经典的东东,不用介绍了吧,缺了几章,希望大家帮着补齐.

Volume 1, Part 1, Pages 3-737 (1999) Edited by: John B. Taylor and Michael Woodford ISBN: 0-444-50156-8

Introduction to the series Page v Kenneth J. Arrow and Michael D. Intriligator

Contents of the handbook Pages vii-ix

Preface to the handbook Pages xi-xiii John B. Taylor and Michael Woodford

Stanford, California, USA Princeton, New Jersey, USA

Part 1 — Empirical and Historical Performance

Chapter 1 Business cycle fluctuations in us macroeconomic time series Pages 3-64 James H. Stock and Mark W. Watson http://www.nber.org/papers/w6528

Kennedy School of Government, Harvard University and the NBER, USA Woodrow Wilson School, Princeton University and the NBER, USA

Abstract

This chapter examines the empirical relationship in the postwar United States between the aggregate business cycle and various aspects of the macroeconomy, such as production, interest rates, prices, productivity, sectoral employment, investment, income, and consumption. This is done by examining the strength of the relationship between the aggregate cycle and the cyclical components of individual time series, whether individual series lead or lag the cycle, and whether individual series are useful in predicting aggregate fluctuations. The chapter also reviews some additional empirical regularities in the US economy, including the Phillips curve and some long-run relationships, in particular long run money demand, long run properties of interest rates and the yield curve, and the long run properties of the shares in output of consumption, investment and government spending.

Keywords: economic fluctuations; Phillips curve; long run macroeconomic relations

JEL classification: E30

Chapter 2 Monetary policy shocks: What have we learned and to what end? Pages 65-148 Lawrence J. Christiano, Martin Eichenbaum and Charles L. Evans

http://www.nber.org/papers/w6400

Northwestern University, NBER and the Federal Reserve Bank of Chicago, USA Northwestern University, NBER and the Federal Reserve Bank of Chicago, USA Federal Reserve Bank of Chicago, USA

Abstract

This chapter reviews recent research that grapples with the question: What happens after an exogenous shock to monetary policy? We argue that this question is interesting because it lies at the center of a particular approach to assessing the empirical plausibility of structural economic models that can be used to think about systematic changes in monetary policy institutions and rules.

The literature has not yet converged on a particular set of assumptions for identifying the effects of an exogenous shock to monetary policy. Nevertheless, there is considerable agreement about the qualitative effects of a monetary policy shock in the sense that inference is robust across a large subset of the identification schemes that have been considered in the literature. We document the nature of this agreement as it pertains to key economic aggregates.

Keywords: monetary policy shocks; recursiveness assumption; benchmark analysis

Chapter 3 Monetary policy regimes and economic performance: The historical record Pages 149-234 Michael D. Bordo and Anna J. Schwartz http://papers.nber.org/papers/W6201Rutgers University, New Brunswick, and NBER, USA National Bureau of Economic Research, New York, USA

Abstract

Monetary policy regimes encompass the constraints or limits imposed by custom, institutions and nature on the ability of the monetary authorities to influence the evolution of macroeconomic aggregates.

This chapter surveys the historical experience of both international and domestic (national) aspects of monetary regimes from the nineteenth century to the present. We first survey the experience of four broad international monetary regimes: the classical gold standard 1880–1914; the interwar period in which a short-lived restoration of the gold standard prevailed; the postwar Bretton Woods international monetary system (1946–1971) indirectly linked to gold; the recent managed float period (1971–1995). We then present in some detail the institutional arrangements and policy actions of the Federal Reserve in the United States as an important example of a domestic policy regime. The survey of the Federal Reserve subdivides the demarcated broad international policy regimes into a number of episodes.

A salient theme in our survey is that the convertibility rule or principle that dominated both domestic and international aspects of the monetary regime before World War I has since declined in its relevance. At the same time, policymakers within major nations placed more emphasis on stabilizing the real economy. Policy techniques and doctrine that developed under the pre-World War I convertible regime proved to be inadequate to deal with domestic stabilization goals in the interwar period, setting the stage for the Great Depression. In the post-World War II era, the complete abandonment of the convertibility principle, and its replacement by the goal of full employment, combined with the legacy of inadequate policy tools and theory from the interwar period, set the stage for the Great Inflation of the 1970s. The lessons from that experience have convinced monetary authorities to reemphasize the goal of low inflation, as it were, committing themselves to rule-like behavior.

