Who is Robert Aumann? Is he an economist or a mathematician? A rational scientist or a deeply religious man? A deep thinker or an easygoing person?

These seemingly disparate qualities can all be found in Aumann; all are essential facets of his personality. A pure mathematician who is a renowned economist, he has been a central figure in developing game theory and establishing its key role in modern economics. He has shaped the field through his fundamental and pioneering work, work that is conceptually profound, and much of it also mathematically deep. He has greatly influenced and inspired many people: his students, collaborators, colleagues, and anyone who has been excited by reading his papers or listening to his talks.

Aumann promotes a unified view of rational behavior, in many different disciplines: chiefly economics, but also political science, biology, computer science, and more. He has broken new ground in many areas, the most notable being perfect competition, repeated games, correlated equilibrium, interactive knowledge and rationality, and coalitions and cooperation.

But Aumann is not just a theoretical scholar, closed in his ivory tower. He is interested in real-life phenomena and issues, to which he applies insights from his research. He is a devoutly religious man; and he is one of the founding fathers—and a central and most active member—of the multidisciplinary Center for the Study of Rationality at the Hebrew University in Jerusalem.

Aumann enjoys skiing, mountain climbing, and cooking—no less than working out a complex economic question or proving a deep theorem. He is a family man, a very warm and gracious person—of an extremely subtle and sharp mind.

This interview catches a few glimpses of Robert Aumann's fascinating world. It was held in Jerusalem on three consecutive days in September 2004. I hope the reader will learn from it and enjoy it as much as we two did.

We study the influence of wage differential on the emergence of endogenous fluctuations. In this way, we introduce a dual labor market, based on the Shapiro–Stiglitz efficiency wage theory in an overlapping generations model. We show that wage inequality is a source of endogenous fluctuations. Indeed, a sufficiently strong wage differential leads to the occurrence of cycles of period 2 and local indeterminacy. Moreover, in contrast to several existing contributions, these results depend neither on increasing returns to scale nor on the degree of capital–labor substitution.

This paper focuses on the demand for money in the United States in the context of two globally flexible functional forms—the Fourier and the asymptotically ideal model (AIM)—estimated subject to full regularity, using methods suggested over 20 years ago. We provide a comparison in terms of violations of the regularity conditions for consumer maximization and in terms of output in the form of a full set of elasticities. We also provide a policy perspective, using (for the first time) parameter estimates that are consistent with global regularity, in that a very strong case can be made for abandoning the simple-sum approach to monetary aggregation, on the basis of the low elasticities of substitution among the components of the popular M2 aggregate of money.

In this progress report, we first indicate the origins and early development of the Marshallian Macroeconomic Model and briefly review some of our past empirical forecasting experiments with the model. Then we present recently developed one-sector, two-sector and n-sector models of an economy that can be employed to explain past experience, predict future outcomes, and analyze policy problems. The results of simulation experiments with various versions of the model are provided to illustrate some of its dynamic properties that include “chaotic” features. Last, we present comments on planned future work with the model.

Guillermo Calvo is one of the most influential economists in the field of international macroeconomics of the past 30 years. He has produced seminal articles in every area of macroeconomics and international economics that he has worked on, including his early classic articles on capacity utilization and time inconsistency, his 1980's works on efficiency wages, price stickiness, and policy credibility, and his recent studies on sudden stops and emerging market crises. Yet, the defining feature of Guillermo Calvo's contribution to our profession is not the depth and wide scope of the economic theories he has developed, but the central emphasis he puts in all his work on the role of economics as a tool for understanding reality and improving the quality of human life.

Guillermo Calvo's passion for the policy implications of economic theory is obvious to anyone who has met him since his days as Senior Advisor of the Research Department of the IMF in the mid-1980's. This feature of his professional interests was much less obvious to those who interacted with him during his early years as an important figure of the rational expectations revolution. It was probably hard to see that behind the highly technical treatment presented in his articles at that time was an author who had his feet soundly set on the ground and focused on understanding how society could benefit from the renaissance of macroeconomic theory that was taking place. Interestingly, Michael Rothschild did figure out the true nature of Guillermo Calvo in those early years. When the University of California at San Diego tried to hire Calvo in the mid-1980's, Rothschild explained to Calvo that he was an excellent fit for San Diego because he was a particular type of theoretician: “Most theoreticians make theory out of theory,” Rothschild noted, but Calvo was different because he made “theory out of reality, taking what is really out there and presenting it in a much wider and complex form than a well-developed but narrow theory.”

The following pages are excerpts from three interview sessions that Guillermo Calvo and I had at his office in the Inter-American Development Bank in the spring of 2003. These interviews provide a clear summary picture of Calvo as the theoretician of reality that Michael Rothschild described. The recollection of the conversation with Rothschild is one of many fascinating memories of Calvo's personal life and professional career that emerged during our meetings. We taped and transcribed the three meetings in Spanish and then Calvo and I together edited that material to produce this much shorter interview in English for Macroeconomic Dynamics.

This interview was completed in May 2004, well before Stan Fischer had any idea he would become Governor of the Bank of Israel, a position he took up in May 2005. The interview took place in April 2004 in my office at the Russell Sage Foundation in New York City, where I was spending a sabbatical year. We completed it while running together in Central Park during the following weeks.

