This study provides a unified growth theory to correctly predict the initially negative and subsequently positive relationship between child mortality and net reproduction observed in industrialized countries over the course of their demographic transitions. The model captures the intricate interplay between technological progress, mortality, fertility, and economic growth in the transition from Malthusian stagnation to modern growth. It not only provides an explanation for the demographic observation that fertility rates response with a delay to lower child mortality, but also identifies a number of turning points over the course of development, suggesting a high degree of complexity in the relationships between various economic and demographic variables.

This paper presents a quantitative analysis of the model developed by Galor and Moav [Galor, Oded and Omer Moav (2002) Natural selection and the origin of economic growth. Quarterly Journal of Economics 117(4), 1133–1191] in which agents vary genetically in their preference for quality and quantity of children. The simulation produces a pattern of income and population growth that resembles the period of Malthusian stagnation before the Industrial Revolution and the take-off into a modern growth era. We also investigate the stability of the modern growth era as an absorbing state of the model under the introduction of a strongly quantity-preferring genotype. We show that, given the absence of a scale effect of population in the model, the economy can regress to a Malthusian state under this change in the initial distribution of genotypes.

We explore the roles of subsidies in the Matsuyama model [K. Matsuyama, Econometrica 67 (1999), 335–347] of growth through cycles with a Solow investment phase and a Romer innovation phase when innovation and intermediate goods production rely on existing capital. We show that subsidies to R&D investment or to the purchase of new intermediate goods can arbitrarily reduce the threshold level of capital per type of intermediate good beyond which the economy moves to the innovation phase. Sufficient subsidization can eventually eliminate cycles. For plausible parameterizations, optimal subsidies can achieve significant welfare gains equivalent to as much as 10% rises in consumption at all times.

Equilibrium indeterminacy due to economies of scale (ES) in financial intermediation is quantitatively examined in a monetary business-cycle environment. Financial intermediation provides deposits that serve as a substitute for currency to purchase consumption, and depositing decisions are susceptible to nonfundamental shocks to confidence. The analysis considers various assumptions on nominal rigidities and the timing of deposit decisions. The results suggest that indeterminacy arises for small ES, and the resulting confidence shocks qualitatively mimic monetary shocks. A calibration exercise concludes that U.S. economic volatility from this nonfundamental source has increased over time while volatility from fundamental sources has decreased.

This paper presents a model of development that is driven by matching between talents and technologies. Differences in productivity across countries are amplified by three dimensions of talent utilization: the range of talents utilized, the density of a specific talent utilized, and the average match quality in the economy. In our model, higher productivity increases the number of technologies available, enhancing the opportunities for individuals to match their talents to specific technologies and increasing the returns to search. More intensive search further contributes to talent utilization.

This paper studies the determinacy properties of monetary and fiscal policy rules in a small-scale New Keynesian model. We modify the standard model in two ways. First, we allow positive public debt in the steady state as in Leeper [Journal of Monetary Economics 27, 129–147 (1991)]. Second, we add rule-of-thumb consumers as in Bilbiie [Journal of Economic Theory 140, 162–196 (2008)]. Leeper studied a model in which Ricardian equivalence holds, and he showed that monetary and fiscal policy can be studied independently. In Bilbiie's analysis, rule-of-thumb consumers break the Ricardian equivalence and generate important consequences for the design of monetary policy. In his model, steady-state public debt was equal to zero. We study a model with both rule-of-thumb consumers and positive steady-state public debt. We find that the mix of fiscal and monetary policies that guarantees equilibrium determinacy is sensitive to the exact values of the parameters of the model.

The U.S. tax system currently provides an incentive for individuals to obtain medical insurance through their employers. This unique tax treatment is widely excoriated as resulting in high costs and distorting consumption decisions. To study this issue, we develop a general equilibrium search model with endogenous health accumulation and a unique feature of the U.S. tax code, which exempts employer-provided medical benefits from taxation, to jointly account for the U.S. long-term unemployment rate and medical expenditure-to-aggregate consumption ratio. Through various counterfactual experiments, we find that (1) eliminating the employment-based tax subsidy lowers medical expenditure but, via a general equilibrium labor market effect, increases unemployment and lowers output, and contrary to conventional wisdom, lowers welfare; (2) having government raise taxes to finance the provision of medical care substantially increases the unemployment rate, while reducing income and welfare.