Keywords: gold standard; Bretton Woods; managed float; Federal Reserve; domestic policy regime; convertibility rule; stabilization goals; Great Depression; Great Inflation of the 1970s; rules; nominal anchor; exchange rate arrangements; inflation level; inflation variability; output level; output variability; trend stationary process; difference stationary process; inflation persistence; price level uncertainty; permanent shocks; temporary shocks

JEL classification: E42; E52

Chapter 4 The new empirics of economic growth Pages 235-308 Steven N. Durlauf and Danny T. Quah http://www.nber.org/papers/w6422

University of Wisconsin, Madison and LSE, USA

Abstract

We provide an overview of recent empirical research on patterns of cross-country growth. The new empirical regularities considered differ from earlier ones, e.g., the well-known Kaldor stylized facts. The new research no longer makes production function accounting a central part of the analysis. Instead, attention shifts more directly to questions like, Why do some countries grow faster than others? It is this changed focus that, in our view, has motivated going beyond the neoclassical growth model.

Keywords: classification; convergence; cross-section regression; distribution dynamics; endogenous growth; neoclassical growth; regression tree; threshold; time series; panel data

JEL classification: C21; C22; C23; D30; E13; O30; O41

* We thank the British Academy, the ESRC, the John D. and Catherine T. MacArthur Foundation, the NSF, and the Santa Fe Institute for financial support. Kim-Sau Chung, Donald Hester, Brian Krauth, Rodolfo Manuelli, Hashem Pesaran, John Taylor and Jonathan Temple provided valuable comments. Kim-Sau Chung provided outstanding research assistance.The word “empiric” has, in Webster's Unabridged Dictionary, two definitions: first, “that depending upon the observation of phenomena”; second, “an ignorant and unlicensed pretender; a quack; a charlatan”. We have chosen, nevertheless, to use the word in the title as we think it conveys the appropriate meaning.

Chapter 5 Numerical solution of dynamic economic models Pages 311-386 Manuel S. Santos Department of Economics, University of Minnesota, USA

Abstract

This chapter is concerned with numerical simulation of dynamic economic models. We focus on some basic algorithms and assess their accuracy and stability properties. This analysis is useful for an optimal implementation and testing of these procedures, as well as to evaluate their performance. Several examples are provided in order to illustrate the functioning and efficiency of these algorithms.

Keywords: dynamic economic model; value function; policy function; Euler equation; numerical algorithm; numerical solution; approximation error

JEL classification: C61; C63; C68 * The author is grateful to Jerry Bona, Antonio Ladron de Guevara, Ken Judd, John Rust, John Taylor and Jesus Vigo for helpful discussions on this topic. Special thanks are due to Adrian Peralta-Alva for his devoted computational assistance.

Chapter 6 Indeterminacy and sunspots in macroeconomics Pages 387-448 Jess Benhabib and Roger E.A. Farmer

New York University, USA UCLA, USA

Abstract

This chapter gives an overview of the recent literature on indeterminacy and sunspots in macroeconomics. It discusses of some of the conceptual and the technical aspects of this literature, and provides a simple framework for illustrating the mechanisms of various dynamic equilibrium models that give rise to indeterminate equilibria. The role of external effects, monopolistic competition, and increasing returns in generating indeterminacy is explored for one-sector and multi-sector models of real business cycles and of economic growth. Indeterminacy is also studied in monetary models, as well as in models where monetary and fiscal policy are endogenous and determined by feedback rules. Particular attention is paid to the empirical plausibility of these models and their parametrizations in generating indeterminate equilibria. An overview of calibrated macroeconomic models with sunspot equilibria is given, and their successes and shortcomings in matching properties of data are assessed. Finally some issues regarding the selection of equilibria, the observable implications, and difficulties of forecasting that arise in such models are briefly addressed.

Keywords: indeterminacy; multiple equilibria; sunspots

JEL classification: E00; E3; 040

Chapter 7 Learning dynamics Pages 449-542 George W. Evans and Seppo Honkapohja

University of Oregon, USA University of Helsinki, USA

Abstract

This chapter provides a survey of the recent work on learning in the context of macroeconomics. Learning has several roles. First, it provides a boundedly rational model of how rational expectations can be achieved. Secondly, learning acts as a selection device in models with multiple REE (rational expectations equilibria). Third, the learning dynamics themselves may be of interest. While there are various approaches to learning in macroeconomics, the emphasis here is on adaptive learning schemes in which agents use statistical or econometric techniques in self-referential stochastic systems.

Careful attention is given to learning in models with multiple equilibria. The methodological tool is to set up the economic system under learning as a SRA (stochastic recursive algorithm) and to analyze convergence by the method of stochastic approximation based on an associated differential equation. Global stability, local stability and instability results for SRAs are presented. For a wide range of solutions to economic models the stability conditions for REE under statistical learning rules are given by the expectational stability principle, which is treated as a unifying principle for the results presented.

Both linear and nonlinear economic models are considered and in the univariate linear case the full set of solutions is discussed. Applications include the Muth cobweb model, the Cagan model of inflation, asset pricing with risk neutrality, the overlapping generations model, the seignorage model of inflation, models with increasing social returns, IS-LM-Phillips curve models, the overlapping contract model, and the Real Business Cycle model. Particular attention is given to the local stability conditions for convergence when there are indeterminacies, bubbles, multiple steady states, cycles or sunspot solutions.

