2007

The recent widening of the wage gap between skilled and unskilled workers has been attributed eit... more The recent widening of the wage gap between skilled and unskilled workers has been attributed either to skill-biased technical progress or to trade liberalization. In this paper both effects are studied in a unified model. Technical progress is modeled as innovations which replace unskilled by skilled workers and trade liberalization is modeled as an increase in the set of tradable goods. We derive two main results. The first is that technical progress increases the wage gap in developed and in less developed countries, while trade liberalization increases the wage gap in developed countries but reduces it in less developed countries. The second result is that while trade liberalization increases trade in all countries, technical progress does not increase trade everywhere. These two results indicate that the recent increase in wage inequality is a combined result of both technical progress and trade liberalization, and cannot be attributed to one factor only.

The Timing of Purchases and Aggregate Fluctuations

Social Science Research Network, Apr 1, 2000

for helpful discussions. Leahy thanks the NSF and the Sloan Foundation for financial support, and... more

Inflationary inertia in a wage-price spiral model

European Economic Review, Oct 1, 1989

This paper examines theoretical issues of inflationary inertia by use of a wage-price spiral mode... more This paper examines theoretical issues of inflationary inertia by use of a wage-price spiral model, in which wage and price decisions are staggered, It is shown that within such a framework inflation is inertial in the following sense: a monetary disinflation cannot immediately succeed and the rate of inflation declines gradually. It is also shown that from another aspect of inflationary inertia, which is the effect of cost shocks, inflation is less inertial even in a wageprice spiral model: a temporary cost shock has no continuing effect on the rate of inflation. Only permanent changes in costs have an inertial effect and they raise the rate of inflation in consecutive periods as well. *I am deeply indebted to Elhanan Helpman, Nissan Liviatan, Oren Sussman and two anonymous referees for helpful comments on former drafts. Remaining errors are of course all mine. 'Many empirical studies have found that the rate of inflation depends, among other variables, on former periods' rates of inflation. Such are the findings of Taylor (1979b), Sachs (1980), Gordon (1985) and many others. 'One example of this phenomenon has been the prolonged inflationary etTect of the 1973 OPEC price shocks on western economies. Other examples have emerged during recent inflations in Israel and Latin American countries, where devaluations or massive subsidy reductions were believed to have an accelerating effect on the rate of inflation. See Liviatan and Piterman (1986) for an example.

Why and How Education Affects Economic Growth

Review of International Economics, Aug 1, 2009

This paper suggests an additional channel through which education affects economic growth. If gro... more This paper suggests an additional channel through which education affects economic growth. If growth is driven by industrialization of production, where machines replace labor in a growing number of tasks, then operating these machines requires workers who are educated, namely literate and know arithmetic, whose human capital is less specific and more general.As a result, technology adoption depends negatively on wages of educated workers. Hence, economic growth depends negatively on the cost of education or on the barriers to acquire education. The model shows that if the cost of education is high, economic growth might be slow and even stop completely, creating a development trap.

Inequality and Public Policy

RePEc: Research Papers in Economics, 2018

This paper addresses a set of interrelated questions about inequality: why public policy should b... more This paper addresses a set of interrelated questions about inequality: why public policy should be concerned with inequality, how differences across countries in the extent and nature of income inequality can be explained, how Ireland's ranking in those terms can best be characterised and explained. It then seeks to draw out implications for public policy and how it is debated and framed. It concludes that modest reductions in income inequality are achievable within the framework of Ireland's current socioeconomic model. However, achieving a level of income inequality much below the (EU or OECD) average, much less one close to the levels of the best performers, would require such a significant enhancement in the Irish Welfare State, and its corollary of substantially higher taxation, as to represent a radical departure from our current socioeconomic model. Recent events in the financial markets and the extremely challenging economic environment to be faced over the next few years provide an opportunity to debate fundamental questions about the role of the State, in particular the extent and nature of social provision and its financing. 1 This paper was presented as an Inaugural Lecture in October 2008.

