An Interview with Neil Wallace;
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Some Unpleasant Monetarist Arithmetic Thomas Sargent, ,, ^ Neil Wallace (P
Federal Reserve Bank of Minneapolis Quarterly Review Some Unpleasant Monetarist Arithmetic Thomas Sargent, ,, ^ Neil Wallace (p. 1) District Conditions (p.18) Federal Reserve Bank of Minneapolis Quarterly Review vol. 5, no 3 This publication primarily presents economic research aimed at improving policymaking by the Federal Reserve System and other governmental authorities. Produced in the Research Department. Edited by Arthur J. Rolnick, Richard M. Todd, Kathleen S. Rolfe, and Alan Struthers, Jr. Graphic design and charts drawn by Phil Swenson, Graphic Services Department. Address requests for additional copies to the Research Department. Federal Reserve Bank, Minneapolis, Minnesota 55480. Articles may be reprinted if the source is credited and the Research Department is provided with copies of reprints. 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. Federal Reserve Bank of Minneapolis Quarterly Review/Fall 1981 Some Unpleasant Monetarist Arithmetic Thomas J. Sargent Neil Wallace Advisers Research Department Federal Reserve Bank of Minneapolis and Professors of Economics University of Minnesota In his presidential address to the American Economic in at least two ways. (For simplicity, we will refer to Association (AEA), Milton Friedman (1968) warned publicly held interest-bearing government debt as govern- not to expect too much from monetary policy. In ment bonds.) One way the public's demand for bonds particular, Friedman argued that monetary policy could constrains the government is by setting an upper limit on not permanently influence the levels of real output, the real stock of government bonds relative to the size of unemployment, or real rates of return on securities. -
How the Rational Expectations Revolution Has Enriched
How the Rational Expectations Revolution Has Changed Macroeconomic Policy Research by John B. Taylor STANFORD UNIVERSITY Revised Draft: February 29, 2000 Written versions of lecture presented at the 12th World Congress of the International Economic Association, Buenos Aires, Argentina, August 24, 1999. I am grateful to Jacques Dreze for helpful comments on an earlier draft. The rational expectations hypothesis is by far the most common expectations assumption used in macroeconomic research today. This hypothesis, which simply states that people's expectations are the same as the forecasts of the model being used to describe those people, was first put forth and used in models of competitive product markets by John Muth in the 1960s. But it was not until the early 1970s that Robert Lucas (1972, 1976) incorporated the rational expectations assumption into macroeconomics and showed how to make it operational mathematically. The “rational expectations revolution” is now as old as the Keynesian revolution was when Robert Lucas first brought rational expectations to macroeconomics. This rational expectations revolution has led to many different schools of macroeconomic research. The new classical economics school, the real business cycle school, the new Keynesian economics school, the new political macroeconomics school, and more recently the new neoclassical synthesis (Goodfriend and King (1997)) can all be traced to the introduction of rational expectations into macroeconomics in the early 1970s (see the discussion by Snowden and Vane (1999), pp. 30-50). In this lecture, which is part of the theme on "The Current State of Macroeconomics" at the 12th World Congress of the International Economic Association, I address a question that I am frequently asked by students and by "non-macroeconomist" colleagues, and that I suspect may be on many people's minds. -
Interest Rates and Expected Inflation: a Selective Summary of Recent Research