The survey also discusses alternative approaches and recent developments, including Bayesian learning, eductive approaches, genetic algorithms, heterogeneity, misspecified models and experimental evidence.

Keywords: expectations; learning; adaptive learning; least squares learning; educative learning; multiple equilibria; expectational stability; stochastic recursive algorithms; sunspot equilibria; cycles; multivariate models; MSV solutions; stability; instability; ODE aproximation; stochastic approximation; computational intelligence; dynamic expectations models

JEL classification: E32; D83; D84; C62

Chapter 8 Micro data and general equilibrium models • REVIEW ARTICLE Pages 543-633 Martin Browning, Lars Peter Hansen and James J. Heckman

Institute of Economics, Copenhagen University, Copenhagen, Denmark University of Chicago, Chicago, IL, USA University of Chicago, Chicago, IL, USA

Abstract

Dynamic general equilibrium models are required to evaluate policies applied at the national level. To use these models to make quantitative forecasts requires knowledge of an extensive array of parameter values for the economy at large. This essay describes the parameters required for different economic models, assesses the discordance between the macromodels used in policy evaluation and the microeconomic models used to generate the empirical evidence. For concreteness, we focus on two general equilibrium models: the stochastic growth model extended to include some forms of heterogeneity and the overlapping generations model enriched to accommodate human capital formation.

Keywords: general equilibrium models; microeconomic evidence; stochastic growth model; overlapping generations model; calibration * We thank Marco Cagetti, John Heaton, Jose Scheinkman, John Taylor, Edward Vytlacil and Noah Williams for comments. Hansen and Heckman gratefully acknowledge funding support by the National Science Foundation.

Part 3 — Models of Economic Growth

Chapter 9 Neoclassical growth theory Pages 637-667 Robert M. Solow

Massachusetts Institute of Technology, Department of Economics, E52-383B, Cambridge, MA 02139

AbstractThis chapter is an exposition, rather than a survey, of the one-sector neoclassical growth model. It describes how the model is constructed as a simplified description of the real side of a growing capitalist economy that happens to be free of fluctuations in aggregate demand. Once that is done, the emphasis is on the versatility of the model, in the sense that it can easily be adapted, without much complication, to allow for the analysis of important issues that are excluded from the basic model.

Among the issues treated are: increasing returns to scale (but not to capital alone), human capital, renewable and non-renewable natural resources, endogenous population growth and technological progress. In each case, the purpose is to show how the model can be minimally extended to allow incorporation of something new, without making the analysis excessively complex.

Toward the end, there is a brief exposition of the standard overlapping-generations model, to show how it admits qualitative behavior generally absent from the original model.

The chapter concludes with brief mention of some continuing research questions within the framework of the simple model.

Keywords: growth; technological progress; neoclassical model

JEL classification: O4; E1

Chapter 10 Explaining cross-country income differences Pages 669-737 Ellen R. McGrattan and James A. Schmitz, Jr.

Federal Reserve Bank of Minneapolis, USA

AbstractThis chapter reviews the literature that tries to explain the disparity and variation of GDP per worker and GDP per capita across countries and across time. There are many potential explanations for the different patterns of development across countries, including differences in luck, raw materials, geography, preferences, and economic policies. We focus on differences in economic policies and ask to what extent can differences in policies across countries account for the observed variability in income levels and their growth rates. We review estimates for a wide range of policy variables. In many cases, the magnitude of the estimates is under debate. Estimates found by running cross-sectional growth regressions are sensitive to which variables are included as explanatory variables. Estimates found using quantitative theory depend in critical ways on values of parameters and measures of factor inputs for which there is little consensus. In this chapter, we review the ongoing debates of the literature and the progress that has been made thus far.

Keywords: cross-country income differences; growth accounting; growth regressions; endogenous growth theory

JEL classification: E62; E65; O11; O41; O47

Author index Pages I-1-I-32

Subject index Pages I-33-I-49

Volume 1, Part 2, Pages 741-1228 (1999) Edited by: John B. Taylor and Michael Woodford ISBN: 0-444-50157-6

Introduction to the series Page v Kenneth J. Arrow and Michael D. Intriligator

Contents of the handbook Pages vii-ix

Preface to the handbook Pages xi-xiii John B. Taylor and Michael Woodford

Stanford, California Princeton, New Jersey

Part 4 — Consumption and Investment

Chapter 11 Consumption Pages 741-812 http://papers.nber.org/papers/w6466 Orazio P. Attanasio University College London, Institute for Fiscal Studies and NBER

Abstract

Consumption is the largest component of GDP. Since the 1950s, the life cycle and the permanent income models have constituted the main analytical tools to the study of consumption behaviour, both at the micro and at the aggregate level. Since the late 1970s the literature has focused on versions of the model that incorporate the hypothesis of Rational Expectations and a rigorous treatment of uncertainty. In this chapter, I survey the most recent contribution and assess where the life cycle model stands. My reading of the evidence and of recent developments leads me to stress two points: (i) the model can only be tested and estimated using a flexible specification of preferences and individual level data; (ii) it is possible to construct versions of the model that are not rejected by the data. One of the main problems of the approach used in the literature to estimate preferences is the lack of a ‘consumption function’. A challenge for future research is to use preference parameter estimates to construct such functions.