We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of pass-through of the policy rate to bank-lending rates. Strong cost-side effects limit the size of the policy rate response to inflation that is consistent with determinacy, so that inflation-targeting policies may not be capable of ensuring REE uniqueness. In this case it is advisable to combine policy rate responses to inflation with an appropriate reaction to the output gap and/or firm profitability. The negative reaction of real activity and asset prices to inflationary shocks adds a negative force to inflation responses that counteracts the borrowing cost effect and prevents expectations of higher inflation from becoming self-fulfilling.

There is common agreement on price inflation stabilization being one of the objectives of monetary policy. But, in an open economy, two alternative measures of inflation coexist: domestic inflation and consumer price inflation. Which of the two should be the target variable? Most of the new open economy macroeconomics (NOEM) literature suggests that the monetary authority should stabilize domestic inflation. This is in sharp contrast with the practice of many inflation-targeting central banks that are using consumer price index (CPI) inflation as target variable. The paper shows that the standard result in the NOEM literature is derived under the simplifying assumption of flexible wages. The inclusion of sticky wages in an otherwise standard small open economy model is shown to rationalize CPI inflation targeting. This conclusion is robust to changes in key parameters, including the trade elasticity.

This paper argues that foreign direct investment (FDI) may increase the vulnerability to capital flow shocks of economies with credit market imperfections. Because of worse access to financial markets, wages in domestic firms carry higher default risk than wages in foreign ones. This alters the domestic wage composition and the subsequent wealth distribution. When credit markets are imperfect, the wealth distribution typically determines an economy's growth potential in autarky; hence, high exposure to FDI may significantly impede the capability to recover from sudden withdrawals of foreign capital. This appears consistent with a first glance at empirical evidence on durations of output recovery after systemic sudden stops.

Edward C. Prescott has argued that mandatory saving is socially desirable because it solves the problem of people intentionally free riding and becoming a welfare burden. Inspired by Prescott's argument, we develop a model in which rational individuals choose between saving and free riding. We find that free riding is a robust outcome for a significant share of the population and that everyone, including the free riders, benefits from the elimination of free riding through mandatory saving. Our results strengthen Prescott's position that free riding is a serious problem and that mandatory saving is socially desirable.

We study the relationships between various concepts of financial development and balanced economic growth. A model of endogenous growth that incorporates roles for both financial efficiency and access to financial services permits a better understanding of the relationship between the size of the financial sector (value added) and growth. Higher financial value added results from some, but not all, kinds of finance-driven growth. If greater access rather than greater efficiency generates higher growth, then value added and growth can be positively correlated. We present some preliminary empirical results that support the importance of access alongside efficiency in explaining cross-country variations in growth.

This paper uses spectral theory to develop the following two testable hypotheses in a unified framework for the predictions of business-cycle and endogenous growth models: (i) financial development affects only business-cycle volatility; and (ii) shocks affect both business-cycle volatility and long-run volatility of GDP growth. In other words, volatility caused by shocks is more persistent than that caused by financial underdevelopment. We decompose the business-cycle and long-run volatility by the spectral method and then test the hypotheses at the cross-country level. Empirical evidence provides support for both hypotheses. Higher private credit, a bank-based measure of financial development, dampens business-cycle volatility but not long-run volatility. Volatility of shocks, as measured by the volatility of changes in the terms of trade, magnifies both business-cycle and long-run volatility. The results are robust to accounting for endogeneity, a market-based measure of financial development, and an alternative method of volatility decomposition.

