<<

SELECTED READINGS

Focus on: Thomas J. Sargent

June 2008

INDEX

INTRODUCTION...... 8

1 WORKING PAPERS ...... 11

1.1 Cogley T., Giorgio E. Primiceri and Thomas J. Sargent, Inflation-Gap Persistence in the U.S, NBER Working Papers No. 13749, National Bureau of Economic Research, 2008...... 11

1.2 Thomas J. Sargent, Evolution and Intelligent Design, 2007...... 11

1.3 Ljungqvist Lars and Thomas J. Sargent, Taxes, Benefits, and Careers: Complete Versus Incomplete Markets, CEPR Discussion Papers No. 6560, 2007...... 12

1.4 Ljungqvist Lars and Thomas J. Sargent, Do Taxes Explain European Employment? Indivisible Labour, Human Capital, Lotteries and Savings, CEPR Discussion Papers No. 6196, 2007...... 13

1.5 Jesús Fernández-Villaverde, Juan F. Rubio-Ramíre and Thomas J. Sargent, Economic and VAR Shocks: What Can Go Wrong?, 2006...... 13

1.6 and Thomas J. Sargent, Indivisible Labor and Its Supply Elasticity: Do Taxes Explain European Employment?, Meeting Papers No. 734, Society for Economic Dynamics, 2006. 14

1.7 Thomas J. Sargent, Noah Williams and Tao Zha, The Conquest of South American Inflation, NBER Working Papers No. 12606, National Bureau of Economic Research, 2006...... 14

1.8 Ljungqvist Lars and Thomas J. Sargent, Jobs and Unemployment in Macroeconomic Theory: A Turbulence Laboratory, CEPR Discussion Papers No. 5340, 2005...... 15

1.9 Timothy Cogley and Thomas J. Sargent, The conquest of U.S. inflation: learning and robustness to model uncertainty, Working Paper Series 478, European Central Bank, 2005...... 16

1.10 Timothy Cogley, Thomas J. Sargent and Riccardo Colacito, Benefits from U.S. Monetary Policy Experimentation in the Days of Samuelson, Meeting Papers No. 791, Society for Economic Dynamics, 2005...... 16

1.11 Jesus Fernandez-Villaverde, Juan F. Rubio-Ramirez and Thomas J. Sargent, A, B, C’s (And D’s) For Understanding VARS, PIER Working Paper Archive 05-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, 2005...... 16

1.12 Hansen Lars Peter and Thomas J. Sargent, Recursive robust estimation and control without commitment, Discussion Paper Series 1: Economic Studies 2005, 28, Deutsche Bundesbank, Research Centre, 2005...... 17

1.13 Marco Bassetto and Thomas J. Sargent, Politics and Efficiency of Separating Capital and Ordinary Government Budgets, NBER Working Papers No. 11030, 2005...... 17

1.14 Thomas J. Sargent, Noah Williams and Tao Zha, Shocks and Government Beliefs: The Rise and Fall of American Inflation, NBER Working Papers No. 10764, 2004...... 18

1.15 Ljungqvist Lars and Thomas J. Sargent European Unemployment and Turbulence Revisited in a Matching Model, CEPR Discussion Papers No. 4183, 2004...... 19

Selected Readings –June 2008 2

1.16 Timothy Cogley, Sergei Morozov and Thomas J. Sargent, Bayesian Fan Charts for U.K. Inflation: Forecasting and Sources of Uncertainty in an Evolving Monetary System, Center for Financial Studies Working Paper Series 2003/44, 2003...... 19

1.17 Timothy Cogley and Thomas J. Sargent, Drifts and volatilities: monetary policies and outcomes in the post WWII U.S, Working Paper 2003-25, Federal Reserve Bank of Atlanta, 2003. . 20

1.18 Ljungqvist Lars and Thomas J. Sargent, The European Employment Experience, CEPR Discussion Papers No. 3543, 2002...... 20

1.19 In-Koo Cho and Thomas J. Sargent, Escaping Nash inflation, Working Paper Series 23, European Central Bank, 2000...... 21

1.20 Mariacristina De Nardi and Selahattin Imrohoglu and Thomas J. Sargent, Projected U.S. demographics and social security, Working Paper Series WP-98-14, Federal Reserve Bank of Chicago, 1998...... 21

1.21 Thomas J. Sargent and Francois R. Velde, The big problem of small change, Working Paper Series, Macroeconomic Issues WP-97-8, Federal Reserve Bank of Chicago, 1997...... 22

1.22 Thomas J. Sargent and Francois R. Velde, The evolution of small change, Working Paper Series, Macroeconomic Issues WP-97-13, Federal Reserve Bank of Chicago, 1997...... 23

1.23 Lars Peter Hansen, Thomas J. Sargent and Thomas D. Tallarini Jr., Robust Permanent Income and Pricing, Levine's Working Paper Archive 596, UCLA Department of Economics, 1997.23

1.24 Albert Marcet, Thomas J. Sargent and Juha Seppala, Optimal Taxation without State- Contingent Debt, Economics Working Papers No. 170, Department of Economics and Business, Universitat Pompeu Fabra, revised October 2001...... 23

1.25 Evan W. Anderson, Lars Peter Hansen, Ellen R. McGrattan and Thomas J. Sargent, On the mechanics of forming and estimating dynamic linear , Staff Report 198, Federal Reserve Bank of Minneapolis, 1995...... 24

1.26 Lars Peter Hansen, Ellen R. McGrattan and Thomas J. Sargent, Mechanics of forming and estimating dynamic linear economies, Staff Report 182, Federal Reserve Bank of Minneapolis, 1994. 24

1.27 Lars Peter Hansen and Thomas J. Sargent, Recursive Linear Models of Dynamic Economies, NBER Working Papers No. 3479, 1990...... 25

1.28 Gary D. Hansen and Thomas J. Sargent, Straight Time and Overtime in Equilibrium, UCLA Economics Working Papers No. 455, UCLA Department of Economics, 1987...... 25

1.29 Thomas J. Sargent, Government debt and taxes, Working Papers No. 293, Federal Reserve Bank of Minneapolis, 1986...... 25

1.30 Thomas J. Sargent and Neil Wallace, Identification and estimation of a model of hyperinflation with a continuum of sunspot equilibrium, Working Papers No. 280, Federal Reserve Bank of Minneapolis, 1985...... 25

1.31 Lars Peter Hansen and Thomas J. Sargent, Identification of continuous time models from discrete time data, Staff Report 73, Federal Reserve Bank of Minneapolis, 1983. 26

Selected Readings –June 2008 3

1.32 Thomas J. Sargent and Neil Wallace, A model of commodity money, Staff Report 85, Federal Reserve Bank of Minneapolis, 1983...... 26

1.33 Thomas J. Sargent, Beyond demand and supply curves in , Staff Report 77, Federal Reserve Bank of Minneapolis, 1982...... 27

1.34 Thomas J. Sargent, Dollarization, seignorage, and the demand for money, Working Papers No. 170, Federal Reserve Bank of Minneapolis, 1981...... 27

1.35 Lars Peter Hansen and Thomas J. Sargent, A note on Wiener-Kolmogorov prediction formulas for rational expectations models, Staff Report 69, Federal Reserve Bank of Minneapolis, 1981. 27

1.36 Thomas J. Sargent and Neil Wallace, The real bills doctrine vs. the quantity theory: a reconsideration, Staff Report 64, Federal Reserve Bank of Minneapolis, 1981...... 27

1.37 Thomas J. Sargent, Stopping moderate inflations: the methods of Poincaré and Thatcher, Working Papers No. 0, Federal Reserve Bank of Minneapolis, 1981...... 28

1.38 Lars Peter Hansen and Thomas J. Sargent, Exact linear rational expectations models: specification and estimation, Staff Report 71, Federal Reserve Bank of Minneapolis, 1981...... 28

1.39 Lars Peter Hansen and Thomas J. Sargent, Aggregation over time and the inverse optimal predictor problem for adaptive expectations in continuous time, Staff Report 74, Federal Reserve Bank of Minneapolis, 1981...... 28

1.40 Lars Peter Hansen and Thomas J. Sargent, Instrumental variables procedures for estimating linear rational expectations models, Staff Report 70, Federal Reserve Bank of Minneapolis, 1981...... 29

1.41 Thomas J. Sargent, The ends of four big inflations, Working Papers No. 158, Federal Reserve Bank of Minneapolis, 1981...... 29