Our meeting at Russell Sage was just like the many meetings we have had over the years. I was not sitting with a Master of the Universe, a world VIP, but with the same Stan Fischer I had first met in 1973 when he was a young associate professor, freshly imported from Chicago. There was the same ability to listen carefully, the same ability to talk and to explain simply and straightforwardly. In addition, there was the accumulated wisdom of a professional life spent developing and applying macroeconomics to the very real world.

When I arrived as a PhD student at MIT in 1973, it was clear that Stan would quickly play a central role in the department. Within a few years, he was one of the most popular teachers, and one of the most popular thesis advisers. We flocked to his office, and I suspect that the only time for research he had was during the night. What we admired most were his technical skills (he knew how to use stochastic calculus)—, and his ability to take on big questions and to simplify them to the point where the answer, ex post, looked obvious. When Rudi Dornbusch joined him in 1975, macro and international quickly became the most exciting fields at MIT. Imitation is the sincerest form of admiration, and this is very much what we all did.

When I came back to MIT in 1982, this time as a faculty member, Stan had acquired near-guru status. Teaching the advanced macro courses with him, and writing “Lectures on Macroeconomics,” which we finished in 1988, was one of the most exciting intellectual adventures of my life. We both felt that there was a new macroeconomics, more micro-founded and full of promises and that we understood its architecture and its usefulness. Although we had not thought of it as a textbook, it quickly became one, and it is nice to know that it still sells surprisingly well today.

As the years had passed, Stan had taken more and more interest in applying theory to the real world, working with Rudi on hyperinflation, being involved in the economics of peace with George Shultz in the Middle East. In 1988, he decided to jump from academia to the real world, and became Chief Economist of the World Bank. After a brief return to MIT, he then returned to Washington in 1994 to become First Deputy Managing Director of the IMF, where he remained until 2001. That part of his life has been well documented in newspapers and magazines: While at the IMF, he was on the front lines during the Mexican crisis, the Russian crisis, the Asian crises, and many others. From the peeks I got of him during those times, what strikes me most is how he remained the same as he had been at MIT: calm, careful about the facts, analytical, using macroeconomic theory even in the middle of the most intense fires. Many thought and hoped that he would become the managing director of the IMF. Antiquated rules and country politics prevented it from happening. The IMF's loss turned out to be the private sector's gain. In 2002, Stan joined Citigroup, where he is the President of Citigroup International. He is still active in macro policy debates and remains one of the wise men of our profession.

Recent research shows that when commonly estimated dynamic Taylor rules, which are augmented with a lagged interest, are embedded in a variety of macroeconomic models, they imply a greater amount of predictable information about future movements in interest rates than is actually evident in the yield curve. We extend the analysis to consider more generally the predictability of the arguments of the Taylor rule—inflation and the output gap—in addition to the interest rate. Specifically, we compare the predictability of these three variables in a macroeconomic model with a dynamic Taylor rule to their predictability in real-time surveys of macroeconomic forecasters or a VAR model. We find that the strongest evidence against the dynamic Taylor rule is that while it is easy to predict the variables that enter the rule, it is very hard to predict actual interest rate changes. This disparity suggests that dynamic Taylor rules neglect important aspects of monetary policy behavior.

The rational expectations hypothesis swept through macroeconomics during the 1970s and permanently altered the landscape. It remains the prevailing paradigm in macroeconomics, and rational expectations is routinely used as the standard solution concept in both theoretical and applied macroeconomic modelling. The rational expectations hypothesis was initially formulated by John F. Muth Jr. in the early 1960s. Together with Robert Lucas Jr., Thomas (Tom) Sargent pioneered the rational expectations revolution in macroeconomics in the 1970s.

Jacques Drèze was born in Verviers, Belgium, in 1929 and completed his Ph.D. in Economics in 1958 at Columbia. His contribution to economics is exceptional, opening up new paths of research in various areas including general equilibrium, decision theory, game theory, econometrics (in particular, Bayesian econometrics), followed by contributions to macroeconomics and economic policy. Drèze has been president of the Econometric Society as well as associate editor and co-editor of Econometrica; founding member and first president of the European Economic Association; president of the International Economic Association and honorary member of the American Economic Association and the National Academy of Sciences. He has received 15 honorary doctorates, including one from the University of Chicago. He has engaged in the promotion and development of research and higher education in Europe, being a founding member of the Centre for Operations Research and Econometrics (CORE) and of the European Doctoral Program in Quantitative Economics (EDP). He has also actively participated in the most pressing economic problems in Europe.

The interview mainly aims at inviting Jacques Drèze to explain what have been his major contributions and what avenues he suggests for future research in macroeconomics. The interview has been conducted sequentially. It started in October 2002 at the European University Institute. The long material collected along these highly illuminating talks was polished and condensed in the following pages. They are organized in the following way. The first section refers to Jacques' initial experiences in Belgium followed by his study of economics in the United States. The second section is devoted to the unity underlying an apparent diversity in his research interests. The third section is devoted to his more recent contributions to macroeconomics, which may be stated as “incomplete markets drive multiplicity of equilibria, calling for active economic policies.” The interview concludes with his contribution to the promotion of research and, in particular, research institutions across Europe.

Both Pierre Dehez and Omar Licandro were students of Jacques Drèze. Dehez and Drèze co-authored several papers, some of which are mentioned in the interview.

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.

We show how introducing home bias in government spending in the redux model generates quasi neutrality of fiscal policy shocks. We offer an intuitive explanation for this result and we stress its policy implications.