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BUSINESS C Y C L E S and EQUILIBRIUM ( continued from front flap ) Black $49.95$49.95 USA/$59.95 USA/$59.95 CANCAN Praise for • Includes discussions dedicated to “the effects BUSINESS EQUILIBRIUM CYCLES and of uncontrolled banking,” “the trouble with Fischer Black econometric models,” and “the effects of BUSINESS noise on investing” hroughout his career, Fischer Black described • Provides enlightening commentary on Black’s CYCLESand a view of business fl uctuations based on life and work at the time Business Cycles and Equilibrium was written Tthe idea that a well-developed economy EQUILIBRIUM will be continually in equilibrium. In the essays that Updated Edition Engaging and informative, the Updated Edition of constitute this book, which is one of only two books Business Cycles and Equilibrium will give you a Black ever wrote, he explores this idea thoroughly and reaches some surprising conclusions. better understanding of what’s really going on during “This book and the articles that preceded it electrifi ed the fi rst generation of these uncertain and volatile fi nancial times. Wall Street quants with Fischer’s famous rallying cry, ‘In my model, markets work,’ With the newfound popularity of quantitative fi nance and challenged them to ‘imagine a world without money.’ He gave us clear, logically and risk management, the work of Fischer Black FISCHER BLACK is regarded as one of the great consistent macroeconomics, without jargon or unnecessary math, which has garnered much attention. Even today, Black’s was directly useful for making money. The material is as fresh and as relevant BUSINESS innovators of modern fi nance theory. He is most Business Cycles and Equilibrium—which lays out his famous for cofounding the legendary Black-Scholes to profi t as when it was written.” theory that economic and fi nancial markets are in a equation, although he contributed much more to —Aaron Brown, AQR Capital Management, author of continual equilibrium—still challenges our thinking, fi nance in the areas of portfolio insurance, commodity The Poker Face of Wall Street and A World of Chance especially during our current economic crisis. futures pricing, bond swaps, interest rate futures, and “Fischer Black has long been known as a genius in fi nance. He was also a genius global asset allocation models. Black worked at the on business cycles and monetary theory, and this book is the proof.” CYCLESand This Updated Edition clearly presents Black’s University of Chicago and the MIT Sloan School of —Tyler Cowen, Professor of Economics, George Mason University classic theory on business cycles and the concept Management, as well as Goldman Sachs. He received of equilibrium, and contains a new Foreword by his PhD in applied mathematics from Harvard the person who knows Black best: Perry Mehrling, University. Black died in 1995, two years before the “Fischer Black is a household name on Wall Street. Had he lived, Fischer would have shared (with Robert Merton and Myron Scholes) the Nobel Prize for author of Fischer Black and the Revolutionary Nobel Prize was awarded to Myron Scholes and their work in fi nancial economics. But Fischer also made extraordinarily deep Idea of Finance. Mehrling places Black’s book in Robert C. Merton for their work on option pricing. contributions to macroeconomics. This collection of Fischer’s key macro EQUILIBRIUM the context of his own intellectual trajectory, shows Since the Nobel Prize is not given posthumously, analyses is a feast for the intellect, but one that is very easily digested thanks to how to read it as a challenge to the macroeconomic Black was given a prominent mention for the key Perry Mehrling’s marvelous introduction, historical perspective, and unique orthodoxy of his day, and suggests how Black role he played in developing the equation. ability to connect Fischer’s many dots. The book is of special relevance to anyone might have used his theory to make sense of today’s hoping to understand today’s fi nancial crisis and its macroeconomic updated edition with a new foreword by fi nancial and economic meltdown. and policy ramifi cations. I recommend it most highly.” —Laurence Kotlikoff, Professor of Economics, Boston University Filled with the practical perspectives of one of the perry mehrling most innovative minds in fi nance, the Updated Edition of Business Cycles and Equilibrium: • Contains Fischer’s original essays, which reach Updated some interesting conclusions concerning the Edition role of equilibrium in a developed economy • Warns about the use and abuse of modeling • Explains the risky business of risk in a straightforward and accessible style ( continued on back flap ) ISBN: 978-0-470-49917-7 bindex.indd 198 8/24/09 9:40:43 AM Business Cycles and Equilibrium Updated Edition Fischer Black John Wiley & Sons, Inc. ffirs.indd i 8/27/09 11:20:37 AM Copyright © Fischer Black 1987, 2010. Foreword © John Wiley & Sons, Inc. 2010. All rights reserved. First published 1987 by Basil Blackwell, Inc. First published in paperback 1990. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Black, Fischer, 1938- Business cycles and equilibrium/Fischer Black. – Updated ed. p. cm. Includes index. ISBN 978-0-470-49917-7 (cloth) 1. Business cycles. 2. Equilibrium (Economics) 3. Title. HB3711.B497 2010 338.5'42—dc22 2009025218 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd ii 8/27/09 11:20:38 AM Contents Foreword v Introduction xxi Chapter 1: Banking and Interest Rates in a World Without Money: The Effects of Uncontrolled Banking 1 Chapter 2: Active and Passive Monetary Policy in a Neoclassical Model 23 Chapter 3: Rational Economic Behavior and the Balance of Payments 43 Chapter 4: Uniqueness of the Price Level in Monetary Growth Models with Rational Expectations 65 Chapter 5: Purchasing Power Parity in an Equilibrium Model 81 Chapter 6: Ups and Downs in Human Capital and Business 85 Chapter 7: How Passive Monetary Policy Might Work 91 Chapter 8: What a Non-Monetarist Thinks 99 Chapter 9: Global Monetarism in a World of National Currencies 107 Chapter 10: The ABCs of Business Cycles 117 iii ftoc.indd iii 8/25/09 8:32:11 PM iv contents Chapter 11: A Gold Standard with Double Feedback and Near Zero Reserves 129 Chapter 12: The Trouble with Econometric Models 135 Chapter 13: General Equilibrium and Business Cycles 153 Chapter 14: Noise 169 Index 191 ftoc.indd iv 8/24/09 9:40:25 AM Foreword P erry M ehrling ischer Black (1938–1995) is best known for his fundamental con- tributions to fi nance, most famously the Black-Scholes option Fpricing formula that bears his name. He also aspired to contrib- ute to macroeconomics. Indeed, he viewed his contributions to macro- economics as more important than his contributions to fi nance, because they were potentially more consequential for general social welfare. This book records the development of his thinking in that fi eld from 1968, when he wrote the fi rst draft of the paper that he includes as the fi rst chapter, to 1986, when he revised his presidential address to the American Finance Association to produce the paper that he includes as the last chapter. In between, the papers are organized chronologically, rather than thematically, more or less in the order in which Black brought them to fruition (see the Appendix at the end of the Foreword). He added some few notes, but otherwise there were no retrospective addi- tions or omissions. In Black ’ s own professional life, the temporal span of this book took him from his fi rst job at the management consultancy fi rm Arthur D. Little, Inc., to what would be his last job at the investment banking fi rm Goldman, Sachs & Co.
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