Many macroeconometric models depict situations where the shares of the major demand aggregates in output are stable over time. The joint dynamic behavior of the considered demand aggregate and output may thus be approximated by a cointegrated vector autoregression. However, the shares of many demand subaggregates in output are rather mobile and changing over time. In order to simultaneously capture the flexibility of the shares of the subaggregates and the long-run constancy of the share of the total aggregate, we consider trivariate systems of two macroeconomic subaggregates and output with error-correction terms that are nonlinear functions of the original variables. The merits of the models are evaluated by means of several forecasting experiments.

This paper examines the choice between government expenditure on public goods and transfer payments, in the form of a pension, in an overlapping-generations model. Government expenditure is tax-financed on a pay-as-you-go basis. A utilitarian judge chooses expenditures to maximize a social welfare function. The nonlinear solution is found to involve the ratio of a welfare-weighted average income, which depends on the inequality aversion of the judge, to arithmetic mean income. An approximation for this ratio is found that produces explicit solutions for the optimal composition. The result is used to obtain an indication of “implicit” inequality aversion for a range of countries.

Stock–flow job matching implies that there are two types of job seekers—those on the short side of their occupations who can easily find work, and those on the long side who expect extended unemployment spells. Using matching data and information on completed and uncompleted unemployment spells for England and Wales, this paper uses the stock–flow matching hypothesis to identify the fraction (incidence) of laid off workers who find themselves on the long side of the market and, conditional on being on the long side, their expected unemployment duration. The average incidence is around one-half and increases significantly in recessions. The expected duration is also strongly countercyclical—peaking at 15 months in the 1990–1992 recession and falling to a more modest 9 months by January 1999. Cross-section estimates also identify a North–South divide and a large city effect—the unemployed in large cities and in the North experience longer spells.

A recent article in The Economist magazine divided economists into “poets” and “plumbers,” the former articulating radical new visions of the field and the latter patiently installing the infrastructure needed to implement those visions. Bob Shiller is the rare economist who is both poet and plumber. Not only that, he is also entrepreneur and pundit. His work has fundamentally changed the theory, econometrics, practice, and popular understanding of finance.

Starting in the late 1970's, Bob boldly challenged the prevailing orthodoxy of financial economics. He showed that financial asset prices often deviate substantially from the levels predicted by simple efficient-markets models, and he developed new empirical methods to measure these price deviations. In the early 1980's, Bob went on to argue that economists need a much more detailed understanding of investor psychology if they are to understand asset price movements. He pioneered the emerging field of behavioral economics and its most successful branch, behavioral finance. At the end of the century, Bob articulated his vision of finance in a wildly successful popular book, Irrational Exuberance. He became so well known that TIAA-CREF asked him to appear in a series of full-page advertisements in the popular press.

Although Bob does not believe that investors use financial markets in a perfectly rational manner, he does believe that these markets offer great possibilities to improve the human condition. His recent work asks how existing financial markets can be used, and new financial markets can be designed, to improve the sharing of risks across groups of people in different regions, countries, and occupations. He has explored risk-sharing possibilities not only in journal articles, but also in business ventures and a 2003 book, The New Financial Order: Risk in the 21st Century.

It was a great privilege for me to interview Bob Shiller. Bob's arrival at Yale when I was a Ph.D. student there set the course of my career as an economist. Bob reinvigorated the Yale tradition of macroeconomics, with its emphasis on the central role of financial markets in the macroeconomy and its idealism about the possibility of improving macroeconomic outcomes. First as a thesis adviser, then as a coauthor, mentor, and friend, Bob showed me how to contribute to this tradition.

The interview took place at the 2003 annual meetings of the Allied Social Science Associations in Washington, D.C. We met in a hotel suite, ate a room service meal, and had the enjoyable conversation that is reproduced below.

We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states, using an underlying logit model determining the relative state weights over time. We show that a widening of the credit spread and a tightening of credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. The credit spread and—to some extent—credit standards are also the key determinants of the underlying state of the economy; the prevalence of the crisis state is more pronounced in times of adverse credit conditions. Together with a stronger shock transmission in the crisis state, this provides further evidence for a financial accelerator in the euro area.