Author Keywords: consumption; life cycle model; household behaviour JEL classification: E2

* A preliminary draft of this chapter was presented at a conference at the New York Fed., February 27–28 1997, where I received useful comments from my discussant, Chris Carroll and several participants. Tullio Jappelli provided many careful and insightful comments for which I am very grateful. I would like to thank Margherita Borella for research assistance and James Sefton for providing me with the UK National Accounts Data. Material from the FES made available by the ONS through the ESRC Data Archive has been used by permission of the Controller of HMSO. Neither the ONS nor the ESRC Data Archive bear any responsibility for the analysis or interpretation of the data reported here.

Chapter 12 Aggregate investment Pages 813-862 Ricardo J. Caballero MIT and NBER http://www.nber.org/papers/w6264

Abstract

The 1990s have witnessed a revival in economists' interest and hope of explaining aggregate and microeconomic investment behavior. New theories, better econometric procedures, and more detailed panel data sets are behind this movement. Much of the progress has occurred at the level of microeconomic theories and evidence; however, progress in aggregation and general equilibrium aspects of the investment problem also has been significant. The concept of sunk costs is at the center of modern theories. The implications of these costs for investment go well beyond the neoclassical response to the irreversible-technological friction they represent, for they can also lead to first-order inefficiencies when interacting with informational and contractual problems.

Author Keywords: sunk costs; irreversible investment; (S, s) models; adjustment hazard; aggregation; non-linearities; private information; incomplete contracts; pent-up investment JEL classification: E22; D21; D23; E32 * I am grateful to Andrew Abel, Steve Bergantino, Olivier Blanchard, Jason Cummins, Esther Dufflo, Eduardo Engel, Austan Goolsbee, Luigi Guiso, Kevin Hassett, Glenn Hubbard, John Leahy, Kenneth West, and Michael Woodford for many useful comments. I thank the NSF for financial support.

Chapter 13 Inventories Pages 863-923 Valerie A. Ramey and Kenneth D. West http://www.nber.org/papers/w6315

University of California — San Diego University of Wisconsin

Abstract

We review and interpret recent work on inventories, emphasizing empirical and business cycle aspects. We begin by documenting two empirical regularities about inventories. The first is the well-known one that inventories move procyclically. The second is that inventory movements are quite persistent, even conditional on sales.

To consider explanations for the two facts, we present a linear-quadratic model. The model can rationalize the two facts in a number of ways, but two stylized explanations have the virtue of relative simplicity and support from a number of papers. Both assume that there are persistent shocks to demand for the good in question, and that marginal production cost slopes up. The first explanation assumes as well that there are highly persistent shocks to the cost of production. The second assumes that there are strong costs of adjusting production and a strong accelerator motive.

Research to date, however, has not reached a consensus on whether one of these two, or some third, alternative provides a satisfactory explanation of inventory behavior. We suggest several directions for future research that promise to improve our understanding of inventory behavior and thus of business cycles.

JEL classification: E22; E32 * We thank the National Science Foundation and the Abe Foundation for financial support; Clive Granger, Donald Hester, James Kahn, Anil Kashyap, Linda Kole, Spencer Krane, Scott Schuh, Michael Woodford and a seminar audience at the University of Wisconsin for helpful comments and discussions; and James Hueng and especially Stanislav Anatolyev for excellent research assistance.

Part 5 — Models of Economic Fluctuations

Chapter 14 Resuscitating real business cycles Pages 927-1007 Robert G. King and Sergio T. Rebelo http://papers.nber.org/papers/W7534

University of Virginia and NBER Northwestern University and NBER

Abstract

The Real Business Cycle (RBC) research program has grown specularly over the last decade, as its concepts and methods have diffused into mainstream macroeconomics. Yet, there is increasing skepticism that technology shocks are a major source of business fluctuations. This chapter exposits the basic RBC model and shows that it requires large technology shocks to produce realistic business cycles. While Solow residuals are sufficiently volatile, these imply frequent technological regress. Productivity studies permitting unobserved factor variation find much smaller technology shocks, suggesting the imminent demise of real business cycles. However, we show that greater factor variation also dramatically amplifies shocks: a RBC model with varying capital utilization yields realistic business cycles from small, nonnegative changes in technology.