We investigate the business cycle effects of imperfect transmission of technology shocks within a basic real business cycle (RBC) model along two dimensions. First, we assume that agents cannot distinguish a temporary increase in productivity growth from a sustained increase in the underlying growth rate of productivity and instead must conduct signal extraction exercises and update beliefs about the source of aggregated shocks. Second, we propose a technology adjustment cost resulting in the slow diffusion of technological innovations into the production process. Both of these impediments to the transmission of technology result in a large initial wealth effect, increasing investment and hours less, relative to the usual RBC model without these frictions. Furthermore, each of these features is capable of producing a decline in hours on impact of the technology shock matching the negative response in hours found in the data by such works as Gali [American Economic Review 89(1), 249–271 (1999)].

This research demonstrates that international financial integration changes the way in which financial development affects inequality within a country. Specifically, both cross-country analysis and dynamic panel data analysis using data collected from more than 100 countries provide evidence indicating that if the financial market of a country is strongly closed to the world market, financial development narrows inequality within that country, whereas if the financial market of a country is strongly open to the world market, financial development widens inequality within that country. Our theoretical framework provides a possible explanation for our empirical findings.

Evolutionary game theory provides a fresh perspective on the prospect that agents with heterogeneous expectations might eventually come to agree on a single expectation corresponding to the efficient markets hypothesis. We establish conditions under which agreement on a unique forecast is stable, but also show that persistent heterogeneous expectations can arise if those conditions do not hold. The critical element is the degree of curvature in the payoff weighting functions agents use to value forecasting performance. We illustrate our results in the context of an asset pricing model where a martingale solution competes with the fundamental solution for agents' attention.

Do immigrants have a higher demand for large-denominated banknotes than natives? This micro study examines whether banknote orders for CHF 1,000 notes are concentrated in Swiss municipalities with a high foreign-to-native ratio. The evidence for 251 Swiss municipalities finds that immigrants hoard fewer CHF 1,000 banknotes than natives. This empirical result means that immigration reduces seigniorage (per person) as measured by banknote orders. A 1% increase in the immigrant-to-native ratio is coincident with a reduction in banknote orders by CHF 4,000. This reduction is attributed to specific traits linked to immigrants.

Every game theorist knows of Mertens and Zamir (1985)'s universal beliefs space, which gives deep foundations to Harsanyi's model of Bayesian games, and Kohlberg and Mertens (1986)'s strategic stability, which is the first stone of a complete, axiomatic theory of selection among Nash equilibria. Some French mathematicians refer to the “Mertens–Zamir operator” when using techniques that Mertens and Zamir (1971) introduced to solve a class of repeated games with incomplete information. Readers of Macroeconomic Dynamics may instead have seen Mertens and Rubinchik's 2012 article “Intergenerational Equity and the Discount Rate for Policy Analysis.”

The previous examples give just a slight idea of the scope of Jean-François Mertens's contributions, which also deal with general equilibrium, stochastic games, nonatomic cooperative games, and the strategic foundations of microeconomic theory. In his 2005 MD interview, Robert Aumann says, “A [. . .] person at CORE who has had a tremendous influence on game theory [. . .] is Jean-François Mertens. Mertens has done some of the deepest work in the discipline, some of it in collaboration with Israelis like my students Kohlberg, Neyman, and Zamir; he established a Belgian school of mathematical game theory that is marked by its beauty, depth, and sophistication.” The short interview that follows will definitely not account for the variety and the relevance of Jean-François's research achievements, but is typical of the way in which he talked about his work.

Jean-François asked me to interview him for MD during the spring of 2010. We discussed by e-mail the topics that would be covered and on July 6, 2010, I came to Louvain-la-Neuve with a tape recorder. After lunch, Jean-François suggested that we have coffee on a terrace near the golf course and there, he patiently answered my questions, sometimes in French, sometimes in English, for about two hours. We planned to go on for at least another round but kept postponing the project. . . . When I saw Jean-François for the last time, in February 2012, I gave him the transcript of the July 2010 interview, but he hardly commented on it. He rather told me about an ongoing research article, “A Random Partitions Approach to the Value,” to be presented (by Abraham Neyman) as a “von Neumann lecture” at the World Congress of Game Theory in Istanbul in July 2012. At the same time, he was also completing, with Anna Rubinchik, the revision of a companion paper to the MD article referred to previously (“Equilibria in an Overlapping Generations Model with Transfer Policies and Exogenous Growth,” forthcoming in Economic Theory).

