We show that dependence on foreign energy can increase economic instability by raising the likelihood of equilibrium indeterminacy, hence making it easier for fluctuations driven by self-fulfilling expectations to occur. This is demonstrated in a standard neoclassical growth model. Calibration exercises, based on the estimated share of imported energy in production for several countries, show that the degree of reliance on foreign energy for many countries can easily make an otherwise determinate and stable economy indeterminate and unstable.

We analyze the importance of the frequency of decision making for macroeconomic dynamics, in the context of a simple, well-known business cycle model with balanced budget rules. We explain how the frequency of decision making (period length) and the measurement unit of time (calibration frequency) differ and examine how local stability is affected by changes in the period length. We find that as the period grows longer, indeterminacy occurs less often. This may have significant quantitative implications: for the model at hand, there is a wide range of economically relevant labor tax rates (from 30% to 38%) for which the continuous-time model gives indeterminacy, whereas the discrete-time model has determinate dynamics.

We estimate the effects of government spending shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound (ELB). Using a panel VAR model for 17 advanced countries, we find that both the government consumption and investment multipliers are significantly higher, and exceed unity, when interest rates are persistently low. Distinguishing between construction- and equipment-related government investments, we find that only the former raises output by significantly more when the ELB binds. This result can be explained by existing New Keynesian models featuring time-to-build constraints on government investment.

Many tests have rejected the implications of the consumption CAPM for data on U.S. asset returns. All of the tests, though, assume that the pricing errors satisfy the Central Limit Theorem. I provide empirical evidence that the marginal distributions of the pricing errors are so heavy-tailed that they do not satisfy the Central Limit Theorem. Using recent work on jackknifing, I construct a method of testing asset pricing models with heavy-tailed errors. Using this procedure, I find that the consumption CAPM is not rejected by annual U.S. data.

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.

The relationship between recessions and productivity growth has been the focus of an important body of theoretical and empirical research in the last two decades. We contribute to this literature by presenting new evidence on the evolution of productivity in the aftermath of recessions. Our method allows us to distinguish between frontier and (in-)efficiency effects of recessions. We present international evidence for a panel of 70 countries for the period 1960–2000. Our results reveal that the average cumulative impact of recessions on productivity up to four years after their end is negative and significant. This, however, results from a mixture of mechanisms. The level of frontier production increases, but the rate of technical progress decreases, leading to a fall in frontier production. Efficiency also falls, lending support to the idea that recessions tend to reduce, rather than increase, economic restructuring. Long and deep recessions are also shown to have distinctive impacts on productivity.

The behavior of the real interest rate in a general equilibrium multisector model with irreversible investment is examined. It is shown that in such a model purely sectoral shocks can lead to substantial variation in the real interest rate and other aggregate time series. A source of variation in aggregate time series that is not found in one-sector models is thus examined, and the implications of this source of variation for the behavior of the interest rate are highlighted. Such a model seems to better capture the relationship among the real interest and output or investment than the standard one-sector stochastic growth model. It is also shown that, because of a desire to smooth consumption, with irreversible investment a rise in uncertainty concerning the future return to capital tends to lead to more current investment and a lower real interest rate.

This paper explores the main determinants of productivity growth. The analysis is performed using Spanish firm-level data. We define a framework where the relative magnitudes of alternative, but not exclusive, sources of technical change are simultaneously estimated. Our main finding is that the average total factor productivity (TFP) growth is fully explained by embodied technical progress (i.e., either new capital goods or human capital). Our results contradict the existence of a positive contribution of economywide neutral technological progress in determining average TFP growth. They also leave little room for large, unpriced effects external to the firm, both at the aggregate and at the industry level. We find evidence of firm-specific learning by doing, short-lived and due to adoption of new processes.

In this paper, we analyze the effects of the stimulus packages adopted by the German government during the Great Recession. We employ a standard medium-scale dynamic stochastic general equilibrium (DSGE) model extended by non-optimizing households and a detailed fiscal sector. In particular, the dynamics of spending and revenue variables are modeled as feedback rules with respect to the cyclical components of output, hours worked and private investment. Based on the estimated rules, fiscal shocks are identified. According to the results, fiscal policy, in particular public consumption, investment, and transfers prevented a sharper and prolonged decline of German output at the beginning of the Great Recession, suggesting a timely response of fiscal policy. The overall effects, however, are small when compared to other domestic and international shocks that contributed to the economic downturn. Our overall findings are not sensitive to considering fiscal foresight.

The concept of E-stability is widely used as a learnability criterion in studies of macroeconomic dynamics with adaptive learning. In this paper, it is demonstrated, via a counterexample, that E-stability generally does not imply learnability of rational expectations equilibria. The result indicates that E-stability may not be a robust device for equilibrium selection.