Author Keywords: macroeconomics; business cycles JEL classification: E10; E32 * We benefited from the comments of the editors as well as from those of Rui Albuquerque, Robert Barro, Marianne Baxter, Satyajit Chatterjee, Aubhik Khan, Daniele Coen Pirani, Henry Siu, Julia Thomas, and Michelle Zaharchuk. Dorsey Farr provided detailed comments and excellent research assistance. Support from the National Science Foundation is gratefully acknowledged.

Chapter 15 Staggered price and wage setting in macroeconomics Pages 1009-1050 John B. Taylor Stanford University http://papers.nber.org/papers/W6754

Abstract

This chapter reviews the role of temporary price and wage rigidities in explaining of the dynamic relationship between money, real output, and inflation. The key properties to be explained are that monetary shocks have persistent, but not permanent, effects on real output, and that the correlation between current output and inflation is positive for leads of inflation and negative for lags of inflation.

The paper begins with a short empirical guide to price- and wage-setting behavior in market economies. It then compares alternative price- and wage-setting theories and argues that staggered contracts models continue to provide the most satisfactory match with the key macroeconomic facts. It then examines the microeconomic foundations of staggered contracts models and reviews some of their extensions and applications.

Research in this area has been very active in the 1990s with a remarkable number of studies using, estimating, or testing models of staggered price and wage setting. A new generation of econometric models incorporating staggered price and wage setting with rational expectations has been built. Researchers have begun to incorporate staggered wage and price setting into real business cycle models. Close links have been discovered between the parameters of people's utility functions and the parameters of staggered price- and wage-setting equations. There is now a debate about whether standard calibrations of utility functions prevent staggered price models, at least those with frequent price changes, from explaining long persistence of real output.

A theme of the paper is that the advent of rational expectations in the 1970s led to models of price and wage rigidities which were more amenable to empirical testing than earlier models, and this is one reason for the recent controversies and debates. There is much to be discovered from these debates and from the future research they stimulate.

Author Keywords: staggered price and wage setting; staggered contracts model; contract multiplier; money; monetary policy; monopolistic competition; market clearing; expected market clearing; time-dependent pricing; state-dependent pricing JEL classification: E32; E10 * This research was supported by the Center for Economic Policy Research at Stanford University. I wish to thank V.V. Chari, Christopher Erceg, Robert Hall, Ellen McGrattan, Akila Weerapana, and Michael Woodford for useful comments and assistance.

Chapter 16 The cyclical behavior of prices and costs Pages 1051-1135 Julio J. Rotemberg and Michael Woodford http://papers.nber.org/papers/W6909

Harvard Business School Princeton University

Abstract

Because inputs are scarce, marginal cost is an increasing function of output. Diminishing returns, costs of increasing employment as well as the increasing marginal disutility of working when hours worked and effort rise all contribute to make this function steep. Without changes in this function relating marginal cost to output, aggregate output can vary if and only if the markup of price to marginal cost (the inverse of real marginal cost for typical firms) varies. We first study whether, empirically, real marginal cost does rise in cyclical expansions. Average real labor cost is not very procyclical but, for several reasons, marginal labor cost is more procyclical than average labor cost. These include the presence of overhead labor and adjustment costs as well as differences between the marginal and the average wage. These corrections results in procyclical measures of real marginal cost. Measures of marginal costs based on materials costs and inventories also appear procyclical. We show that these procyclical movements in marginal cost may, depending on how costs are modeled, account for a substantial fraction of cyclical output movements. Finally, we survey models of variable markups. These include both models of sticky prices (in which markups vary because firms cannot all costlessly charge the markup they desire) and models in which firms' desired markup varies over time. This set of models allows a rich set of variables to affect output even if these variables do not shift the marginal cost schedule.

JEL classification: E3; D4; D3

Chapter 17 Labor-market frictions and employment fluctuations Pages 1137-1170 Robert E. Hall http://papers.nber.org/papers/W6501

Hoover Institution and Department of Economics, Stanford University National Bureau of Economic Research

Abstract

The labor market occupies center stage in modern theories of fluctuations. The most important phenomenon to explain and understand in a recession is the sharp decline in employment and jump in unemployment. This chapter considers explanations based on frictions in the labor market. Earlier research within the real business cycle paradigm considered frictionless labor markets where fluctuations in the volume of work effort represented substitution by households between work in the market and activities at home. A preliminary section of the chapter discusses why frictionless models are incomplete — they fail to account for either the magnitude or persistence of fluctuations in employment. And the frictionless models fail completely to describe unemployment. The evidence suggests strongly that consideration of unemployment as a third use of time is critical for a realistic model. The two elements of a theory of unemployment are a mechanism for workers to lose or leave their jobs and an explanation for the time required from them to find new jobs. Theories of mechanism design or of continuous re-bargaining of employment terms provide the first. The theory of job search together with efficiency wages and related issues provides the second. Modern macro models incorporating these features come much closer than their predecessors to realistic and rigorous explanations of the magnitude and persistence of fluctuations.