1.42 Lars Peter Hansen and Thomas J. Sargent, Methods for estimating continuous time Rational Expectations models from discrete time data, Staff Report 59, Federal Reserve Bank of Minneapolis, 1980. 29

1.43 Thomas J. Sargent, Interpreting economic time series, Staff Report 58, Federal Reserve Bank of Minneapolis, 1980...... 30

1.44 Lars Peter Hansen and Thomas J. Sargent, Rational expectations models and the aliasing phenomenon, Staff Report 60, Federal Reserve Bank of Minneapolis, 1980...... 30

1.45 Lars Peter Hansen and Thomas J. Sargent, Linear rational expectations models for dynamically interrelated variables, Working Papers No. 135, Federal Reserve Bank of Minneapolis, 1980. 31

1.46 Thomas J. Sargent, Tobin's q and the rate of investment in general equilibrium, Staff Report 40, Federal Reserve Bank of Minneapolis, 1979...... 31

1.47 Lars Peter Hansen and Thomas J. Sargent, Formulating and estimating dynamic linear rational expectations models, Working Papers No. 127, Federal Reserve Bank of Minneapolis, 1979. 31

Selected Readings –June 2008 4

1.48 Thomas J. Sargent, Estimation of dynamic labor demand schedules under rational expectations, Staff Report 27, Federal Reserve Bank of Minneapolis, 1978...... 32

1.49 Thomas J. Sargent, A note on maximum likelihood estimation of the rational expectations model of the term structure, Staff Report 26, Federal Reserve Bank of Minneapolis, 1978...... 32

1.50 Thomas J. Sargent, Rational expectations, econometric exogeneity and consumption, Staff Report 25, Federal Reserve Bank of Minneapolis, 1977...... 32

1.51 Thomas J. Sargent, Is a dead end?, Working Papers No. 101, Federal Reserve Bank of Minneapolis, 1977...... 32

1.52 Thomas J. Sargent and Christopher A. Sims, Business cycle modeling without pretending to have too much a priori economic theory, Working Papers No. 55, Federal Reserve Bank of Minneapolis, 1977...... 33

1.53 Thomas J. Sargent, Econometric exogeneity and alternative estimators of portfolio balance schedules for hyperinflations: a note, Working Papers No. 79, Federal Reserve Bank of Minneapolis, 1976. 33

1.54 Thomas J. Sargent, Observations on improper methods of simulating and teaching Friedman's time series consumption model, Working Papers No. 53, Federal Reserve Bank of Minneapolis, 1976...... 33

1.55 Thomas J. Sargent, Testing for neutrality and rationality, Working Papers No. 54, Federal Reserve Bank of Minneapolis, 1976...... 33

1.56 Rusdu Saracoglu and Thomas J. Sargent, Seasonality and portfolio balance under rational expectations, Working Papers No. 58, Federal Reserve Bank of Minneapolis, 1976...... 34

1.57 Thomas J. Sargent, The demand for money during hyperinflations under rational expectations: II, Working Papers No. 60, Federal Reserve Bank of Minneapolis, 1976...... 34

1.58 Thomas J. Sargent, Naive business cycle theory, Working Papers No. 23, Federal Reserve Bank of Minneapolis, 1975...... 34

1.59 Thomas J. Sargent, The observational equivalence of natural and unnatural rate theories of macroeconomics, Working Papers No. 48, Federal Reserve Bank of Minneapolis, 1975...... 34

1.60 Salih Neftci and Thomas J. Sargent, A little bit of evidence on the natural rate hypothesis from the U.S, Working Papers No. 83, Federal Reserve Bank of Minneapolis, 1975...... 34

1.61 Thomas J. Sargent, 1974. Dynamic analysis of a Keynesian model, Working Papers No. 27, Federal Reserve Bank of Minneapolis...... 35

1.62 Dale W. Henderson and Thomas J. Sargent, Unemployment and stabilization policy in a two-sector, two-country aggregative model, Working Papers No. 26, Federal Reserve Bank of Minneapolis, 1974...... 35

1.63 Thomas J. Sargent and Neil Wallace, Rational expectations and the theory of economic policy, Working Papers No. 29, Federal Reserve Bank of Minneapolis, 1974...... 35

1.64 Thomas J. Sargent, Interest rates and prices in the long run: a study of the Gibson paradox, Working Papers No. 75, Federal Reserve Bank of Minneapolis, 1971...... 35

Selected Readings –June 2008 5

1.65 Timothy Cogley and Thomas J. Sargent, Evolving Post-World War II U.S. Inflation Dynamics, Working Papers No. 2132872, Department of Economics, W. P. Carey School of Business, Arizona State University...... 36

2 ARTICLES ...... 37

2.1 Thomas J. Sargent, Commentary on Long-run risks and financial markets, Review, Federal Reserve Bank of St. Louis, issue Jul, pages 301-304, 2007...... 37

2.2 HUANG HE, IMROHOROG[caron]LU SELAHATTIN and THOMAS J. SARGENT, Two Computations To Fund Social Security, Macroeconomic Dynamics, Cambridge University Press, Volume 1(01), pages 7-44, March 2005...... 37

2.3 Lars Peter Hansen and Thomas J. Sargent, Certainty equivalence and model uncertainty, Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 17-38, 2005...... 38

2.4 Thomas J. Sargent, Commentary : the evolution of economic understanding and postwar stabilization policy, Proceedings, Federal Reserve Bank of Kansas City, pages 79-94, 2002...... 38

2.5 Hansen Lars-Peter and Thomas J. Sargent, Acknowledgement Misspecification in Macroeconomic Theory, Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Volume 19 (S1), pages 213-27, February 2001...... 38

2.6 Ljungqvist Lars and Thomas J. Sargent, The European Unemployment Dilemma, Working Paper Series 481, Research Institute of Industrial Economics, 1997...... 39

2.7 George J. Hall and Thomas J. Sargent, Accounting for the federal government's cost of funds, Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 18-28, 1997...... 39

2.8 Lars Ljungqvist and Thomas J. Sargent, A supply-side explanation of European unemployment, Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 2-15, 1996. 39

2.9 Thomas J. Sargent and Francois R. Velde, The analytics of German monetary unification, Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 33-50, 1990...... 40

2.10 Thomas J. Sargent, Interpreting the Reagan deficits, Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 5-12, 1986...... 40

2.11 Preston J. Miller and Thomas J. Sargent, A reply to Darby, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr., 1984...... 40

2.12 Lars Peter Hansen and Thomas J. Sargent, The dimensionality of the aliasing problem in models with rational spectral densities, Staff Report 72, Federal Reserve Bank of Minneapolis, 1981. 41

2.13 Thomas J. Sargent and Neil Wallace, A model of commodity money, Staff Report 85, Federal Reserve Bank of Minneapolis, 1983...... 41

2.14 Thomas J. Sargent and Neil Wallace, Some unpleasant monetarist arithmetic, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, 1981...... 41

2.15 Thomas J. Sargent, Rational expectations and the reconstruction of macroeconomics, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, 1980...... 42

Selected Readings –June 2008 6

2.16 Robert E. Lucas, Jr. and Thomas J. Sargent, After Keynesian macroeconomics, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, 1979...... 42

2.17 Thomas J. Sargent, Estimating vector autoregressions using methods not based on explicit economic theories, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, 1979...... 42

2.18 Thomas J. Sargent, Rational Expectations: A Correction, Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Volume 4 (1973-3), pages 799-800, 1973. 42

2.19 Thomas J. Sargent, Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment, Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Volume 4 (1973-2), pages 429-480, 1973...... 42

3 BOOKS ...... 44

3.1 Rational Expectations and Econometric Practice, with Robert E. Lucas Jr., Press, 1981...... 44

3.2 Recursive Macroeconomic Theory, 2nd edition, with Lars Ljungqvist, MIT press, September 2004. 44

3.3 The Big Problem of Small Change, with Francois Velde, Princeton University Press, 2002 ..... 44

3.4 The Conquest of American Inflation, Princeton University Press...... 44

3.5 Robustness, with Lars Peter Hansen, Princeton University Press, 2007...... 44

Selected Readings –June 2008 7

INTRODUCTION

Thomas J. Sargent is a senior fellow at the Hoover Institution and a leader in the field of macroeconomics.

He also is the William R. Berkley Professor of Economics and Business at New York University and the Donald L. Lucas Professor in Economics, Emeritus, at Stanford University.

