We consider a model that provides insight into the well-known Folk theorem in economics that when the discount factor β is sufficiently close to 1, expropriation will never occur. Although this Folk theorem is true in our model, our perspective is different. The discount factor β often is described as a “deep structural parameter” that is difficult to alter at a point in time. In contrast, we analyze the determinants of two thresholds β and β* that segment the unit interval on which β is defined into three subintervals. These subintervals correspond to the three possible equilibria for investment flows: autarky, underinvestment, and unconstrained optimal investment. These thresholds are of interest because they can be altered by specific policy interventions. As a consequence, even if β is small, some level of foreign investment can be supported. We construct measures of β for 40 countries, characterize β and β*, and discuss recent trends in investment flows.

This paper analyzes aggregate wealth based on separable risk aversion and intertemporal substitution. In an infinite-period overlapping-generations model with survival uncertainty, economic growth, and permanent and temporary income shocks, our closed-form solution permits us to derive rich behavioral conclusions and to assess the relative importance of the major components of aggregate wealth. In particular, the separation of the attitudes toward risk and substitution allows us to disentangle behaviors relating to the intertemporal substitution motive from behaviors relating to the precautionary motive.

In the context of I(1) time series, we provide some asymptotic results for the Davidson-MacKinnon J-type test. We examine both the case where our regressor sets x1t and x2t are not cointegrated, and the case where they are. In the former case, the OLS estimator of the weighting coefficient from the artificial compound model converges at rate T to a mixed normal distribution, and the associated t-statistic has an asymptotic standard normal distribution. In the latter case, we find that the J-test also has power against violation of weak exogeneity (with respect to the short-run coefficients of the null model), which is caused by correlation between the disturbance of the null model and that of the cointegrating equation linking x1t and x2t. Moreover, unlike the previous case, the OLS estimator of the weighting coefficient from the artificial compound model converges at \sqrt{T} to an asymptotic normal distribution when the null model is specified correctly. In an empirical illustration, we use the tests to examine an industrial production data set for six countries.

This honorary lecture is the first to appear in Macroeconomic Dynamics. Other honorary lectures and addresses on topics of importance to macroeconomics will appear occasionally in this journal. Many unpublished honorary lectures and addresses have become well known and heavily cited. As a means of making such valuable “named” lectures and addresses available in published form, journals of some professional societies annually publish an invited lecture presented at society meetings.

Two alternative theories of aggregate supply, both with a New Keynesian “flavor,” are compared. The first assumes that prices are rigid due to the existence of menu costs. The second derives price stickiness endogenously as one equilibrium in an economy with multiple equilibria. In both cases I show that the Ball–Romer concept of real rigidities is essential to explain why monetary policy has real persistent effects. I argue that dynamic menu cost models are determinate because they make special assumptions about the way that money enters the economy. For example, most authors assume either a cash-in-advance constraint or that money enters separably into utility or production functions. Once one moves beyond these special cases, menu cost models that display real rigidity are also likely to display indeterminacy.

William A. Brock has taught in the Departments of Economics at the University of Rochester, Cornell University, and the University of Chicago, before moving to the University of Wisconsin, Madison, where he is now Vilas Research Professor of Economics. He has also been an External Professor at the Santa Fe Institute since 1989. His many awards include election as a Fellow of the Econometric Society in 1974, a Fellow of the American Academy of Arts and Sciences in 1992, and as a Member of the National Academy of Sciences in 1998. His over 100 invited lectures include presentations in Poland, Belgium, France, Mexico, Canada, Japan, Australia, England, Sweden, Norway, and Australia.

Brock has been a leading contributor to the development of methods of intertemporal equilibrium analysis in the areas of growth theory, monetary theory, and finance. More recently, he has played a crucial role in the development of new methods for the analysis of nonlinear dynamics in macroeconomics and finance, and models of expectations that relax the assumption of rational expectations.

I interviewed Buz in the faculty cafeteria near the Social Science Research Institute building, on the Madison campus of the University of Wisconsin, on October 22, 1998. Our interview was interrupted when he had to go to teach, and then was finished by phone on December 11, 1998. The transcript that follows does little justice to the liveliness of Buz's conversation, mainly because of my inability to transcribe the animated facial expressions and hand gestures that made the mathematical references more concrete. I have added several footnotes to the transcript, identifying some of the published sources that were mentioned during our conversation.