JEL classification: E24

Chapter 18 Job reallocation, employment fluctuations and unemployment Pages 1171-1228 Dale T. Mortensen and Christopher A. Pissarides

Northwestern University London School of Economics

Abstract

The purpose of this chapter is twofold. First, it reviews the model of search and matching equilibrium and derives the properties of employment and unemployment equilibrium. Second, it applies the model to the study of employment fluctuations and to the explanation of differences in unemployment rates in industrialized countries.

The search and matching model is built on the assumptions of a time-consuming matching technology that determines the rate of job creation given the unmatched number of workers and jobs; and on a stochastic arrival of idiosyncratic shocks that determines the rate of job destruction given the wage contract between matched firms and workers. The outcome is a model for the flow of new jobs and unemployed workers from inactivity to production (the ‘job creation’ flow) and one for the flow of workers from employment to unemployment and of jobs out of the market (the ‘job destruction’ flow). Steady-state equilibrium is at the point where the two flows are equal.

The model is shown to explain well the employment fluctuations observed in the US economy, within the context of a real business cycle model. It is also shown that the large differences in unemployment rates observed in industrialized countries can be attributed to a large extent to differences in policy towards employment protection legislation (which increases the duration of unemployment and reduces the flow into unemployment) and the generosity of the welfare state (which reduces job creation). It is argued that on the whole European countries have been more generous in their unemployment support policies and in their employment protection legislation than the USA. The chapter also surveys other reasons given in the literature for the observed levels in unemployment, including mismatch and real interest rates.

JEL classification: J63; J64; J65; J68; E24; E32; J41

* Presented at the Federal Reserve Conference on “Recent Developments in Macroeconomics I”, February 27–28, 1997, New York, NY. The authors acknowledge financial support from the US National Science Foundation, Northwestern University, and the Centre for Economic Performance at the London School of Economics.

Author index Pages I-1-I-32

Subject index Pages I-33-I-49

Volume 1, Part 3, Pages 1231-1745 (1999) Edited by: John B. Taylor and Michael Woodford ISBN: 0-444-50158-4

Introduction to the series • CONTENTS LIST Page v Kenneth J. Arrow and Michael D. Intriligator

Contents of the handbook Pages vii-ix

Preface to the handbook Pages xi-xiii John B. Taylor and Michael Woodford Stanford, California Princeton, New Jersey

Part 6 — Financial Markets and the Macroeconomy

Chapter 19 Asset prices, consumption, and the business cycle Pages 1231-1303 John Y. Campbell http://papers.nber.org/papers/W6485

Harvard University and NBER. Department of Economics, Littauer Center, Harvard University, Cambridge, MA 02138, USA

Abstract

This chapter reviews the behavior of financial asset prices in relation to consumption. The chapter lists some important stylized facts that characterize US data, and relates them to recent developments in equilibrium asset pricing theory. Data from other countries are examined to see which features of the US experience apply more generally. The chapter argues that to make sense of asset market behavior one needs a model in which the market price of risk is high, time-varying, and correlated with the state of the economy. Models that have this feature, including models with habitformation in utility, heterogeneous investors, and irrational expectations, are discussed. The main focus is on stock returns and short-term real interest rates, but bond returns are also considered.

JEL classification: G12 * This chapter draws heavily on John Y. Campbell, “Consumption and the Stock Market: Interpreting International Experience”, Swedish Economic Policy Review 3:251–299, Autumn 1996. I am grateful to the National Science Foundation for financial support, to Tim Chue, Vassil Konstantinov, and Luis Viceira for able research assistance, to Andrew Abel, Olivier Blanchard, Ricardo Caballero, Robert Shiller, Andrei Shleifer, John Taylor, and Michael Woodford for helpful comments, and to Barclays de Zoete Wedd Securities Limited, Morgan Stanley Capital International, David Barr, Bjorn Hansson, and Paul Söderlind for providing data.

Chapter 20 Human behavior and the efficiency of the financial system Pages 1305-1340 Robert J. Shiller Yale University http://www.nber.org/papers/w6375

Abstract

Recent literature in empirical finance is surveyed in its relation to underlying behavioral principles, principles which come primarily from psychology, sociology, and anthropology. The behavioral principles discussed are: prospect theory, regret and cognitive dissonance, anchoring, mental compartments, overconfidence, over- and under-reaction, representativeness heuristic, the disjunction effect, gambling behavior and speculation, perceived irrelevance of history, magical thinking, quasi-magical thinking, attention anomalies, the availability heuristic, culture and social contagion, and global culture.