A professor of economics at the University of Minnesota from 1975 to 1987, when he joined the Hoover staff, he was also the David Rockefeller Professor at the from 1992 to 1998.

Sargent earned his Ph.D. from Harvard University in 1968 and was a first lieutenant and captain in the U.S. Army.

Sargent is past president of the , the American Economic Association, and the Society for Economic Dynamics.

Sargent was a university medalist as Most Distinguished Scholar in the Class of 1964 and won the Nemmers Prize in Economics in 1997. Sargent was elected a fellow of the National Academy of Sciences and a fellow of the American Academy of Arts and Sciences, both in 1983.

Thomas John Sargent is known as one of the leaders of the rational expectations revolution and the author of numerous path-breaking papers. Together with Neil Wallace, Sargent developed the saddle path stability characterization of the rational expectations equilibrium and also produced the Policy Ineffectiveness Proposition.

His work with Robert Lucas Jr. pioneered the rational expectations revolution in macroeconomics in the 1970s.

Selected Readings –June 2008 8

One of Sargent’s main work in the early 1970’s focused on the implications of rational expectations for empirical and econometric research.

His short 1971 paper A Note on the Accelerationist Controversy provided a dramatic 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 expectations hypothesis. Imposing rational expectations led to new forms of restrictions, called cross-equation restrictions, which in turn required the development of new econometric techniques for the study of macroeconomic relations and models.

Tom’s contributions were wide ranging. His early econometric work in the 1970s includes studies of the natural rate of unemployment, the neutrality of real interest rates with respect to money, dynamic labor demand, empirics of hyperinflation, and tests for the neutrality of money in classical rational expectations models. In the 1980s Sargent (with Lars Hansen) developed new econometric methods for estimating rational expectations models.

In addition to these seminal contributions to rational expectations , Sargent made several key contributions during this period to theoretical macroeconomics, including the saddle path stability characterization of the rational expectations equilibrium and the policy ineffectiveness proposition (both developed with Neil Wallace), and the observational equivalence of rational and non-rational theories of monetary neutrality. In later work Tom continued to extend the rational expectations equilibrium paradigm into new areas. Two prominent examples are the implications of the government budget constraint for inflation and unpleasant monetarist arithmetic (with Neil Wallace) and the sources of the European unemployment problem (with Lars Ljungqvist).

Tom’s impact on macroeconomics in the early days of rational expectations extends well beyond this research. His 1979 textbook Macroeconomic Theory introduced to a new

Selected Readings –June 2008 9

vision of macroeconomics in which time series analysis is fully integrated into macro theory, and in which macroeconomic equilibrium is viewed as a stochastic process.

Sargent’s contributions have not been confined to the development and application of the rational expectations paradigm. As a true scholar he became interested in the theoretical foundations of rationality. The initial criticisms of the concept of rational expectations led him in the 1980s to join a line of research called learning theory, in which the theoretical underpinnings of rational expectations were examined.

Sargent has also done important research in economic history. His work in the 1980s on episodes of moderate and rapid inflations and the recent research on monetary standards (with Francois Velde) is much less technical, but the rational expectations viewpoint remains clearly visible in these works.

The following list is a non-exhaustive, subjective selection of Thomas J. Sargent’s publications.

This list is divided in three parts:

• Working Papers,

• articles,

• and books

More information can be found on ’s homepage at New York University at:

http://homepages.nyu.edu/~ts43/

Contact point: GianLuigi Mazzi, Responsible for Euro-indicators and statistical methodology, Estat - D1 Key Indicators for European Policies [email protected].

Selected Readings –June 2008 10

1 WORKING PAPERS

1.1 Cogley T., Giorgio E. Primiceri and Thomas J. Sargent, Inflation-Gap Persistence in the U.S, NBER Working Papers No. 13749, National Bureau of Economic Research, 2008.

We use Bayesian methods to estimate two models of post WWII U.S. inflation rates with drifting stochastic volatility and drifting coefficients. One model is univariate, the other a multivariate autoregression. We define the inflation gap as the deviation of inflation from a pure random walk component of inflation and use both of our models to study changes over time in the persistence of the inflation gap measured in terms of short- to medium- term predicability. We present evidence that our measure of the inflation-gap persistence increased until Volcker brought mean inflation down in the early 1980s and that it then fell during the chairmanships of Volcker and Greenspan. Stronger evidence for movements in inflation gap persistence emerges from the VAR than from the univariate model. We interpret these changes in terms of a simple dynamic new Keynesian model that allows us to distinguish altered monetary policy rules and altered private sector parameters.

Available at: http://www.nber.org/papers/w13749.pdf

1.2 Thomas J. Sargent, Evolution and Intelligent Design, 2007.

This paper discusses two sources of ideas that influence monetary policy makers today.

The first is a set of analytical results that impose the rational expectations equilibrium concept and do `intelligent design' by solving Ramsey and mechanism design problems.

Selected Readings –June 2008 11

The second is the adaptive learning process that first taught us how to anchor the price level with a gold standard, then how to replace the gold standard with a fiat currency wanting nominal anchors. Models of out-of-equilibrium learning say that such an adaptive evolutionary process will converge to a self-confirming equilibrium (SCE).

In an SCE, a government's probability model is correct about events that occur under the prevailing government policy, but possibly wrong about the consequences of other policies. That causes mistakes absent from a rational expectations equilibrium and expands the role of learning.

Free available at: http://www.econ.princeton.edu/seminars/SEMINARS/Fall07Seminar/Fall07pdfs/sargent. pdf

1.3 Ljungqvist Lars and Thomas J. Sargent, Taxes, Benefits, and Careers: Complete Versus Incomplete Markets, CEPR Discussion Papers No. 6560, 2007.

An incomplete markets life-cycle model with indivisible labour makes career lengths and human capital accumulation respond to labour tax rates and government supplied non- employment benefits. We compare aggregate and individual outcomes in this individualistic incomplete markets model with those in a comparable collectivist representative family with employment lotteries and complete insurance markets. The incomplete and complete market structures assign leisure to different types of individuals who are distinguished by their human capital and age. These microeconomic differences distinguish the two models in terms of how macroeconomic aggregates respond to some types of government supplied non-employment benefits, but remarkably, not to labor tax changes.

Available at: http://www.cepr.org/pubs/dps/DP6560.asp

Selected Readings –June 2008 12

1.4 Ljungqvist Lars and Thomas J. Sargent, Do Taxes Explain European Employment? Indivisible Labour, Human Capital, Lotteries and Savings, CEPR Discussion Papers No. 6196, 2007.

Adding generous government supplied benefits to Prescott's (2002) model with employment lotteries and private consumption insurance causes employment to implode and prevents the model from matching outcomes observed in Europe. To understand the role of a 'not-so-well-known aggregation theory' that Prescott uses to rationalize the high labour supply elasticity that underlies his finding that higher taxes on labour have depressed Europe relative to the US, this paper compares aggregate outcomes for economies with two arrangements for coping with indivisible labour: (1) employment lotteries plus complete consumption insurance, and (2) individual consumption smoothing via borrowing and lending at a risk-free interest rate. The two arrangements support equivalent outcomes when human capital is not present; when it is present, allocations differ because households' reliance on personal savings in the incomplete markets model constrains the 'career choices' that are implicit in their human capital acquisition plans relative to those that can be supported by lotteries and consumption insurance in the complete markets model. Nevertheless, the responses of aggregate outcomes to changes in tax rates are quantitatively similar across the two market structures. Thus, under both aggregation theories, the high disutility that Prescott assigns to labour is an impediment to explaining European non-employment and benefits levels. Moreover, while the identities of the non-employed under Prescott's tax hypothesis differ between the two aggregation theories, they all seem counterfactual.

Available at: http://www.cepr.org/pubs/dps/DP6196.asp

1.5 Jesús Fernández-Villaverde, Juan F. Rubio-Ramíre and Thomas J. Sargent, Economic and VAR Shocks: What Can Go Wrong?, 2006.

This paper discusses the problem of invertibility between the economic shocks in a dynamic equilibrium model and the corresponding VAR innovations. We present an algebraic check of invertibility based on the model fundamentals and we find the

Selected Readings –June 2008 13

identification scheme that recovers the economic shocks from the VAR innovations when the model is invertible. We illustrate our results with a model of the Great Depression proposed by Christiano, Motto, and Rostagno (2005).

