We incorporate a production technology that exhibits increasing returns to scale for small values of the capital stock and diminishing returns for the higher stocks at the firm level in a discrete-time version of Romer's endogenous growth model. We study the social planner's problem where the social production technology exhibits globally increasing returns to scale. The properties of the optimal paths are characterized. It is proved that for a given quality of knowledge technology, the countries can take off if their initial stock of capital is above a critical value. We analyze the effect of three factors on the critical value: initial knowledge, quality of knowledge technology, and level of fixed costs associated with production.

This paper discusses the asymptotic behavior of distributions of state variables of Markov processes generated by first-order stochastic difference equations. It studies the problem in a context that is general in the sense that (i) the evolution of the system takes place in a general state space (i.e., a space that is not necessarily finite or even countable); and (ii) the orbits of the unperturbed, deterministic component of the system converge to subsets of the state space which can be more complicated than a stationary state or a periodic orbit, that is, they can be aperiodic or chaotic. The main result of the paper consists of the proof that, under certain conditions on the deterministic attractor and the stochastic perturbations, the Markov process describing the dynamics of a perturbed deterministic system possesses a unique, invariant, and stochastically stable probability measure. Some simple economic applications are also discussed.

This paper revisits an important issue concerning the persistent real effect of a shock to monetary policy. Although recent sentiment has shifted away from price stickiness toward wage stickiness in explaining persistence, the present paper shows that introducing an input–output structure tends to make the former an equally important monetary transmission mechanism. Under staggered wage setting, the well-known relative-wage effect is the only source of endogenous sluggishness in wage, and thus price, adjustments, regardless of whether there is an intermediate input. Under staggered price setting, relative wages are constant, but the presence of an intermediate input creates a real-wage effect that prevents nominal wages from deviating too much from a sticky intermediate-input price. Meanwhile, stickiness in the intermediate-input price translates directly into sluggishness in marginal-cost movement. This reinforces the endogenous rigidity in the nominal wages and makes firms' pricing decisions even more rigid. Thus, although it makes no difference in output dynamics under staggered wage setting, the input–output structure improves the ability of staggered price setting in generating persistence. As a consequence, the conventional wisdom on the equivalence of price and wage staggering may continue to hold for some reasonable parameter values.

Recent literature on independent and conservative Central Banks has highlighted the possibility of achieving lower inflation for no increase in the volatility of output—especially when political influences are taken into account. We extend this idea to allow for political uncertainty, where political parties get elected with a probability that may vary over time. We find that it is no longer possible to guarantee lower inflation at no cost at all times. But it is possible to guarantee one or other property if the bank is very conservative or if the governments are always liberal. That implies a conventional inflation–output stability trade-off. However, it is also possible to have conditions in which neither property applies.

In this paper, I study the effect that switching to a voucher system of educational finance has on the distribution of income. The model is calibrated to U.S. data, and simulated for two different forms of education finance: a voucher system and a completely private system of schools. All voucher policies considered result in welfare gains and reductions in income inequality. A private system entails a welfare loss and an increase in income inequality. The more important the peer group is to future income, the smaller the welfare gains and reductions in inequality associated with voucher systems, and the greater the welfare cost and increase in inequality associated with a private system.

We use two-stage optimal control techniques to solve some adoption problems under embodied technical change. We first solve a benchmark problem without learning behavior. At the date of switching, the consumption level is shown to drop, as the relative price of capital goes down (obsolescence). In such a case, the economy sticks to the initial technology, or immediately switches to a new technology with a higher level of embodiment, depending on how the obsolescence costs compare to the induced growth advantage. In a second step, we introduce learning. The learning curve involves fixed costs and incentives to wait as well. Adoption is shown to depend on the growth advantage of switching net of obsolescence and learning fixed costs. The economy will switch if and only if this indicator is positive. If it is big enough to “compensate” the option of waiting, then the economy switches immediately. Otherwise, the economy waits.

Christopher Sims is a well-known intellectual leader in time-series econometrics and applied macroeconomics. Among his many honors and distinctions, he has been the President of the Econometric Society and he is a member of the National Academy of Sciences. He has made fundamental contributions to both statistical theory of time series and empirical macroeconomics. Sims' work is influential precisely because it was motivated by important problems in macroeconomics. Not only did Sims study questions of statistical approximation in abstract environments, he showed how to apply the resulting apparatus to a variety of specific problems confronting applied researchers. The applications include seasonality in economic time series, aggregation over time, and approximation in formulating statistical models with economic underpinnings. Moreover, Sims' contributions to causality in time series and to the development of vector autoregressive methods were complemented by an important body of empirical research. Sims has served as an effective advocate and critic of the extensively used vector autoregressive statistical methods. Motivated by his own and related empirical research, Sims is one of the leaders in rethinking how monetary policy should be modeled and reconsidering the channels by which monetary policy influences economic aggregates. This interview with Chris Sims gives an opportunity to explore further the context of many of these contributions. Sims typically has a unique perspective on many economic problems, a perspective that is articulated in his answers to a variety of questions.