This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Explorations in Economic Research, Volume 3, number 3 Volume Author/Editor: NBER Volume Publisher: NBER Volume URL: http://www.nber.org/books/sarg76-1 Publication Date: 1976 Chapter Title: Interest Rates and Expected Inflation: A Selective Summary of Recent Research Chapter Author: Thomas J. Sargent Chapter URL: http://www.nber.org/chapters/c9082 Chapter pages in book: (p. 1 - 23) 1 THOMAS J. SARGENT University of Minnesota Interest Rates and Expected Inflation: A Selective Summary of Recent Research ABSTRACT: This paper summarizes the macroeconomics underlying Irving Fisher's theory about tile impact of expected inflation on nomi nal interest rates. Two sets of restrictions on a standard macroeconomic model are considered, each of which is sufficient to iniplv Fisher's theory. The first is a set of restrictions on the slopes of the IS and LM curves, while the second is a restriction on the way expectations are formed. Selected recent empirical work is also reviewed, and its implications for the effect of inflation on interest rates and other macroeconomic issues are discussed. INTRODUCTION This article is designed to pull together and summarize recent work by a few others and myself on the relationship between nominal interest rates and expected inflation.' The topic has received much attention in recent years, no doubt as a consequence of the high inflation rates and high interest rates experienced by Western economies since the mid-1960s. NOTE: In this paper I Summarize the results of research 1 conducted as part of the National Bureaus study of the effects of inflation, for which financing has been provided by a grait from the American life Insurance Association Heiptul coinrnents on earlier eriiins of 'his p,irx'r serv marIe ti PhillipCagan arid l)y the mnibrirs Ut the stall reading Committee: Michael R. -
Advanced Topics: Theory of Money ∗
Advanced Topics: Theory of money ∗ Francesco Lippi University of Sassari and EIEF flippi‘at’uniss.it November 20, 2013 The class has two parts. The first part describes models where money has value in equilibrium because of explicitly specified frictions. We use these models to discuss optimal monetary policy. Second, we study the propagation of monetary shocks in an economy with sticky prices. We will use continuous-time stochastic processes and optimal-control methods to model infrequent price adjustment by firms. Emphasis will be placed on the solution methods, mostly analytical, and on quantitative applications. We will solve the firm decision problem under different frictions, discuss aggregation of the individual firm decisions within a GE model, and study the propagation of shocks in an economy populated by “inactive” firms. ∗ 1. Pure currency economies • Samuelson-Lucas OLG (Lucas (1996)) Competitive equilibrium • Lump-sum, proportional • Planner’s problem and welfare analysis • Money in the Utility function, CIA, Sidrausky and Goodfriend-MacCallun type of models, Lucas (2000). • Cost of Inflation with Heterogeneous agents. Money as a buffer stock: Lucas (1980), chapter 13.5 of Stokey and Lucas (1989), Imrohoroglu (1992), Lippi, Ragni, and Trachter (2013) 2. Money in a search and matching environment • Lagos and Wright (2005) model • Individual rationality and implementability of FR (Andolfatto (2013)) • Competing media of exchange Nosal and Rocheteau (2011) Ch. 10 3. Continuous time diffusions, controlled BM and Hamilton-Jacobi-Bellman equations • Chapters 1-4 from Dixit (1993) and Chapters 3 (1, 2 optional) Stokey (2009) • Discrete time - discrete state derivation of BM • Derivation of the Hamilton-Jacobi-Bellman equation • Controlled BM: expected time to hit barrier • Invariant distribution of a controlled diffusion: Kolmogorov equation • The smooth pasting principle 4. -
PIER Working Paper 03-028
View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics Penn Institute for Economic Research Department of Economics University of Pennsylvania 3718 Locust Walk Philadelphia, PA 19104-6297 [email protected] http://www.econ.upenn.edu/pier PIER Working Paper 03-028 “Search, Money and Capital: A Neoclassical Dichotomy” by S. Boragan Aruoba and Randall Wright http://ssrn.com/abstract=470905 44 Search, Money and Capital: A Neoclassical Dichotomy S. Boragan¼ Aruoba Randall Wright Department of Economics Department of Economics University of Pennsylvania University of Pennsylvania [email protected] [email protected] September 3, 2003 Abstract Recent work has reduced the gap between search-based monetary theory and main- stream macroeconomics by incorporating into the search model some centralized mar- kets as well as some decentralized markets where money is essential. This paper takes a further step towards this integration by introducing labor, capital and neoclassical …rms. The resulting framework nests the search-theoretic monetary model and a stan- dard neoclassical growth model as special cases. Perhaps surprisingly, it also exhibits a dichotomy: one can determine the equilibrium path for the value of money inde- pendently of the paths of consumption, investment and employment in the centralized market. We thank K. Burdett, G. Eudey, R. Lagos, M. Molico and C. Waller for their input, as well as the NSF and the Cleveland Fed for research support. 