Machines as Engines of Growth

DEGIT Conference Papers, 2006

This paper builds a model of growth through industrialization, where machines replace workers in ... more This paper builds a model of growth through industrialization, where machines replace workers in a growing number of tasks. This enables the economy to experience long-run growth, as machines become servants of humans, and as their number grows unboundedly. The mechanism that drives growth is feedback between industrialization and wages. High wages provide incentives to use machines, while industrialization raises wages. The model shows that industrialization and growth take off only if the economy is productive enough. It also shows that monopoly power can stifle growth, as it lowers wages. Hence, a one-time increase in productivity, or a reduction of monopoly power can push economies from stagnation to industrialization.

Technical Progress and Early Retirement

This paper claims that technical progress induces early retirement of older workers. Technical pr... more This paper claims that technical progress induces early retirement of older workers. Technical progress erodes technology specific human capital. Since older workers have shorter career horizons, there is less incentive for them or for their employers to invest in learning how to use the new technologies. Consequently, they are more likely to stop working. We call this effect the erosion effect. Since technical progress also raises wages in the economy as a whole and since technical progress is positively correlated across sectors, this presents an opposite effect of technical progress, which we call the wage effect. Using individual and sector data, we separate the two effects and find support for our theory.

Labor Productivity in Israel

Cost uncertainty and the rate of investment

Journal of Economic Dynamics and Control, Feb 1, 1990

This paper examines the effect of cost and price uncertainty on the optimal rate of investment by... more This paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework. Former works which have studied this issue like Hartman (1972) and Abel (1983Abel ( .1984Abel ( .1985) ) have come to the conclusion that this effect is positive. since increased price uncertainty raises expected profitability. But these studies assume a fixed discount rate. which is equivalent to assuming that consumers are risk-neutral. This paper shows that if consumers are risk-averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased. ' Zeira (1987,19%X) presents two examples where increasing risk reduces capital accumulation in general equilibrium models, 0165-1889/90/$3.50~1990, Elsevier Science Publishers B.V. (North-Holland) 'Indeed, Craine (19X9) has conducted independently and virtually simultaneously a research along this line. The two papers. though. are quite different. 4Analysia of this model in case of adjustment costs can be found in Zeira (1989).

Informational overshooting, booms, and crashes

Journal of Monetary Economics, Feb 1, 1999

This paper offers an informational explanation to stock markets' booms and crashes. This explanat... more This paper offers an informational explanation to stock markets' booms and crashes. This explanation builds on the idea of 'informational overshooting': if market fundamentals change for an unknown period of time, prices experience a boom, which ends in a crash, due to informational dynamics. The paper then shows that 'informational overshooting' occurs when the market expands to a new capacity, which is unknown until it is reached. The paper presents two examples for such expansions, one due to increased productivity and one due to entry of new investors to the stock market. One implication is that financial liberalizations tend to be followed by booms and crashes.

Convergence and Divergence: A New Approach, New Data, and New Results

Macroeconomic Dynamics, Sep 24, 2020

Recently, Penn World Tables include new data that enable calculation of total factor productivity... more Recently, Penn World Tables include new data that enable calculation of total factor productivity in addition to output for a large set of countries. We use these new data to examine convergence and divergence across countries by applying a new approach, which differentiates between the dynamics of output and of productivity. Our empirical results lead to two main new contributions to the literature. The first is on the interpretation of “β-convergence” in “growth regressions.” It means that output per worker in each country converges to productivity but does not imply convergence across countries, since productivity tends to diverge from the global frontier. The second contribution is to the literature, which finds that income gaps across countries are due mainly to differential technology adoption. This paper shows that the gaps in technology are not only large but keep growing over time.

Workers, Machines, and Economic Growth

Quarterly Journal of Economics, Nov 1, 1998

This paper analyzes a model of economic growth, with technological innovations that reduce labor ... more This paper analyzes a model of economic growth, with technological innovations that reduce labor requirements but raise capital requirements. The paper has two main results. The first is that such technological innovations are not everywhere adopted, but only in countries with high productivity. The second result is that technology adoption significantly amplifies differences in productivity between countries. This paper can,

Credit Rationing in an Open Economy

International Economic Review, Nov 1, 1991

... I also wish to thank Reuben Gronau, Paul Krugman, Nissan Liviatan, Assaf Razin, Oren Sussman,... more