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COPYRIGHT NOTICE: Edited by Philippe Aghion, Roman Frydman, , and Michael Woodford: Knowledge, Information, and Expectations in Modern : In Honor of Edmund S. Phelps is published by Press and copyrighted, © 2003, by Princeton University Press. All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher, except for reading and browsing via the World Wide Web. Users are not permitted to mount this file on any network servers.

Follow links for Class Use and other Permissions. For more information, send email to: [email protected] CONTENTS

Contributors ix

Edmund Phelps, Insider-’ Insider 1 Paul A. Samuelson

Edmund S. Phelps and Modern Macroeconomics 3 Philippe Aghion, Roman Frydman, Joseph Stiglitz, and Michael Woodford

PART I Information, Wage-Price Dynamics, and Business Fluctuations

1 Imperfect Common Knowledge and the Effects of 25 Michael Woodford

2 Comments on Woodford 59 Lars E. O. Svensson

3 Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps 64 N. Gregory Mankiw and

4 A Theory of Rational Inflationary Inertia 87 Guillermo A. Calvo, Oya Celasun, and Michael Kumhof

5 Comments on Calvo, Celasun, and Kumhof 118

6 Macroeconomic Fluctuations in an Economy of Phelps-Winter Markets 123 and Joseph Stiglitz

7 General Comments on Part I 137 Robert E. Lucas, Jr. vi CONTENTS

PART II Imperfect Knowledge, Expectations, and Rationality

8 Imperfect Knowledge Expectations, Uncertainty-Adjusted Uncovered Rate Parity, and Exchange Rate Dynamics 145 Roman Frydman and Michael D. Goldberg

9 Comments on Frydman and Goldberg 183 David H. Papell

10 Endogenous Fluctuations and the Role of Monetary Policy 188 Mordecai Kurz with Hehui Jin and Maurizio Motolese

11 A Debt Puzzle 228 David Laibson, Andrea Repetto, and Jeremy Tobacman

12 Comments on Laibson, Repetto, and Tobacman 267 Robert A. Pollak

13 Reflections on Parts I and II 271 Edmund S. Phelps

PART III Determinants of Equilibrium

14 How Monopsonistic Is the (Danish) Labor Market? 285 Dale T. Mortensen

15 Company Start-Up Costs and Employment 309 Christopher A. Pissarides

16 European Unemployment: From a Worker’s Perspective 326 Lars Ljungqvist and Thomas J. Sargent

17 Comments on Ljungqvist and Sargent 351 Olivier J. Blanchard

18 Flexibility and Job Creation: Lessons for Germany 357 James J. Heckman

19 The Beveridge Curve, Unemployment, and Wages in the OECD from the 1960s to the 1990s 394 Stephen Nickell, Luca Nunziata, Wolfgang Ochel, and Glenda Quintini

20 Comments on Nickell, Nunziata, Ochel, and Quintini 432 Jean-Paul Fitoussi CONTENTS vii

PART IV Education, Technical Change, and Growth

21 Wage Inequality and Technological Change: A Nelson-Phelps Approach 443 Philippe Aghion, Peter Howitt, and Gianluca Violante

22 Comments on Aghion, Howitt, and Violante 462 Robert E. Hall

23 Factor Prices and Technical Change: From Induced Innovations to Recent Debates 464

24 Comments on Acemoglu 492 Nancy L. Stokey

25 Population and Ideas: A Theory of Endogenous Growth 498 Charles I. Jones

26 Another View of : 40 Years Later 522 Jess Benhabib and Bart Hobijn

27 General Comments on Part IV 546 Robert M. Solow

28 Reflections on Parts III and IV 550 Edmund S. Phelps

Index 565