1 1 Introduction There seems to be a big distance between standard macroeconomics and the branch of monetary theory with explicit microfoundations based on search, or matching, theory. -
A Search-Theoretic Approach to Monetary Economics Author(S): Nobuhiro Kiyotaki and Randall Wright Source: the American Economic Review, Vol
American Economic Association A Search-Theoretic Approach to Monetary Economics Author(s): Nobuhiro Kiyotaki and Randall Wright Source: The American Economic Review, Vol. 83, No. 1 (Mar., 1993), pp. 63-77 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2117496 . Accessed: 14/09/2011 06:08 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review. http://www.jstor.org A Search-TheoreticApproach to MonetaryEconomics By NOBUHIRO KIYOTAKI AND RANDALL WRIGHT * The essentialfunction of money is its role as a medium of exchange. We formalizethis idea using a search-theoreticequilibrium model of the exchange process that capturesthe "doublecoincidence of wants problem"with pure barter. One advantage of the frameworkdescribed here is that it is very tractable.We also show that the modelcan be used to addresssome substantive issuesin monetaryeconomics, including the potentialwelfare-enhancing role of money,the interactionbetween specialization and monetaryexchange, and the possibilityof equilibriawith multiplefiat currencies.(JEL EOO,D83) Since the earliest writings of the classical theoretic equilibrium model of the exchange economists it has been understood that the process that seems to capture the "double essential function of money is its role as a coincidence of wants problem" with pure medium of exchange. -
Putting Home Economics Into Macroeconomics (P
Federal Reserve Bank of Minneapolis Putting Home Economics Into Macroeconomics (p. 2) Jeremy Greenwood Richard Rogerson Randall Wright The Macroeconomic Effects of World Trade in Financial Assets (p. 12) Harold L. Cole Federal Reserve Bank of Minneapolis Quarterly Review Vol. 17, No. 3 ISSN 0271-5287 This publication primarily presents economic research aimed at improving policymaking by the Federal Reserve System and other governmental authorities. Any views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Editor: Arthur J. Rolnick Associate Editors: S. Rao Aiyagari, John H. Boyd, Warren E. Weber Economic Advisory Board: Edward J. Green, Ellen R. McGrattan, Neil Wallace Managing Editor: Kathleen S. Rolfe Article Editor/Writers: Kathleen S. Rolfe, Martha L. Starr Designer: Phil Swenson Associate Designer: Beth Leigh Grorud Typesetters: Jody Fahland, Correan M. Hanover Circulation Assistant: Cheryl Vukelich The Quarterly Review is published by the Research Department Direct all comments and questions to of the Federal Reserve Bank of Minneapolis. Subscriptions are Quarterly Review available free of charge. Research Department Articles may be reprinted if the reprint fully credits the source— Federal Reserve Bank of Minneapolis the Minneapolis Federal Reserve Bank as well as the Quarterly P.O. Box 291 Review. Please include with the reprinted article some version of Minneapolis, Minnesota 55480-0291 the standard Federal Reserve disclaimer and send the Minneapo- (612-340-2341 / FAX 612-340-2366). lis Fed Research Department a copy of the reprint. Federal Reserve Bank of Minneapolis Quarterly Review Summer 1993 Putting Home Economics Into Macroeconomics* Jeremy Greenwood Richard Rogerson Randall Wright Professor of Economics Visitor Consultant University of Rochester Research Department Research Department Federal Reserve Bank of Minneapolis Federal Reserve Bank of Minneapolis and Associate Professor of Economics and Associate Professor and University of Minnesota Joseph M. -