Keywords: efficient markets; random walk; excess volatility; anomalies in finance; stock market; prospect theory; regret and cognitive dissonance; anchoring; mental compartments; overconfidence; overreaction; underreaction; representativeness heuristic; the disjunction effect; gambling behavior and speculation; irrelevance of history; magical thinking; quasi-magical thinking; attention anomalies; the availability heuristic; culture and social contagion; global culture

JEL classification: G10 * An earlier version was presented at a conference Recent Developments in Macroeconomics at the Federal Reserve Bank of New York, February 27–28, 1997. The author is indebted to Ricky Lam for research assistance, and to Michael Krause, Virginia Shiller, Andrei Shleifer, David Wilcox, and the editors for helpful comments. This research was supported by the National Science Foundation.

Chapter 21 The financial accelerator in a quantitative business cycle framework

Pages 1341-1393 http://papers.nber.org/papers/W6455 Ben S. Bernanke, Mark Gertler and Simon Gilchrist

Princeton University, New York University, and Boston University

Abstract

This chapter develops a dynamic general equilibrium model that is intended to help clarify the role of credit market frictions in business fluctuations, from both a qualitative and a quantitative standpoint. The model is a synthesis of the leading approaches in the literature. In particular, the framework exhibits a “financial accelerator”, in that endogenous developments in credit markets work to amplify and propagate shocks to the macroeconomy. In addition, we add several features to the model that are designed to enhance the empirical relevance. First, we incorporate money and price stickiness, which allows us to study how credit market frictions may influence the transmission of monetary policy. In addition, we allow for lags in investment which enables the model to generate both hump-shaped output dynamics and a lead-lag relation between asset prices and investment, as is consistent with the data. Finally, we allow for heterogeneity among firms to capture the fact that borrowers have differential access to capital markets. Under reasonable parametrizations of the model, the financial accelerator has a significant influence on business cycle dynamics.

Keywords: financial accelerator; business fluctuations; monetary policy

JEL classification: E30; E44; E50 * Thanks to Michael Woodford, Don Morgan and John Taylor for helpful comments, and to the NSF and C.V. Starr Center for financial support. ** Each author is also affiliated with the National Bureau of Economic Research

Part 7 — Monetary and Fiscal Policy

Chapter 22 Political economics and macroeconomic policy Pages 1397-1482 Torsten Persson and Guido Tabellini http://www.nber.org/papers/w6329

Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden. IGIER, Bocconi University, via Salasco 3/5, 20136 Milano, Italy.

Abstract

This chapter surveys the recent literature on the theory of macroeconomic policy. We study the effect of various incentive constraints on the policy making process, such as lack of credibility, political opportunism, political ideology, and divided government. The survey is organized in three parts. Part I deals with monetary policy in a simple Phillips curve model: it covers credibility issues, political business cycles, and optimal design of monetary institutions. Part II deals with fiscal policy in a dynamic general equilibrium set up: the main topics here are credibility of tax policy, and political determinants of budget deficits. Part III studies economic growth in models with endogenous fiscal policy.

Keywords: politics; monetary policy; fiscal policy; credibility; budget deficits

JEL classification: E5; E6; H2; H3; O1

* We are grateful to participants in the Handbook conference at the Federal Reserve Bank of New York, to our discussant Adam Posen and to Roel Beetsma, Jon Faust, Francesco Lippi, Ken Rogoff, Lars Svensson and John Taylor for helpful comments. The research was supported by Harvard University, by a grant from the Bank of Sweden Tercentenary Foundation and by a TMR Grant from the European Commission. We are grateful to Christina Lönnblad and Alessandra Startari for editorial assistance.

Chapter 23 Issues in the design of monetary policy rules Pages 1483-1530 Bennett T. McCallum Carnegie Mellon University and National Bureau of Economic Research

http://papers.nber.org/papers/w6016

Abstract

This chapter begins with a number of important preliminary issues including the distinction between rules and discretion in monetary policy; the feasibility of committed rule-like behavior by an independent central bank; and optimal control vs. robustness strategies for conducting research. It then takes up the choice among alternative target variables — with the most prominent contenders including price level, nominal income, and hybrid (inflation plus output gap) variables — together with the issue of growth-rate vs. growing-level target path specifications. One conclusion is that inflation and nominal income growth targets, but not the hybrid target, would have induced fairly similar policy responses in the US economy over 1960–1995. With regard to instrument choice, the chapter argues that both nominal interest rate and monetary base measures are feasible; this discussion emphasizes the basic conceptual distinction between nominal indeterminacy and solution multiplicity. Accordingly, root-mean-square-error performance measures are estimated for interest rate and base instruments (with nominal income target) in the context of a VAR model. Other topics emphasized in the chapter include the operationality of policy-rule specifications; stochastic vs. historical simulation procedures; interactions between monetary and fiscal policies; and the recently-developed fiscal theory of the price level.

JEL classification: E52; E58 * The author is indebted to Peter B. Clark, Todd Clark, Charles Evans, Robert Flood, Marvin Goodfriend, Charles Goodhart, Andrew Haldane, Robert Hetzel, Lars Jonung, Allan Meltzer, Edward Nelson, Christopher Sims, Lars Svensson, John Taylor, John Whittaker, and especially Michael Woodford for helpful suggestions and criticisms.