This paper tests the optimality of consumption decisions at the aggregate level, taking into account popular deviations from the canonical constant-relative-risk-aversion (CRRA) utility function model—rule of thumb and habit. First, we provide extensive empirical evidence of the inappropriateness of linearization and testing strategies using Euler equations for consumption—a drawback for standard rule-of-thumb tests. Second, we propose a novel approach to testing for consumption optimality in this context: nonlinear estimation coupled with return aggregation, where rule-of-thumb behavior and habit are special cases of an all-encompassing model. We estimated 48 Euler equations using GMM. At the 5% level, we only rejected optimality twice out of 48 times. Moreover, out of 24 regressions, we found the rule-of-thumb parameter to be statistically significant only twice. Hence, lack of optimality in consumption decisions represent the exception, not the rule. Finally, we found the habit parameter to be statistically significant on four occasions out of 24.

Costas Azariadis was born in Athens, Greece, in 1943. He attended the National Technical University in Athens and received a degree in chemical engineering in 1969. He then attended Carnegie Mellon University, receiving an MBA in 1971 and his Ph.D. in 1975. His doctoral dissertation was advised by Edward Prescott and Robert Lucas. Azariadis's first academic appointment was as an assistant professor at Brown University between 1973 and 1977, after which he moved to the University of Pennsylvania. In 1992, he moved to UCLA. In addition, Azariadis spent two semesters at Hebrew University and Princeton and has held briefer visiting positions all over the world.

The Encyclopedia Americana, 2002 edition, concludes its entry on Milton Friedman as follows: “His major work, A Monetary History of the United States, 1867–1960, was published in 1963.” That might be seen as an indirect compliment to Anna J. Schwartz, who coauthored the Monetary History with Friedman but is not mentioned in the encyclopedia entry. Similarly, the Nobel Committee neglected to mention Schwartz when, in awarding Friedman his Prize in 1976, it described A Monetary History as “[h]is major work [and] … one of Friedman's most profound and also most distinguished achievements.” Fortunately, the economics profession as a whole has not been so negligent, and the phrase “Friedman and Schwartz” has become second nature to economists when discussing the importance of monetary policy.

Beside her collaborations with Friedman, Anna Schwartz is perhaps best known for her longevity, which is on an epoch-shattering scale. Her career as an economic researcher began a quarter-century before the publication of A Monetary History, and has continued in the 40 years since. Schwartz's first journal article was published in May 1940, the month Winston Churchill became Prime Minister of the United Kingdom and over 18 months before the United States entered World War II. She has worked at the National Bureau of Economic Research in New York City continuously since 1941. Monetary economics has been a constant interest for her, and she is the only person to have had items published in the inaugural issues of both the Journal of Money, Credit, and Banking (February 1969) and the Journal of Monetary Economics (January 1975).The JME piece was a book review, and so does not appear in the bibliography below. Schwartz's numerous book reviews make rewarding reading and include a prediction in Kyklos in 1968 of an era when economists would use Internet connections to download macroeconomic databases. The JME moved into its fiftieth volume in 2003, and Schwartz became one of only two authors (the other being Thomas Sargent) to have published in both volumes 1 and 50 of the journal. With the NBER branching out in the 1970's into a national network of researchers, Schwartz has been for a quarter century an unmistakable fixture at the NBER monetary economics program's regular meetings at Cambridge, Massachusetts. At the time of the interview, her contributions to the NBER's various working paper series spanned from NBER Technical Paper No. 4, 1947, to NBER Working Paper No. 9321, November 2002. The latter paper covered the issue of equity price behavior, the same subject of her 1940 publication, implying that Schwartz had entered a remarkable seventh decade of research in that area. Much of Schwartz's early research was on UK economic growth and fluctuations in the nineteenth century, and was reflected in a two-volume study essentially completed in the early 1940's but not published until 1953 [Gayer et al. (1953)]. Robert Lucas, who read the volume as a graduate student in history, describes it as “an amazingly ambitious and exciting mix of history and theory.”