Available at: http://www.econ.upenn.edu/~jesusfv/format_jeea3.pdf

1.6 Lars Ljungqvist and Thomas J. Sargent, Indivisible Labor and Its Supply Elasticity: Do Taxes Explain European Employment?, Meeting Papers No. 734, Society for Economic Dynamics, 2006.

We first scrutinize and challenge Prescott's (2002, 2004) quantitative analysis of the role of differences in taxes in explaining cross-country differences in labor market outcomes, and then defend an alternative model that assigns an important role to cross-country differences in social unemployment insurance institutions that Prescott argues can be safely ignored. In the process, we explore how the assumption of indivisible labor interacts with assumptions regarding the (in) completeness of financial markets and any frictions in the labor market, to determine the labor supply elasticity.

Available at: http://repec.org/sed2006/up.17323.1140039244.pdf

1.7 Thomas J. Sargent, Noah Williams and Tao Zha, The Conquest of South American Inflation, NBER Working Papers No. 12606, National Bureau of Economic Research, 2006.

We infer determinants of Latin American hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden Markov model that potentially assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals. Our maximum likelihood estimates allow us to interpret observed inflation rates in terms of variations in the deficits, sequences of shocks that trigger temporary episodes of expectations driven hyperinflations, and occasional

Selected Readings –June 2008 14

superficial reforms that cut inflation without reforming deficits. Our estimates also allow us to infer the deficit adjustments that seem to have permanently stabilized inflation processes.

Available at: http://www.nber.org/papers/w12606.pdf

1.8 Ljungqvist Lars and Thomas J. Sargent, Jobs and Unemployment in Macroeconomic Theory: A Turbulence Laboratory, CEPR Discussion Papers No. 5340, 2005.

We use three general equilibrium frameworks with jobs and unemployed workers to study the effects of government mandated unemployment insurance (UI) and employment protection (EP). To illuminate the forces in these models, we study how UI and EP affect outcomes when there is higher 'turbulence' in the sense of worse skill transition probabilities for workers who suffer involuntary layoffs. Matching and search- island models have labour market frictions and incomplete markets. The representative family model with employment lotteries has no labour market frictions and complete markets. The adverse welfare state dynamics coming from high UI indexed to past earnings that were isolated by Ljungqvist and Sargent (1998) are so strong that they determine outcomes in all three frameworks. Another force stressed by Ljungqvist and Sargent (2005), through which higher layoff taxes suppress frictional unemployment in less turbulent times, prevails in the models with labour market frictions, but not in the frictionless representative family model. In addition, the high aggregate labour supply elasticity that emerges from employment lotteries and complete insurance markets in the representative family model makes it impossible to include generous government- supplied unemployment insurance in that model without getting the unrealistic result that economic activity virtually shuts down.

Available at: http://www.cepr.org/pubs/dps/DP5340.asp

Selected Readings –June 2008 15

1.9 Timothy Cogley and Thomas J. Sargent, The conquest of U.S. inflation: learning and robustness to model uncertainty, Working Paper Series 478, European Central Bank, 2005.

Previous studies have interpreted the rise and fall of U.S. inflation after World War II in terms of the Fed's changing views about the natural rate hypothesis but have left an important question unanswered. Why was the Fed so slow to implement the low-inflation policy recommended by a natural rate model even after economists had developed statistical evidence strongly in its favor? Our answer features model uncertainty. Each period a central bank sets the systematic part of the inflation rate in light of updated probabilities that it assigns to three competing models of the Phillips curve. Cautious behavior induced by model uncertainty can explain why the central bank presided over the inflation of the 1970s even after the data had convinced it to place much the highest probability on the natural rate model.

Available at: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp478.pdf

1.10 Timothy Cogley, Thomas J. Sargent and Riccardo Colacito, Benefits from U.S. Monetary Policy Experimentation in the Days of Samuelson, Meeting Papers No. 791, Society for Economic Dynamics, 2005.

No abstract available.

Available at: http://ideas.repec.org/p/red/sed005/791.html

1.11 Jesus Fernandez-Villaverde, Juan F. Rubio-Ramirez and Thomas J. Sargent, A, B, C’s (And D’s) For Understanding VARS, PIER Working Paper Archive 05-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, 2005.

The dynamics of a linear (or linearized) dynamic stochastic economic model can be expressed in terms of matrices (A, B, C, D) that define a state space system. An associated state space system (A, K, C, and Sigma) determines a vector autoregression

Selected Readings –June 2008 16

for observables available to an econometrician. We review circumstances under which the impulse response of the VAR resembles the impulse response associated with the economic model. We give four examples that illustrate a simple condition for checking whether the mapping from VAR shocks to economic shocks is invertible. The condition

applies when there are equal numbers of VAR and economic shocks.

Available at: http://www.econ.upenn.edu/Centers/pier/Archive/05-018.pdf

1.12 Hansen Lars Peter and Thomas J. Sargent, Recursive robust estimation and control without commitment, Discussion Paper Series 1: Economic Studies 2005, 28, Deutsche Bundesbank, Research Centre, 2005.

In a Markov decision problem with hidden state variables, a posterior distribution serves as a state variable and Bayes' law under an approximating model gives its law of motion. A decision maker expresses fear that his model is misspecified by surrounding it with a set of alternatives that are nearby when measured by their expected log likelihood ratios (entropies). Martingales represent alternative models. A decision maker constructs a sequence of robust decision rules by pretending that a sequence of minimizing players chooses increments to a martingale and distortions to the prior over the hidden state. A risk sensitivity operator induces robustness to perturbations of the approximating model conditioned on the hidden state. Another risk sensitivity operator induces robustness to the prior distribution over the hidden state. We use these operators to extend the approach of Hansen and Sargent (1995) to problems that contain hidden states. The worst case martingale is overdetermined, expressing an intertemporal inconsistency of worst case beliefs about the hidden state, but not about observables.

Available at: http://opus.zbw-kiel.de/volltexte/2006/4222/pdf/200528dkp.pdf

1.13 Marco Bassetto and Thomas J. Sargent, Politics and Efficiency of Separating Capital and Ordinary Government Budgets, NBER Working Papers No. 11030, 2005.

Selected Readings –June 2008 17

We analyze the democratic politics of a rule that separates capital and ordinary account budgets and allows the government to issue debt to capital items only. Many national governments followed this rule in the 18th and 19th centuries and most U.S. states do today. This simple 1800s financing rule sometimes provides excellent incentives for majorities to choose an efficient mix of public goods in an with a growing population of overlapping generations of long-lived but mortal agents. In a special limiting case with demographics that make Ricardian equivalence prevail, the 1800s rule does nothing to promote efficiency. But when the demographics imply even a moderate departure from Ricardian equivalence, imposing the rule substantially improves the efficiency of democratically chosen allocations. We calibrate some examples to U.S. demographic data. We speculate why in the twentieth century most national governments

abandoned the 1800s rule while U.S. state governments have retained it.

Available at: http://www.nber.org/papers/w11030.pdf

1.14 Thomas J. Sargent, Noah Williams and Tao Zha, Shocks and Government Beliefs: The Rise and Fall of American Inflation, NBER Working Papers No. 10764, 2004.

We use a Bayesian Markov Chain Monte Carlo algorithm to estimate a model that allows temporary gaps between a true expectational Phillips curve and the monetary authority's approximating non-expectational Phillips curve. A dynamic programming problem implies that the monetary authority's inflation target evolves as its estimated Phillips curve moves. Our estimates attribute the rise and fall of post WWII inflation in the US to an intricate interaction between the monetary authority's beliefs and economic shocks. Shocks in the 1970s altered the monetary authority's estimates and made it misperceive the tradeoff between inflation and unemployment. That caused a sharp rise in inflation in the 1970s. Our estimates say that policymakers updated their beliefs continuously. By the 1980s, their beliefs about the Phillips curve had changed enough to account for Volcker's

conquest of US inflation in the early 1980s.

Available at: http://www.nber.org/papers/w10764.pdf

Selected Readings –June 2008 18

1.15 Ljungqvist Lars and Thomas J. Sargent European Unemployment and Turbulence Revisited in a Matching Model, CEPR Discussion Papers No. 4183, 2004.

We recalibrate den Haan, Haefke, and Ramey's matching model to incorporate our preferred specification of 'turbulence' as causing distinct dynamics of human capital after voluntary and involuntary job losses. Under our calibration, with high unemployment benefits, an increase in turbulence increases the unemployment rate and the duration of unemployment while leaving the inflow rate into unemployment roughly unchanged, mirroring features of European data in the 1980s and 1990s. The essential issue is that den Haan, Haefke, and Ramey specify that in turbulent time workers experiencing layoffs and quits are both subject to instantaneous skill losses, while we restrict instantaneous skill losses to lay off workers.