The Ends of Four Big Inflations
This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Inflation: Causes and Effects Volume Author/Editor: Robert E. Hall Volume Publisher: University of Chicago Press Volume ISBN: 0-226-31323-9 Volume URL: http://www.nber.org/books/hall82-1 Publication Date: 1982 Chapter Title: The Ends of Four Big Inflations Chapter Author: Thomas J. Sargent Chapter URL: http://www.nber.org/chapters/c11452 Chapter pages in book: (p. 41 - 98) The Ends of Four Big Inflations Thomas J. Sargent 2.1 Introduction Since the middle 1960s, many Western economies have experienced persistent and growing rates of inflation. Some prominent economists and statesmen have become convinced that this inflation has a stubborn, self-sustaining momentum and that either it simply is not susceptible to cure by conventional measures of monetary and fiscal restraint or, in terms of the consequent widespread and sustained unemployment, the cost of eradicating inflation by monetary and fiscal measures would be prohibitively high. It is often claimed that there is an underlying rate of inflation which responds slowly, if at all, to restrictive monetary and fiscal measures.1 Evidently, this underlying rate of inflation is the rate of inflation that firms and workers have come to expect will prevail in the future. There is momentum in this process because firms and workers supposedly form their expectations by extrapolating past rates of inflation into the future. If this is true, the years from the middle 1960s to the early 1980s have left firms and workers with a legacy of high expected rates of inflation which promise to respond only slowly, if at all, to restrictive monetary and fiscal policy actions. -
Rational Expectations: Retrospect and Prospect
Rational Expectations: Retrospect and Prospect A Panel Discussion with Michael Lovell Robert Lucas Dale Mortensen Robert Shiller Neil Wallace Moderated by Kevin Hoover Warren Young CHOPE Working Paper No. 2011-10 30 May 2011 Rational Expectations: Retrospect and Prospect A Panel Discussion with Michael Lovell Robert Lucas Dale Mortensen Robert Shiller Neil Wallace Moderated by Kevin Hoover † Warren Young * 30 May 2011 †Department of Economics and Department of Philosophy, Duke University. Address: Box 90097, Durham, NC 27278, U.S.A. E-mail [email protected] *Department of Economics, Bar Ilan University. Address: Department of Economics, Bar Ilan University, Ramat Gan 52900, Israel. E-mail: [email protected] 1 Abstract of Rational Expectations: Retrospect and Prospect The transcript of a panel discussion marking the fiftieth anniversary of John Muth’s “Rational Expectations and the Theory of Price Movements” ( Econometrica 1961). The panel consists of Michael Lovell, Robert Lucas, Dale Mortensen, Robert Shiller, and Neil Wallace. The discussion is moderated by Kevin Hoover and Warren Young. The panel touches on a wide variety of issues related to the rational-expectations hypothesis, including: its history, starting with Muth’s work at Carnegie Tech; its methodological role; applications to policy; its relationship to behavioral economics; its role in the recent financial crisis; and its likely future. JEL Codes: B22, B31, B26, E17 Keywords: rational expectations, John F. Muth, macroeconomics, dynamics, macroeconomic policy, behavioral economics, efficient markets 2 “Rational Expectations” 28 May 2011 Rational Expectations: Retrospect and Prospect: A Panel Discussion with Michael Lovell, Robert Lucas, Dale Mortensen, Robert Shiller and Neil Wallace, Moderated by Kevin Hoover and Warren Young The panel discussion was held in a session sponsored by the History of Economics Society at the Allied Social Sciences Association (ASSA) meetings in the Capitol 1 Room of the Hyatt Regency Hotel in Denver, Colorado on 7 January 2011. -
An Interview with Thomas J. Sargent