The fraction of the labor force under 35, or youth share, has been correlated with cyclical GDP volatility over the past several decades. The youth share and business cycle fluctuations were high during the 1970s. Then, as the population aged, output volatility declined. I develop an overlapping generations model featuring search frictions and productivity shocks, in which the age distribution affects cyclical volatility through two channels. First, employment for younger workers fluctuates more, creating a composition effect. Second, inexperienced workers produce less, so firms decide how many jobs to create based on the age distribution. Both this endogenous response by firms and the composition effect increase aggregate volatility when the youth share is high. The model can replicate a large portion of the Great Moderation in GDP volatility, suggesting an important role for demographics. The model also replicates unemployment rates, separation rates, and employment volatility by age group.

We analyze a Ramsey economy in which gross investment is constrained to be nonnegative. We prove the existence of a competitive equilibrium for the case in which utility need not be bounded from below and the Inada-type conditions need not hold. The analysis is carried out by means of a direct and technically standard approach. This direct approach allows us to obtain detailed results concerning properties of competitive equilibria, and is easily adapted for the analysis of analogous models often found in macroeconomics.

This paper estimates Taylor rules featuring instabilities in policy parameters and switches in policy shocks’ volatility for the post-World War II (WWII) U.S. economy. We contrast a rule embedding a fixed-inflation target with another featuring trend inflation, i.e., a time-varying inflation target. The rule embedding trend inflation turns out to be (a) empirically superior according to a marginal likelihood-based comparison and (b) more able to pin down some relevant episodes of the post-WWII U.S. monetary policy history. Estimates conducted with Greenbook data confirm the empirical superiority of the rule featuring a time-varying inflation target. A comparison with recently published estimates of trend inflation is also conducted.

One part of the literature on endogenous growth concerns models where public infrastructure affects the private production process. An unsolved puzzle in this literature concerns observed public investment-to-output ratios for developed economies, which tend to fall short of theoretical model-based optimal ratios. We reexamine the optimal choice of public investment in a more general framework. This setting allows for long-lasting capital stocks, a lower depreciation rate for public capital than for private capital, an elasticity of intertemporal substitution that differs from unity, and the need to finance a nontrivial share of public services in output. Given other fundamentals in the economy, we show that the optimal public investment-to-output ratio is smaller for low-growth economies, for economies populated by consumers with low preferences for substituting consumption intertemporally, and when public capital is durable. For a calibrated economy, we show that a combination of these factors solves the public investment puzzle.

It is customary for the Interviewer to begin with an introduction describing the circumstances of the interview and providing an overview of the nature and importance of the work of the interviewee. However, in this case, as Editor of this journal, I feel it would be presumptuous of me to provide my own overview and evaluation of the work of this great man, Paul Samuelson. The scope of his contributions has been so vast (averaging almost one technical paper per month for over 50 years) that it could be particularly difficult to identify those areas of modern economic theory to which he has not made seminal contributions.Perhaps those rare exceptions might include game theoretic and topological models and maybe the recent literatures on complex unstable nonlinear dynamics, sunspots, and incomplete markets. But I would not be surprised, if he were to correct those speculations as misperceptions, if I were to ask. In addition to his over 550 published papers, his books are legendary. He once said: “Let those who will—write the nation's laws–if I can write its textbooks.”