Even if Jean-François did not proofread the transcript that follows, I cannot keep this material for myself. I am confident that those who have known Jean-François will take the interview, even incomplete, as an opportunity to remember his enthusiasm and his patience when he was talking about research. He would often start by identifying holes in obvious or well-known solutions to basic problems, and after a few audacious but illuminating shortcuts, would describe the most surprising achievements in everyday words. I hope that the interview will give an idea of Jean-François's approach to those who did not know him.

Quite naturally, because MD was the planned outlet of the interview, we started by talking about the paper on the discount rate for policy analysis, which was already mentioned in the preceding. Jean-François made a number of informal comments, which usefully complement the MD article. He also explained how this paper led him and his coauthor to undertake a thorough analysis of overlapping generations economies in continuous time. This made a perfect transition to Jean-François's views on general equilibrium theory, his own work in this area, and his early career.

The next step would be Jean-François's meeting with Bob Aumann, who introduced him to game theory. Jean-François pursued Aumann and Maschler's seminal work on infinitely repeated games with incomplete information, mostly with Shmuel Zamir. He went on with the existence of a value in stochastic games, another model of infinitely long games, which was introduced by Shapley in 1953. This research was undertaken with Abraham Neyman at the Institute of Advanced Studies in Jerusalem in 1980. Soon after, Mertens and Zamir started to review and complete all available results on repeated games in order to prepare a reference book on this topic. The material kept growing. Sylvain Sorin joined the team in the nineties and a draft appeared as a 1994 CORE discussion paper. However, in 2010, the book was still unpublished. . . the interview ends up with Jean-François's feelings about the project.

As shown by the list of publications at the end, many important contributions of Jean-François Mertens to game theory and microeconomics are not even mentioned in the interview. During his stay at the Institute of Advanced Studies in Jerusalem in 1980, Jean-François not only worked with Abraham Neyman on stochastic games, but also had his first discussions with Elon Kohlberg on refinements of Nash equilibria. These would be followed by many others, at CORE and Harvard, until the famous Econometrica paper appeared in 1986. For the next 15 years or so, Jean-François further developed the theory of strategic stability, by himself and with his students.

During the same period, Jean-François was also making progress on a completely different problem, the extension of the Shapley value to nonatomic cooperative games. Aumann and Shapley (1974) had made the first steps by proposing a value for smooth games. Jean-François proposed a complete answer to the problem in the eighties and, as already pointed out above, kept working on related topics until the very end.

Even without entering into details, a description of Jean-François's more recent contributions would be beyond the scope of this short introduction. As the interview makes clear, Jean-François became more and more interested in the foundations of microeconomic theory. A typical example is his “limit price mechanism,” which can be loosely described as a double auction with several goods or as an extension of Shapley and Shubik's strategic market games. Another example is “relative utilitarianism,” which, as Jean-François explains in the interview, plays a crucial role in the determination of an appropriate social discount rate for the evaluation of long-term economic policies. Let us listen to him.

This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment. As opposed to the existing literature, our method can be employed in the medium- and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters model [American Economic Review 97(3), 586–606 (2007)], for which we show that imperfect commitment has relevant implications for interest rate setting, the sources of business cycle fluctuations, and welfare.

This study documents the cyclical properties of business credit in the United States and in the Euro area and constructs a theoretical model that can successfully replicate the observed characteristics. I find that real business loans lag output; i.e., business credit is more strongly correlated with past output than with current output. Furthermore, real business loans correlate negatively with future output and investment and positively with past output and investment. I show that a fairly standard model of business and credit fluctuations with agency costs can neither generate the lagging behavior of business credit nor induce the observed cross-correlation patterns of output, investment, and business loans. I introduce a costly financial intermediation mechanism into an otherwise standard macroeconomic framework and show that the evolution of intermediary balance sheets and the interaction of intermediation and agency costs can induce the observed regularities.