Macroeconomic Dynamics, 9, 2005, 561–583. Printed in the United States of America. DOI: 10.1017.S1365100505050042 MD INTERVIEW AN INTERVIEW WITH THOMAS J. SARGENT Interviewed by George W. Evans Department of Economics, University of Oregon and Seppo Honkapohja Faculty of Economics, University of Cambridge January 11, 2005 Keywords: Rational Expectations, Cross-Equation Restrictions, Learning, Model Misspecification, Adaptation, Robustness 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 stan- dard solution concept in both theoretical and applied macroeconomic mod- elling. 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. Possibly Sargent’s most important work in the early 1970s focused on the implications of rational expectations for empirical and econometric research. His short 1971 paper “A Note on the Accelerationist Controversy” provided a dra- matic illustration of the implications of rational expectations by demonstrating that the standard econometric test of the natural rate hypothesis was invalid. This work was followed in short order by key papers that showed how to conduct valid tests of central macroeconomic relationships under the rational expecta- tions hypothesis. Imposing rational expectations led to new forms of restric- tions, called “cross-equation restrictions,” which in turn required the development of new econometric techniques for the study of macroeconomic relations and models. Correspondence to: Professor George W. Evans, Department of Economics, 1285 University of Oregon, Eugene, OR 97403-1285, USA; e-mail: [email protected]. -
Buyers, Sellers, and Middlemen
BUYERS, SELLERS, AND MIDDLEMEN: VARIATIONS ON SEARCH-THEORETIC THEMES Author(s): Randall Wright and Yuet-Yee Wong Source: International Economic Review , May 2014, Vol. 55, No. 2 (May 2014), pp. 375- 397 Published by: Wiley for the Economics Department of the University of Pennsylvania and Institute of Social and Economic Research, Osaka University Stable URL: https://www.jstor.org/stable/24517048 JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms and Wiley are collaborating with JSTOR to digitize, preserve and extend access to International Economic Review This content downloaded from 128.226.136.66 on Fri, 25 Sep 2020 19:46:20 UTC All use subject to https://about.jstor.org/terms INTERNATIONAL ECONOMIC REVIEW Vol. 55, No. 2, May 2014 BUYERS, SELLERS, AND MIDDLEMEN: VARIATIONS ON SEARCH-THEORETIC THEMES* By Randall Wright and Yuet-Yee Wong1 University of Wisconsin-Madison, Federal Reserve Banks of Minneapolis and Chicago, and NBER, U.S.A.; Binghamton University, U.S.A. We study exchange that is bilateral but indirect—it involves chains of intermediaries, or middlemen—in markets with frictions. These frictions include search and bargaining problems. We show how, and how many, intermediaries might get involved in a chain, and how bargaining with one depends on upcoming negotiations with those downstream. -
Krannert School of Management
KRANNERT SCHOOL OF MANAGEMENT Purdue University West Lafayette, Indiana Financial Sophistication and the Distribution of the Welfare Cost of Inflation By Paola Boel Gabriele Camera Paper No. 1222 Date: June, 2009 Institute for Research in the Behavioral, Economic, and Management Sciences Financial Sophistication and the Distribution of the Welfare Cost of Inflation† Paola Boel Gabriele Camera Bowdoin College Purdue University Abstract The welfare cost of anticipated inflation is quantified in a calibrated model of the U.S. econ- omy that exhibits tractable equilibrium dispersion in wealth and earnings. Inflation does not generate large losses in societal welfare, yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy. If money is the only asset, then inflation hurts mostly the wealthier and more productive agents, while those poorer and less productive may even benefitfrominflation. The converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money. Keywords: Money, Heterogeneity, Friedman rule, Trade frictions, Calibration. JEL codes: E4, E5 –––––––––––––––– †Helpful suggestions from an anonymous Referee and the Editor are acknowledged. The authors thank Julián P. Díaz, Paul Hanouna, Randall Wright and seminar participants at the Cleveland Fed, Midwest Macroeconomic Meetings, and SAET 2007 meetings for comments on earlier versions of this paper. G. Camera acknowledges research support from the NSF grant DMS-0437210 and thanks the people of the Institute for Advanced Studies (ISA) at the University of Bologna for their hospitality during the Spring 2009. 2 1 Introduction A considerable amount of theoretical work, based on disparate modeling approaches, supports the notion that efficiency in a monetary economy is inconsistent with inflation- ary policy.