Chapter 24 Inflation stabilization and bop crises in developing countries Pages 1531-1614 Guillermo A. Calvo and Carlos A. Végh http://papers.nber.org/papers/w6925University of Maryland UCLA

Abstract

High and persistent inflation has been one of the distinguishing macroeconomic characteristics of many developing countries since the end of World War II. Countries afflicted by chronic inflation, however, have not taken their fate lightly and have engaged in repeated stabilization attempts. More often than not, stabilization plans have failed. The end of stabilizations — particularly those which rely on a pegged exchange rate — has often involved dramatic balance-of-payments crises. As stabilization plans come and go, a large literature has developed trying to document the main empirical regularities and to understand the key issues involved. This chapter undertakes a critical review and evaluation of the literature related to inflation stabilization policies and balance-of-payments crises in developing countries.

The chapter begins by trying to rationalize the existence of chronic inflation in a world of rational agents. It then offers an empirical analysis of the main stylized facts associated with stopping chronic inflation. It is shown that the real effects of disinflation depend on the nominal anchor which is used. Exchange-rate-based stabilizations lead to an initial output and consumption boom — which is particularly evident in the behavior of durable goods — real exchange rate appreciation, and current account deficits. The contractionary costs typically associated with disinflation emerge only later in the program. In contrast, in money-based stabilizations, the contraction occurs in the beginning of the program. The chapter then proceeds to review several explanations for these puzzling phenomena, emphasizing the real effects of lack of credibility, inflation inertia, and consumption cycles generated by durable goods purchases.

The chapter also documents the fact that most exchange-rate-based stabilizations end up in balance-of-payments crises. The Mexican crisis of December 1994 brought back to life some of the key questions: Do exchange-rate-based stabilizations sow the seeds of their own destruction by unleashing “unsustainable” real exchange rate appreciations and current account deficits? Or are credibility problems and self-fulfilling prophecies at the root of these crises? The remainder of the chapter is devoted to analyzing the main ideas behind this unfolding literature.

JEL classification: E52; E63; F41 * We are grateful to Francesco Daveri, David Gould, Amartya Lahiri, Carmen Reinhart, Sergio Rodriguez, Jorge Roldos, Julio Santaella, John Taylor, Aaron Tornell, Martin Uribe, Sara Wong, Mike Woodford, Carlos Zarazaga, participants at the conference on “Recent Developments in Macroeconomics”, organized by the Federal Reserve Bank of New York (February 1997), and especially, Ratna Sahay and Miguel Savastano for insightful comments and discussions. Corresponding author. Department of Economics, UCLA, 405 Hilgard Avenue, Los Angeles, CA 90095-1477.

Chapter 25 Government debt Pages 1615-1669 Douglas W. Elmendorf and N. Gregory Mankiw http://papers.nber.org/papers/W6470

Federal Reserve Board Harvard University and NBER

Abstract

This chapter surveys the literature on the macroeconomic effects of government debt. It begins by discussing the data on debt and deficits, including the historical time series, measurement issues, and projections of future fiscal policy. The chapter then presents the conventional theory of government debt, which emphasizes aggregate demand in the short run and crowding out in the long run. It next examines the theoretical and empirical debate over the theory of debt neutrality called Ricardian equivalence. Finally, the chapter considers various normative perspectives about how the government should use its ability to borrow.

JEL classification: E6; H6

Chapter 26 Optimal fiscal and monetary policy Pages 1671-1745 V.V. Chari and Patrick J. Kehoe http://woodrow.mpls.frb.fed.us/research/sr/sr251.html

University of Minnesota and Federal Reserve Bank of Minneapolis University of Pennsylvania, Federal Reserve Bank of Minneapolis, and National Bureau of Economic Research

Abstract

We provide an introduction to optimal fiscal and monetary policy using the primal approach to optimal taxation. We use this approach to address how fiscal and monetary policy should be set over the long run and over the business cycle.

We find four substantive lessons for policymaking: Capital income taxes should be high initially and then roughly zero; tax rates on labor and consumption should be roughly constant; state-contingent taxes on assets should be used to provide insurance against adverse shocks; and monetary policy should be conducted so as to keep nominal interest rates close to zero.

We begin by studying optimal taxation in a static context. We then develop a general framework to analyze optimal fiscal policy. Finally, we analyze optimal monetary policy in three commonly used models of money: a cash-credit economy, a money-in-the-utility-function economy, and a shopping-time economy.

Keywords: primal approach; Ramsey problems; capital income taxation; Friedman rule; tax smoothing

JEL classification: E5; E6; E52; E62; H3; H21 * The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

Author index Pages I-1-I-32

Subject index Pages I-33-I-49