Schwartz's collaboration with Milton Friedman on the relationship between the quantity of money and other variables began in 1948. Their early findings on the importance of money were reported by Friedman in a 1952 American Economic Review paper, but, by and large, he had problems promoting their work in the 1950's. Friedman's solo work in the fifties on flexible exchange rates, the consumption function, and the limits of stabilization policy would cement his reputation and be cited in his eventual Nobel award, but the monetary policy studies initially made a much more limited impact. All of Friedman's remaining 1950's writings on money were in “in-house” University of Chicago publications or in congressional testimony.A short excerpt from a Journal of Political Economy paper by Friedman on money did appear in the 1959 proceedings issue of the American Economic Review. Two books by Friedman in the early 1960's previewed some findings from the monetary history project with Schwartz. The first of these, A Program for Monetary Stability, is now recognized as a classic, but its muted reception is evidenced by the fact that economists have never been able to agree on which year it was published. The second book, Capitalism and Freedom (1962), was intended for a wide audience, but was virtually driven underground when all major U.S. newspapers declined to review it. In 1969, a Federal Reserve Bank of New York official, Richard Davis, gave this perspective on reactions to early monetarist work of the 1950's and early 1960's: “[E]conomists regarded this group—when they regarded it at all—as a mildly amusing, not quite respectable collection of eccentrics…. The fact is that the view held by Friedman and others on the predominant importance of money was just not given serious attention by most economists.”

The turning point was in 1963, when Friedman and Schwartz's 15 years of research finally saw print in their Monetary History and the article “Money and Business Cycles.” The Monetary History is justly celebrated, and has remained in print for 40 years.Furthermore, of the 93 books listed by Princeton University Press in its Economics and Finance Catalogue 2003, the Monetary History is the only pre-1994 publication included. The “Cycles” paper, as Davis acknowledged, provided “[b]y far the largest mass of evidence” on the cyclical relation between money and output. In addition, the paper's “tentative sketch” of the monetary transmission mechanism became a cornerstone of the monetarist literature, and an inspiration to many monetary economists, including the late Rudiger Dornbusch, as they endeavored to escape the “single interest rate channel” view of the transmission mechanism.

Schwartz began the 1970's with another collaboration with Friedman, Monetary Statistics, and went on in 1973 to join a number of economists, including fellow monetarists Karl Brunner and Allan Meltzer, in forming the Shadow Open Market Committee (SOMC). The SOMC commented regularly on U.S. economic policy and, in particular, offered monetary policy recommendations to address the severe inflation problem of the 1970's. Schwartz remains on the SOMC 30 years later, the only founding member to serve since the SOMC's inception.

Friedman and Schwartz's final major collaboration, Monetary Trends in the United States and the United Kingdom, was published in 1982. Among monetary economists, the response to Monetary Trends was mild compared to the reception for the Monetary History. Work by Friedman and Schwartz and other monetarists had already changed macroeconomic thinking substantially, and most academic work was now concerned with rigorous modeling of short-run dynamics, rather than the empirical evidence on long-run relations that concerned Friedman and Schwartz in their Trends study.

Schwartz's own work over the past 20 years has been prolific, and has often been in collaboration with Michael Bordo, with whom she has written some 25 articles. While her areas of research have included banking regulation and the role of international financial institutions, Bordo's and her mutual interest in monetary economics and economic history has repeatedly been evident in their work. Among the issues that their studies, sometimes with further collaborators, have addressed are the role of monetary targets in Canada and the United Kingdom in the face of money demand instability, whether monetary policy rules could have avoided the Great Contraction, the historical record of alternative monetary policy regimes, and the history of economic thought, including the development of monetarism.

This paper examines the stability of sunspot equilibria in one-sector RBC models under infinite horizon learning. We present general conditions under which the reduced-form model can possess E-stable sunspot equilibria and apply these conditions to three prominent one-sector RBC models. We find that the rational expectations sunspot equilibria are generally unstable under learning.

This study uses two large datasets to explore the output dynamics following economic disasters, one including 180 economic disasters across 38 countries over the last two centuries and the other including 204 disasters in 182 countries since World War II. Our results suggest that extreme economic crises are associated with huge and remarkably persistent loss. On average, output loss surges to above 26% in the first few years after the outbreak of a disaster and remains above 20% for as long as 20 years. It is only after more than 50 years that the loss is fully recovered.