Available at: http://ideas.repec.org/p/cpr/ceprdp/4183.html

1.16 Timothy Cogley, Sergei Morozov and Thomas J. Sargent, Bayesian Fan Charts for U.K. Inflation: Forecasting and Sources of Uncertainty in an Evolving Monetary System, Center for Financial Studies Working Paper Series 2003/44, 2003.

We estimate a Bayesian vector autoregression for the U.K. with drifting coefficients and stochastic volatilities. We use it to characterize posterior densities for several objects that are useful for designing and evaluating monetary policy, including local approximations to the mean, persistence, and volatility of inflation. We present diverse sources of uncertainty that impinge on the posterior predictive density for inflation, including model uncertainty, policy drift, structural shifts and other shocks. We use a recently developed minimum entropy method to bring outside information to bear on inflation forecasts. We compare our predictive densities with the Bank of England’s fan charts.

Available at: http://www.ifk-cfs.de/fileadmin/downloads/publications/wp/03_44.pdf

Selected Readings –June 2008 19

1.17 Timothy Cogley and Thomas J. Sargent, Drifts and volatilities: monetary policies and outcomes in the post WWII U.S, Working Paper 2003-25, Federal Reserve Bank of Atlanta, 2003.

For a VAR with drifting coefficients and stochastic volatilities, the authors present posterior densities for several objects that are of interest for designing and evaluating monetary policy. These include measures of inflation persistence, the natural rate of unemployment, a core rate of inflation, and activism coefficients for monetary policy rules. Their posteriors imply substantial variation of all of these objects for post WWII U.S. data. After adjusting for changes in volatility, persistence of inflation increases during the 1970s then falls in the 1980s and 1990s. Innovation variances change systematically, being substantially larger in the late 1970s than during other times. Measures of uncertainty about core inflation and the degree of persistence covary positively. The authors use their posterior distributions to evaluate the power of several tests that have been used to test the null of time-invariance of autoregressive coefficients of VARs against the alternative of time-varying coefficients. Except for one test, they find that those tests have low power against the form of time variation captured by our model. That one test also rejects time invariance in the data.

Available at: http://www.frbatlanta.org/filelegacydocs/wp0325.pdf

1.18 Ljungqvist Lars and Thomas J. Sargent, The European Employment Experience, CEPR Discussion Papers No. 3543, 2002.

Similar durations but lower flows into unemployment gave Europe lower unemployment rates than the until the 1970's. But since 1980, higher durations have kept unemployment rates in Europe persistently higher than in the U.S. A general equilibrium search model with human capital explains how these outcomes arise from the way Europe's higher firing costs and more generous unemployment compensation make its unemployment rate respond to a parameter that measures a worker's loss of human capital after an involuntary job loss. An increase in that parameter between the 70s and the 80s made workers face more turbulence in labor market outcomes and allows our model to

Selected Readings –June 2008 20

match features of a number of empirical studies showing that workers experienced more earnings volatility after 1980. Our model also explains why, especially among older workers, hazard rates of gaining employment in Europe fall off sharply with the duration of unemployment, and why displaced workers in Europe experience smaller earnings losses and lower re-employment rates than those in the United States. The effects of layoff costs on unemployment rates depend on the proportions of frictional and structural unemployment and therefore on the generosity of unemployment benefits and the amount of microeconomic turbulence facing workers.

Available at: http://www.cepr.org/pubs/dps/DP3543.asp

1.19 In-Koo Cho and Thomas J. Sargent, Escaping Nash inflation, Working Paper Series 23, European Central Bank, 2000.

Mean dynamics govern convergence to rational expectations equilibria of self-referential systems under least squares learning. We highlight escape dynamics that propel away from rational expectations equilibrium under fixed-gain recursive learning schemes. These learning schemes discount past observations. In a model with a unique self- confirming equilibrium, we show that the destination of the escape dynamics is an outcome associated with government discovery of too strong a version of the natural rate hypothesis. That destination is not sustainable as a self-confirming equilibrium but is visited recurrently. The escape route dynamics cause recurrent outcomes close to the Ramsey (commitment) inflation rate in a model with an adaptive government. JEL Classification: E3; E52; E58.

Available at: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp023.pdf

1.20 Mariacristina De Nardi and Selahattin Imrohoglu and Thomas J. Sargent, Projected U.S. demographics and social security, Working Paper Series WP- 98-14, Federal Reserve Bank of Chicago, 1998.

Selected Readings –June 2008 21

Without policy reforms, the aging of the U.S. population is likely to increase the burden of the currently unfunded social security and medicare systems. In this paper we build an applied general equilibrium model and incorporate the population projections made by the Social Security Administration (SSA) to evaluate the macroeconomic and welfare implications of alternative fiscal responses to the retirement of the baby- boomers. Our calculation suggest that it will be costly to maintain the benefits at the levels now promised because the increases in distortionary taxes required to finance those benefits will reduce private saving and labor supply. We also find that the accounting calculations made by SSA underestimate the required fiscal adjustments. Finally, our results confirm that policies with similar long-run characteristics have very different transitional implications about the distribution of welfare across generations.

Available at:

http://www.chicagofed.org/publications/workingpapers/papers/wp98_14.pdf

1.21 Thomas J. Sargent and Francois R. Velde, The big problem of small change, Working Paper Series, Macroeconomic Issues WP-97-8, Federal Reserve Bank of Chicago, 1997.

Western Europe was plagued with currency shortages from the 14th century, at which a 'standard formula' had been devised to cure the problem. We use a cash-in-advance model of commodity money to define a currency shortage, show that they could develop and persist under commodity money regime, and analyze the role played by each ingredient in the standard formula. A companion paper documents the evolution of monetary theory, monetary experiments and minting technology over the course of six hundred years.

Available at: http://www.chicagofed.org/publications/workingpapers/papers/wp97_8.pdf

Selected Readings –June 2008 22

1.22 Thomas J. Sargent and Francois R. Velde, The evolution of small change, Working Paper Series, Macroeconomic Issues WP-97-13, Federal Reserve Bank of Chicago, 1997.

Western Europe was plagued with currency shortages from the 14th to the 19th century, at which time a `standard formula' had been devised to cure the problem. We document the evolution of monetary theory, policy experiments and minting technology over the course of six hundred years. In a companion paper, we use a cash-in-advance model of commodity money to provide an analytical frame- work for the problem of small change.

Available at: http://www.chicagofed.org/publications/workingpapers/papers/wp97_13.pdf

1.23 Lars Peter Hansen, Thomas J. Sargent and Thomas D. Tallarini Jr., Robust Permanent Income and Pricing, Levine's Working Paper Archive 596, UCLA Department of Economics, 1997.

No abstract available.

Available at: http://www.dklevine.com/archive/PESSNEW4.PDF

1.24 Albert Marcet, Thomas J. Sargent and Juha Seppala, Optimal Taxation without State-Contingent Debt, Economics Working Papers No. 170, Department of Economics and Business, Universitat Pompeu Fabra, revised October 2001.

To recover a version of Barro's (1979) `random walk' tax smoothing outcome, we modify Lucas and Stokey's (1983) economy to permit only risk--free debt. This imparts near unit root like behavior to government debt, independently of the government expenditure process, a realistic outcome in the spirit of Barro's. We show how the risk--free--debt-- only economy confronts the Ramsey planner with additional constraints on equilibrium allocations that take the form of a sequence of measurability conditions. We solve the Ramsey problem by formulating it in terms of a Lagrangian, and applying a

Selected Readings –June 2008 23

Parameterized Expectations Algorithm to the associated first--order conditions. The first- -order conditions and numerical impulse response functions partially affirm Barro's random walk outcome. Though the behaviors of tax rates, government surpluses, and government debts differ, allocations are very close for computed Ramsey policies across incomplete and complete markets economies.

Available at: http://www.econ.upf.edu/docs/papers/downloads/170.pdf

1.25 Evan W. Anderson, Lars Peter Hansen, Ellen R. McGrattan and Thomas J. Sargent, On the mechanics of forming and estimating dynamic linear economies, Staff Report 198, Federal Reserve Bank of Minneapolis, 1995.

This paper catalogues formulas that are useful for estimating dynamic linear economic models. We describe algorithms for computing equilibria of an economic model and for recursively computing a Gaussian likelihood function and its gradient with respect to parameters. We apply these methods to several example economies.