Instead of attempting to provide my own overview, I am limiting this introduction to the following direct (slightly edited) quotation of a few paragraphs from the Web site, The History of Economic Thought, which is maintained online by the New School University in New YorkThe current URL of that Web site is http://cepa.newschool.edu/het/home.htm.: Perhaps more than anyone else, Paul A. Samuelson has personified mainstream economics in the second half of the twentieth century. The writer of the most successful principles textbook ever (1948), Paul Samuelson has been not unjustly considered the incarnation of the economics ‘establishment’—and as a result, has been both lauded and vilified for virtually everything right and wrong about it.Samuelson's most famous piece of work, Foundations of Economic Analysis (1947), is one of the grandest tomes that helped revive Neoclassical economics and launched the era of the mathematization of economics. Samuelson was one of the progenitors of the Paretian revival in microeconomics and the Neo-Keynesian Synthesis in macroeconomics during the post-war period.The wunderkind of the Harvard generation of 1930s, where he studied under Schumpeter and Leontief, Samuelson had a prodigious grasp of economic theory, which has since become legendary. An unconfirmed anecdote has it that at the end of Samuelson's dissertation defense, Schumpeter turned to Leontief and asked, ‘Well, Wassily, have we passed?’ Paul Samuelson moved on to M.I.T. where he built one of the century's most powerful economics departments around himself. He was soon joined by R.M. Solow, who was to become Samuelson's sometime co-writer and partner-in-crime.Samuelson's specific contributions to economics have been far too many to be listed here—being among the most prolific writers in economics. Samuelson's signature method of economic theory, illustrated in his Foundations (1947), seems to follow two rules which can also be said to characterize much of Neoclassical economics since then: With every economic problem, (1) reduce the number of variables and keep only a minimum set of simple economic relations; and (2) if possible, rewrite it as a constrained optimization problem.In microeconomics, he is responsible for the theory of revealed preference (1938, 1947). This and his related efforts on the question of utility measurement and integrability (1937, 1950) opened the way for future developments by Debreu, Georgescu-Roegen, and Uzawa. He also introduced the use of comparative statics and dynamics through his ‘correspondence principle’ (1947), which was applied fruitfully in his contributions to the dynamic stability of general equilibrium (1941, 1944). He also developed what are now called ‘Bergson-Samuelson social welfare functions’ (1947, 1950, 1956); and, no less famously, Samuelson is responsible for the harnessing of ‘public goods’ into Neoclassical theory (1954, 1955, 1958).Samuelson was also instrumental in establishing the modern theory of production. His Foundations (1947) are responsible for the envelope theorem and the full characterization of the cost function. He made important contributions to the theory of technical progress (1972). His work on the theory of capital is well known, if contentious. He demonstrated one of the first remarkable ‘Non-Substitution’ theorems (1951) and, in his famous paper with Solow (1953), initiated the analysis of dynamic Leontief systems. This work was reiterated in his famous 1958 volume on linear programming with Robert Dorfman and Robert Solow, wherein we also find a clear introduction to the ‘turnpike’ conjecture of linear von Neumann systems. Samuelson was also Joan Robinson's main adversary in the Cambridge Capital Controversy—introducing the ‘surrogate’ production function (1962), and then subsequently (and graciously) relenting (1966).In international trade theory, he is responsible for the Stolper–Samuelson Theorem and, independently of Lerner, the Factor Price Equalization theorem (1948, 1949, 1953), as well as (finally) resolving the age-old ‘transfer problem’ relating terms of trade and capital flows, as well as the Marxian transformation problem (1971), and other issues in Classical economics (1957, 1978).In macroeconomics, Samuelson's multiplier-accelerator macrodynamic model (1939) is justly famous, as is the Solow–Samuelson presentation of the Phillips Curve (1960) to the world. He is also famous for popularizing, along with Allais, the ‘overlapping generations’ model which has since found many applications in macroeconomics and monetary theory. In many ways, his work on speculative prices (1965) effectively anticipates the efficient markets hypothesis in finance theory. His work on diversification (1967) and the ‘lifetime portfolio’ (1969) is also well known.Paul Samuelson's many contributions to Neoclassical economic theory were recognized with a Nobel Memorial prize in 1970.

This paper is dedicated to the memory of the great statistician Melvin J. Hinich, with whom we were in contact about this research prior to his untimely death from a tragic fall. We develop a neoclassical growth model with habit formation to exhibit an equilibrium nonlinear relationship between aggregate consumption growth and income growth. We first provide empirical evidence consistent with this relationship both for the United States and France, and we reject the hypothesis of a random walk for consumption. We then estimate this nonlinear relationship. We find for both countries robust evidence of persistence, nonlinearity, and cyclicity in the relationship between consumption and income.

We use the longest span data that have ever been studied before (from 1870 to 2014) to investigate the relationship between the price of oil and the level of economic activity in the United States. In the context of a bivariate (identified) structural generalized autoregressive conditional heteroscedasticity (GARCH)-in-Mean VAR in real output growth and the change in the real price of oil, we find that uncertainty about oil prices has had a negative and significant effect on real output. We also find that the responses of real output growth to positive and negative shocks are not very informative of whether they are symmetric or asymmetric, and that accounting for oil price uncertainty tends to amplify the negative dynamic response of real output growth to unfavorable (positive) oil price shocks.

In constitutional democracies, laws take time to be deliberated upon, to be passed, and to be implemented. Motivated by this observation, we study the properties of optimal tax reform when it has to be announced in advance of its implementation. We find that a delay between announcement and implementation has large effects on the optimal fiscal policy during the transition to the new steady state. On the other hand, we find that the welfare gains from optimal tax reform are fairly robust to the introduction of an implementation lag. Increasing the lag from zero to four years reduces the welfare gains by less than a quarter. Moreover, it turns out that this reduction of the welfare gain is mainly due to the delay itself rather than the effect of preannouncement on the character of the optimal tax reform.

In this paper we use a dynamic general equilibrium growth model to quantify the contribution to productivity growth from different technological sources in the three leading economies of the world: Germany, Japan, and the United States. The sources of technology are classified into neutral progress and investment-specific progress. The latter can be split into two different types of equipment: information and communication technologies (ICT) and non-ICT equipment. We find that in the long run, neutral technological change is the main source of productivity growth in Germany and Japan. For the United States, the main source of productivity growth arises from investment-specific technological change, mainly associated with ICT. We also find that a non-negligible part of productivity growth in the three countries has been due to the technology specific to non-ICT equipment.

In this paper we investigate the relationship between crude oil and gasoline prices and also examine the effect of oil price uncertainty on gasoline prices. The empirical model is based on a structural vector autoregression that is modified to accommodate multivariate GARCH-in-Mean errors. We use monthly data for the United States over the period from January 1976 to September 2014. We find that there is an asymmetric relationship between crude oil and gasoline prices, and that oil price uncertainty has a positive effect on gasoline price changes. Our results are robust to alternative model specifications and alternative measures of the price of oil.