When studying the Federal Open Market Committee’s (FOMC’s) interest rate rule, some authors, such as Gonzalez-Astudillo [(2018) Journal of Monetary, Credit, and Banking 50(1), 115–154.], find evidence for changes in inflation and output gap responses. Others, such as Sims and Zha [(2006) American Economic Review 96(1), 54–81.], only find evidence for a change in the variance of the interest rate rule. In this paper, I develop a new two-regime Markov-switching model that probabilistically performs variable selection and identification of parameter change for each variable in the model. I find substantial evidence that there have been changes in the FOMC’s response to the unemployment gap and in the volatility of the rule. When the FOMC responds strongly to the unemployment gap, I find a bimodal density for the inflation response coefficient. Despite the bimodal density, there is a low probability that there have been changes in the FOMC’s response to inflation.

Why is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank’s interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound.

We analyze the role of the lending-deposit interest rate spread in the dynamics of the current account in developing countries. For that purpose, we extend the standard perfect-foresight intertemporal model of the current account for the existence of the interest rate spread and simulate the convergence path of developing economies. This model helps explain why in many cases it is optimal for a fast-growing, low-income country to run a balanced current account.

We develop an overlapping generations model to study how the interplay between social and human capital affects fertility. In a framework where families face a trade-off between the quantity and quality of children, we incorporate the assumption that social capital plays a key role in the accumulation of human capital. We show how the erosion of social capital can trigger a chain of reactions leading households to base their childbearing decisions on quantity, instead of quality, resulting in higher fertility.

The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labor market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

We build a model that, according to the empirical evidence, gives rise to oscillations in wealth within a dynasty while keeping intergenerational persistence in education attainment. We propose a mechanism based on the interaction between wealth and effort as suggested by the Carnegie conjecture, according to which wealthier individuals devote less effort in their job occupations than poorer. Oscillations in wealth arise from changes in the occupation chosen by different generations of the same dynasty as a response to both inherited wealth and college premium. Our mechanism generates a rich social stratification with several classes in the long run due to the combination of different levels of education and occupation types. Furthermore, we generate a large mobility in wealth among classes even in the long run. Our model highlights the role played by the minimum cost on education investment, the borrowing constraints, and the complementarity between education and occupational effort.

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.

Persistent high unemployment has fostered the employment persistency hypothesis according to which employment changes are driven by unanticipated shocks whereas anticipated shocks that potentially could change employment are absorbed by wage changes. Empirical tests of the persistency hypothesis fail to distinguish between the properties of shocks and endogenous propagation mechanism causing persistency. This paper develops a new test strategy by explicitly distinguishing between these two factors. The methodology is applied to the manufacturing sector in Denmark, and some support in favor of an endogenous propagation mechanism causing employment persistency is found.

Weekly live cattle prices in various markets would be expected to share common trends, i.e., they cannot be driven by separate nonstationarities because at some point the prices will diverge sufficiently for it to be economic to cross-ship the cattle, or at least the beef. This paper extends previous bivariate work to a multivariate analysis that is capable of modeling the multiple market linkages in prices for many geographical regions. The empirical estimation represents the application of an innovation on Aoki's Linear Systems State Space model that allows determination of long- and short-run dynamics common to multiple series. The common dynamics permit characterization of the multiple markets with a limited number of states (sufficient statistics for the past), resulting in dynamic arbitrage relations between the series. A nonparametric test is used to evaluate the value of expected arbitrage forecasts implied by the structure of the model. The arbitrage relationship also is employed to generate efficient discounts/premiums for either physical delivery or cash settlement of futures contracts. The proposed settlement mechanism accounts for spatial arbitrage opportunities and therefore better represents the true geographical discounts faced by traders in individual markets.

This paper explores the possible real effects of inflation within a two-sector neoclassical growth model of the Heckscher–Ohlin type with a cash-in-advance constraint on the purchases of consumption goods. The main findings are that the relative prices of both factors and of both goods, which are linked via a Stolper–Samuelson relation, depend only on the rate of time preference, not on any monetary variable; that the steady-state level of total capital can be influenced by inflation if the capital intensities and the cash requirements in both sectors differ, leading to Tobin effects or reversed Tobin effects; and that higher inflation unambiguously reduces total labor supply and leads to a reversed Tobin effect in most cases if the labor/leisure choice is endogenized.