Available at: http://minneapolisfed.org/research/sr/sr198.ps

1.26 Lars Peter Hansen, Ellen R. McGrattan and Thomas J. Sargent, Mechanics of forming and estimating dynamic linear economies, Staff Report 182, Federal Reserve Bank of Minneapolis, 1994.

This paper catalogues formulas that are useful for estimating dynamic linear economic models. We describe algorithms for computing equilibria of an economic model and for recursively computing a Gaussian likelihood function and its gradient with respect to parameters. We display an application to Rosen, Murphy, and Scheinkman's (1994) model of cattle cycles.

Available at: http://minneapolisfed.org/research/sr/sr182.pdf

Selected Readings –June 2008 24

1.27 Lars Peter Hansen and Thomas J. Sargent, Recursive Linear Models of Dynamic Economies, NBER Working Papers No. 3479, 1990.

This paper describes a class of dynamic stochastic linear quadratic equilibrium models. A model is specified by naming lists of matrices that determine preferences, technology, and the information structure. Aggregate equilibrium allocations and prices are computed by solving a social planning problem in the form of an optimal linear regulator. Heterogeneity among agents is permitted. Several examples are computed.

Available at: http://www.nber.org/papers/w3479.pdf

1.28 Gary D. Hansen and Thomas J. Sargent, Straight Time and Overtime in Equilibrium, UCLA Economics Working Papers No. 455, UCLA Department of Economics, 1987.

No abstract available. Available at: http://www.econ.ucla.edu/workingpapers/wp455.pdf

1.29 Thomas J. Sargent, Government debt and taxes, Working Papers No. 293, Federal Reserve Bank of Minneapolis, 1986.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP293.pdf

1.30 Thomas J. Sargent and Neil Wallace, Identification and estimation of a model of hyperinflation with a continuum of sunspot equilibrium, Working Papers No. 280, Federal Reserve Bank of Minneapolis, 1985.

This paper constructs a model with two structural equations: the Government budget constraint and a linear version of Cagan’s portfolio balance equation. The model contains a continuum of equilibria with sunspot equilibria. Closed forms for the solutions are found. Even though there is a continuum of equilibria, the model is overidentified

Selected Readings –June 2008 25

econometrically, so that the model restricts time series data on price levels and currency stocks. We describe how the free parameters of the model can be estimated, including some parameters that serve to index particular members of the continuum of equilibria. The sunspot equilibria hold out some promise of explaining anomalies in the observed behavior of inflation and real balances during hyperinflations.

Available at: http://www.minneapolisfed.org/research/WP/WP280.pdf

1.31 Lars Peter Hansen and Thomas J. Sargent, Identification of continuous time rational expectations models from discrete time data, Staff Report 73, Federal Reserve Bank of Minneapolis, 1983.

This paper shows how the cross-equation restrictions implied by dynamic rational expectations models can be used to resolve the aliasing identification problem. Using a continuous time, linear-quadratic optimization environment, this paper describes how the resulting restrictions are sufficient to identify the parameters of the underlying continuous time process when it is known that the true continuous time process has a rational spectral density matrix.

Available at: http://minneapolisfed.org/research/sr/sr73.pdf

1.32 Thomas J. Sargent and Neil Wallace, A model of commodity money, Staff Report 85, Federal Reserve Bank of Minneapolis, 1983.

Commodity money is modeled as one or two of the capital goods in a one-consumption good and one or two capital-good, overlapping generations’ model. Among the topics addressed using versions of the model are (i) the nature of the inefficiency of commodity money; (ii) the validity of quantity-theory predictions for commodity money systems; (iii) the circumstances under which one commodity emerges naturally as the commodity money; (iv) the role of inside money (money backed by private debt) in commodity money systems; and (v) the circumstances under which a government can choose the commodity to serve as the commodity money.

Selected Readings –June 2008 26

Available at: http://minneapolisfed.org/research/sr/sr85.pdf

1.33 Thomas J. Sargent, Beyond demand and supply curves in macroeconomics, Staff Report 77, Federal Reserve Bank of Minneapolis, 1982.

This paper surveys recent issues in macroeconomics from the viewpoint of dynamic economic theory. The need to look beyond demand and supply curves and the insights that come from doing so are emphasized. Examples of issues in debt management and fiscal policy are analyzed.

Available at: http://minneapolisfed.org/research/sr/sr77.pdf

1.34 Thomas J. Sargent, Dollarization, seignorage, and the demand for money, Working Papers No. 170, Federal Reserve Bank of Minneapolis, 1981.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP170.pdf

1.35 Lars Peter Hansen and Thomas J. Sargent, A note on Wiener-Kolmogorov prediction formulas for rational expectations models, Staff Report 69, Federal Reserve Bank of Minneapolis, 1981.

A prediction formula for geometrically declining sums of future forcing variables is derived for models in which the forcing variables are generated by a vector autoregressive-moving average process. This formula is useful in deducing and characterizing cross-equation restrictions implied by linear rational expectations models.

Available at: http://minneapolisfed.org/research/sr/sr69.pdf

1.36 Thomas J. Sargent and Neil Wallace, The real bills doctrine vs. the quantity theory: a reconsideration, Staff Report 64, Federal Reserve Bank of Minneapolis, 1981.

Selected Readings –June 2008 27

On our interpretation, real bills advocates favor unfettered intermediation, while their critics, who we call quantity theorists, favor legal restrictions on intermediation geared to separate money from credit. We display examples of economies in which quantity-theory assertions about money-supply and price-level behavior under the real bills regime are valid. In particular, both the price level and an asset total that quantity theorists would identify as money fluctuate more under a real bills regime than under a regime with restrictions like those favored by quantity theorists. Despite this, the Pareto criterion does not support the quantity-theory position.

Available at: http://minneapolisfed.org/research/sr/sr64.pdf

1.37 Thomas J. Sargent, Stopping moderate inflations: the methods of Poincaré and Thatcher, Working Papers No. 0, Federal Reserve Bank of Minneapolis, 1981.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP0.pdf

1.38 Lars Peter Hansen and Thomas J. Sargent, Exact linear rational expectations models: specification and estimation, Staff Report 71, Federal Reserve Bank of Minneapolis, 1981.

This paper describes how to specify and estimate rational expectations models in which there are exact linear relationships among variables and expectations of variables that the econometrician observes.

Available at: http://minneapolisfed.org/research/sr/sr71.pdf

1.39 Lars Peter Hansen and Thomas J. Sargent, Aggregation over time and the inverse optimal predictor problem for adaptive expectations in continuous time, Staff Report 74, Federal Reserve Bank of Minneapolis, 1981.

Selected Readings –June 2008 28

This paper describes the continuous time stochastic process for money and inflation under which Cagan’s adaptive expectations model is optimal. It then analyzes how data formed by sampling money and prices at discrete points in time would behave.

Available at: http://minneapolisfed.org/research/sr/sr74.pdf

1.40 Lars Peter Hansen and Thomas J. Sargent, Instrumental variables procedures for estimating linear rational expectations models, Staff Report 70, Federal Reserve Bank of Minneapolis, 1981.

A prediction formula for geometrically declining sums of future forcing variables is derived for models in which the forcing variables are generated by a vector autoregressive-moving average process. This formula is useful in deducing and characterizing cross-equation restrictions implied by linear rational expectations models.

Available at: http://minneapolisfed.org/research/sr/sr70.pdf

1.41 Thomas J. Sargent, The ends of four big inflations, Working Papers No. 158, Federal Reserve Bank of Minneapolis, 1981.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP158.pdf

1.42 Lars Peter Hansen and Thomas J. Sargent, Methods for estimating continuous time Rational Expectations models from discrete time data, Staff Report 59, Federal Reserve Bank of Minneapolis, 1980.

This paper describes methods for estimating the parameters of continuous time linear stochastic rational expectations models from discrete time observations. The economic models that we study are continuous time, multiple variable, stochastic, linear-quadratic rational expectations models. The paper shows how such continuous time models can properly be used to place restrictions on discrete time data. Various heuristic procedures for deducing the implications for discrete time data of these models, such as replacing

Selected Readings –June 2008 29

derivatives with first differences, can sometimes give rise to very misleading conclusions about parameters. The idea is to express the restrictions imposed by the rational expectations model on the continuous time process of the observable variables. Then the likelihood function of a discrete-time sample of observations from this process is obtained. Estimators are obtained by maximizing the likelihood function with respect to the free parameters of the continuous time model.

Available at: http://minneapolisfed.org/research/sr/sr59.pdf

1.43 Thomas J. Sargent, Interpreting economic time series, Staff Report 58, Federal Reserve Bank of Minneapolis, 1980.

This paper explores some of the implications for econometric practice of the principle that people’s observed behavior will change when their constraints change. In dynamic contexts, a proper definition of people’s constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell. Changes in agents’ perceptions of these laws of motion (or constraints) will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess. Until very recently, received dynamic econometric practice ignored this principle. The practice of dynamic econometrics should be changed so that it is consistent with the principle that people’s rules of choice are influenced by their constraints. This is a substantial undertaking, and involves major adjustments in the ways that we formulate, estimate, and simulate econometric models.

Available at: http://minneapolisfed.org/research/sr/sr58.pdf

1.44 Lars Peter Hansen and Thomas J. Sargent, Rational expectations models and the aliasing phenomenon, Staff Report 60, Federal Reserve Bank of Minneapolis, 1980.

This paper shows how the cross-equation restrictions delivered by the hypothesis of rational expectations can serve to solve the aliasing identification problem. It is shown

Selected Readings –June 2008 30

how the rational expectations restrictions uniquely identify the parameters of a continuous time model from statistics of discrete time models.

Available at: http://minneapolisfed.org/research/sr/sr60.pdf

1.45 Lars Peter Hansen and Thomas J. Sargent, Linear rational expectations models for dynamically interrelated variables, Working Papers No. 135, Federal Reserve Bank of Minneapolis, 1980.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP135.pdf

1.46 Thomas J. Sargent, Tobin's q and the rate of investment in general equilibrium, Staff Report 40, Federal Reserve Bank of Minneapolis, 1979.

No abstract available.

Available at: http://minneapolisfed.org/research/sr/sr40.pdf

1.47 Lars Peter Hansen and Thomas J. Sargent, Formulating and estimating dynamic linear rational expectations models, Working Papers No. 127, Federal Reserve Bank of Minneapolis, 1979.

This paper describes methods for conveniently formulating and estimating dynamic linear econometric models under the hypothesis of rational expectations. An econometrically convenient formula for the cross-equation rational expectations restrictions is derived. Models of error terms and the role of the concept of Granger causality in formulating rational expectations models are both discussed. Tests of hypothesis of strict econometric exogeneity along the lines of Sim’s are compared with a test that is related to Wu’s.

Available at: http://www.minneapolisfed.org/research/WP/WP127.pdf

Selected Readings –June 2008 31

1.48 Thomas J. Sargent, Estimation of dynamic labor demand schedules under rational expectations, Staff Report 27, Federal Reserve Bank of Minneapolis, 1978.

A dynamic linear demand schedule for labor is estimated and tested. The hypothesis of rational expectations and assumptions about the orders of the Markov processes governing technology impose over-identifying restrictions on a vector autoregression for straight-time employment, overtime employment, and the real wage. The model is estimated by the full information maximum likelihood method. The model is used as a vehicle for re-examining some of the paradoxical cyclical behavior of real wages described in the famous Dunlop-Tarshis-Keynes exchange.

Available at: http://minneapolisfed.org/research/sr/sr27.pdf

1.49 Thomas J. Sargent, A note on maximum likelihood estimation of the rational expectations model of the term structure, Staff Report 26, Federal Reserve Bank of Minneapolis, 1978.

No abstract available.

Available at: http://minneapolisfed.org/research/sr/sr26.pdf

1.50 Thomas J. Sargent, Rational expectations, econometric exogeneity and consumption, Staff Report 25, Federal Reserve Bank of Minneapolis, 1977.

No abstract available.

Available at: http://minneapolisfed.org/research/sr/sr25.pdf

1.51 Thomas J. Sargent, Is Keynesian economics a dead end?, Working Papers No. 101, Federal Reserve Bank of Minneapolis, 1977.

No abstract available.

Selected Readings –June 2008 32

Available at: http://www.minneapolisfed.org/research/WP/WP101.pdf

1.52 Thomas J. Sargent and Christopher A. Sims, Business cycle modeling without pretending to have too much a priori economic theory, Working Papers No. 55, Federal Reserve Bank of Minneapolis, 1977.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP55.pdf

1.53 Thomas J. Sargent, Econometric exogeneity and alternative estimators of portfolio balance schedules for hyperinflations: a note, Working Papers No. 79, Federal Reserve Bank of Minneapolis, 1976.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP79.pdf

1.54 Thomas J. Sargent, Observations on improper methods of simulating and teaching Friedman's time series consumption model, Working Papers No. 53, Federal Reserve Bank of Minneapolis, 1976.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP53.pdf

1.55 Thomas J. Sargent, Testing for neutrality and rationality, Working Papers No. 54, Federal Reserve Bank of Minneapolis, 1976.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP54.pdf

Selected Readings –June 2008 33

1.56 Rusdu Saracoglu and Thomas J. Sargent, Seasonality and portfolio balance under rational expectations, Working Papers No. 58, Federal Reserve Bank of Minneapolis, 1976.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP58.pdf

1.57 Thomas J. Sargent, The demand for money during hyperinflations under rational expectations: II, Working Papers No. 60, Federal Reserve Bank of Minneapolis, 1976.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP60.pdf

1.58 Thomas J. Sargent, Naive business cycle theory, Working Papers No. 23, Federal Reserve Bank of Minneapolis, 1975.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP23.pdf

1.59 Thomas J. Sargent, The observational equivalence of natural and unnatural rate theories of macroeconomics, Working Papers No. 48, Federal Reserve Bank of Minneapolis, 1975.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP48.pdf

1.60 Salih Neftci and Thomas J. Sargent, A little bit of evidence on the natural rate hypothesis from the U.S, Working Papers No. 83, Federal Reserve Bank of Minneapolis, 1975.

Selected Readings –June 2008 34

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP83.pdf

1.61 Thomas J. Sargent, 1974. Dynamic analysis of a Keynesian model, Working Papers No. 27, Federal Reserve Bank of Minneapolis.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP27.pdf

1.62 Dale W. Henderson and Thomas J. Sargent, Unemployment and stabilization policy in a two-sector, two-country aggregative model, Working Papers No. 26, Federal Reserve Bank of Minneapolis, 1974.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP26.pdf

1.63 Thomas J. Sargent and Neil Wallace, Rational expectations and the theory of economic policy, Working Papers No. 29, Federal Reserve Bank of Minneapolis, 1974.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP29.pdf

1.64 Thomas J. Sargent, Interest rates and prices in the long run: a study of the Gibson paradox, Working Papers No. 75, Federal Reserve Bank of Minneapolis, 1971.

No abstract available.

Available at: http://www.minneapolisfed.org/research/WP/WP75.pdf

Selected Readings –June 2008 35

1.65 Timothy Cogley and Thomas J. Sargent, Evolving Post-World War II U.S. Inflation Dynamics, Working Papers No. 2132872, Department of Economics, W. P. Carey School of Business, Arizona State University.

This paper uses a nonlinear stochastic model to describe inflation-unemployment dynamics in the U.S. after World War II. The model is a vector autoregression with coefficients that are random walks with innovations that are arbitrarily correlated with each other and with innovations to the observables. The model enables us to detect features that have been emphasized in theoretical analyses of inflation-unemployment dynamics. Those analyses involve coefficient drift in essential ways.

Available at: ftp://zia.stanford.edu/pub/sargent/webdocs/research/l12.pdf

Selected Readings –June 2008 36

2 ARTICLES

2.1 Thomas J. Sargent, Commentary on Long-run risks and financial markets, Review, Federal Reserve Bank of St. Louis, issue Jul, pages 301-304, 2007.

No abstract available.

Available at: http://research.stlouisfed.org/publications/review/07/07/Sargent.pdf

2.2 HUANG HE, IMROHOROG[caron]LU SELAHATTIN and THOMAS J. SARGENT, Two Computations To Fund Social Security, Macroeconomic Dynamics, Cambridge University Press, Volume 1(01), pages 7-44, March 2005.

We use a general equilibrium model to study the impact of fully funding social security on the distribution of consumption across cohorts and over time. In an initial stationary equilibrium with an unfunded social security system, the capital/output ratio, debt/output ratio, and rate of return to capital are 3.2, 0.6, and6.8%, respectively. In our first experiment, we suddenly terminate social security payments but compensate entitled generations by a massive one-time increase in government debt. Eventually, the aggregate physical capital stock rises by 40%, the return on capital falls to 4.4%, and the labor income tax rate falls from 33.9 to14%. We estimate the size of the entitlement debt to be 2.7 times real GDP, which is paid off by levying a 38% labor income tax rate during the first 40 years of the transition. In our second experiment, we leave social security benefits untouched but force the government temporarily to increase the tax on labor income so as gradually to accumulate private physical capital, from the proceeds of which it eventually social security payments. This particular government-run funding scheme delivers larger efficiency gains (in both the exogenous and endogenous price cases) than privatization, an outcome stemming from the scheme s public provision of insurance both against life-span risk and labor income volatility.

Available at: http://ideas.repec.org/a/cup/macdyn/v1y2005i01p7-44_00.html

Selected Readings –June 2008 37

2.3 Lars Peter Hansen and Thomas J. Sargent, Certainty equivalence and model uncertainty, Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 17-38, 2005.

Simon’s and Theil’s certainty equivalence property justifies a convenient algorithm for solving dynamic programming problems with quadratic objectives and linear transition laws: first, optimize under perfect foresight, then substitute optimal forecasts for unknown future values. A similar decomposition into separate optimization and forecasting steps prevails when a decision maker wants a decision rule that is robust to model misspecification. Concerns about model misspecification leave the first step of the algorithm intact and affect only the second step of forecasting the future. The decision maker attains robustness by making forecasts with a distorted model that twists probabilities relative to his approximating model. The appropriate twisting emerges from a two-player zero-sum dynamic game.

Available at: http://www.federalreserve.gov/events/conferences/mmp2004/pdf/hansensargent.pdf

2.4 Thomas J. Sargent, Commentary : the evolution of economic understanding and postwar stabilization policy, Proceedings, Federal Reserve Bank of Kansas City, pages 79-94, 2002.

No abstract available.

Available at: http://www.kc.frb.org/Publicat/sympos/2002/pdf/S02Sargent.pdf

2.5 Hansen Lars-Peter and Thomas J. Sargent, Acknowledgement Misspecification in Macroeconomic Theory, Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Volume 19 (S1), pages 213-27, February 2001.

We explore methods for confronting model misspecification in macroeconomics. We construct dynamic equilibria in which private agents and policy makers recognize that models are approximations. We explore two generalizations of rational expectations equilibria. In one of these equilibria, decision makers use dynamic evolution equations that are imperfect statistical approximations, and in the other misspecification are impossible to detect even from infinite samples of time-series

Selected Readings –June 2008 38

data. In the first of these equilibria, decision rules are tailored to be robust to the allowable statistical discrepancies. Using frequency domain methods, we show that robust decision makers treat model misspecification like time-series econometricians.

Available at: http://ideas.repec.org/a/ime/imemes/v19y2001is1p213-27.html

2.6 Ljungqvist Lars and Thomas J. Sargent, The European Unemployment Dilemma, Working Paper Series 481, Research Institute of Industrial Economics, 1997.

Post World War II European welfare states experienced several decades of relatively low unemployment, followed by a plague of persistently high unemployment since the 1980s. We impute the higher unemployment to welfare states' diminished ability to cope with more turbulent economic times, such as the ongoing restructuring from manufacturing to the service industry, adoption of new information technologies and a rapidly changing international economy. We use a general equilibrium search model where workers accumulate skills on the job and lose skills during unemployment.

Available at: http://swopec.hhs.se/iuiwop/papers/iuiwop0481.pdf

2.7 George J. Hall and Thomas J. Sargent, Accounting for the federal government's cost of funds, Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 18-28, 1997.

This article describes and defends the authors' corrections to the federal government's flawed measure of its cost of funds. Further, it examines how the maturity structure of the debt influences the way inflation risk and interest rate risk are shared by the government and its creditors.

Available at: http://www.chicagofed.org/publications/economicperspectives/1997/epjulyaug97b.pd f

2.8 Lars Ljungqvist and Thomas J. Sargent, A supply-side explanation of European unemployment, Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 2-15, 1996.

Selected Readings –June 2008 39

This article offers a supply-side explanation of striking patterns in unemployment rates and duration of unemployment in European countries, compared with other member countries of the OECD (Organization for Economic Cooperation and Development). The rise in long-term unemployment in Europe is attributed to the adverse incentive effects of generous welfare programs in times of economic turbulence.

Available at: http://www.chicagofed.org/publications/economicperspectives/1996/epsep96a.pdf

2.9 Thomas J. Sargent and Francois R. Velde, The analytics of German monetary unification, Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 33-50, 1990.

No abstract available.

Available at: http://www.frbsf.org/publications/economics/review/1990/90-4_33-50.pdf

2.10 Thomas J. Sargent, Interpreting the Reagan deficits, Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 5-12, 1986.

No abstract available.

Available at: http://www.frbsf.org/publications/economics/review/1986/86-4_5-12.pdf

2.11 Preston J. Miller and Thomas J. Sargent, A reply to Darby, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr., 1984.

No abstract available.

Available at: http://www.minneapolisfed.org/research/QR/QR823.pdf

Selected Readings –June 2008 40

2.12 Lars Peter Hansen and Thomas J. Sargent, The dimensionality of the aliasing problem in models with rational spectral densities, Staff Report 72, Federal Reserve Bank of Minneapolis, 1981.

This paper reconsiders the aliasing problem of identifying the parameters of a continuous time stochastic process from discrete time data. It analyzes the extent to which restricting attention to processes with rational spectral density matrices reduces the number of observationally equivalent models. It focuses on rational specifications of spectral density matrices since rational parameterizations are commonly employed in the analysis of the time series data.

Available at: http://minneapolisfed.org/research/sr/sr72.pdf

2.13 Thomas J. Sargent and Neil Wallace, A model of commodity money, Staff Report 85, Federal Reserve Bank of Minneapolis, 1983.

Commodity money is modeled as one or two of the capital goods in a one- consumption good and one or two capital-good, overlapping generations’ model. Among the topics addressed using versions of the model are (i) the nature of the inefficiency of commodity money; (ii) the validity of quantity-theory predictions for commodity money systems; (iii) the circumstances under which one commodity emerges naturally as the commodity money; (iv) the role of inside money (money backed by private debt) in commodity money systems; and (v) the circumstances under which a government can choose the commodity to serve as the commodity money.

Available at: http://minneapolisfed.org/research/sr/sr85.pdf

2.14 Thomas J. Sargent and Neil Wallace, Some unpleasant monetarist arithmetic, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, 1981.

No abstract available.

Available at: http://www.minneapolisfed.org/research/QR/QR531.pdf

Selected Readings –June 2008 41

2.15 Thomas J. Sargent, Rational expectations and the reconstruction of macroeconomics, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, 1980.

No abstract available.

Available at: http://www.minneapolisfed.org/research/QR/QR434.pdf

2.16 Robert E. Lucas, Jr. and Thomas J. Sargent, After Keynesian macroeconomics, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, 1979.

No abstract available.

Available at: http://www.minneapolisfed.org/research/QR/QR321.pdf

2.17 Thomas J. Sargent, Estimating vector autoregressions using methods not based on explicit economic theories, Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, 1979.

No abstract available.

Available at: http://www.minneapolisfed.org/research/QR/QR333.pdf

2.18 Thomas J. Sargent, Rational Expectations: A Correction, Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Volume 4 (1973-3), pages 799-800, 1973.

No abstract available.

Available at: http://www.brookings.edu/press/Journals/2007/brookingspapersoneconomicactivity12 007.aspx

2.19 Thomas J. Sargent, Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment, Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Volume 4 (1973-2), pages 429-480, 1973.

Selected Readings –June 2008 42

No abstract available.

Available at: http://www.brookings.edu/press/Journals/2007/brookingspapersoneconomicactivity12 007.aspx

Selected Readings –June 2008 43

3 BOOKS

3.1 Rational Expectations and Econometric Practice, with Robert E. Lucas Jr., University of Minnesota Press, 1981

3.2 Recursive Macroeconomic Theory, 2nd edition, with Lars Ljungqvist, MIT press, September 2004.

3.3 The Big Problem of Small Change, with Francois Velde, Princeton University Press, 2002

3.4 The Conquest of American Inflation, Princeton University Press

3.5 Robustness, with Lars Peter Hansen, Princeton University Press, 2007.

Selected Readings –June 2008 44