Index Adams, Gwyn, 293 banks, central, see central banks aggregate consumption, 86, 88 Barro, Robert J., 30 aggregate demand: Baumol, William J., 13 autoregressions for, 75, 77 Bayesian (least-squares) analysis, 268, 277, disaggregation of, 95±97 278 employment and, 38±39 Blanchard, Olivier, 5, 30±31 interest rate and, 85±88 BLS (Bureau of Labor Statistics), 34 in multicountry model, 67, 70, 75, 77, bond market, in¯ation and, 290±91 78, 87, 95, 208 bonds, long-term, 70 production and, 67, 70, 78±79 Bray, Margaret, 278 in single-country model, 38±39, 42 Brayton, Flint, 98 wages and, 75, 77, 78±79 Bretton Woods system, 137, 259 aggregate price level, 78±79, 80, 132 Bryant, Ralph, 98, 217, 257 see also price level, price budget de®cit: aggregate supply, see potential GNP automatic stabilizers and, 289 Alexander, Lewis, 293 exchange rates and, 216 Anderson, Theodore W., 133 of Germany, 8, 290 Annual Report of the Council of Economic reduction of, 7, 259, 269±78 Advisers, 282 structural vs. actual, 7 antirecession policy, 33 of United States, 7, 11, 216, 269±78, 289 appreciation: budget law, 7, 288, 289 in¯ation and, 207 Budget Summit (1990), 289 interest rate and, 272±73 Bundesbank, 134, 232 money supply and, 213 Bureau of Labor Statistics (BLS), 34 trade account and, 210, 211, 214, 216 Bush, George, 281±82 see also exchange rates, exchange-rate policy call-money rate, 225, 226 automatic stabilizers: Calvo, Guillermo, 5 oil-price shock of 1990 and, 288±89 Canada, 6 policy rules and, 4±5, 223, 250, 259 alternative policy rule effects in, 251±56 systematic policies and, 288±89 consumption demand in, 86±88, 102 autoregressive moving average (ARMA), correlation matrix of errors to the 44, 45, 46, 48, 51, 52 exchange-rate equations of, 116±29 Ball, Lawrence, 278 durables consumption in, 86, 87, 111 Bank of Japan, 8, 134, 211, 225, 226, expected sales and investments in, 104 232±33, 235, 286 export demand in, 91±93, 104 320 Index Canada (continued) Cooper, J. P., 256 export prices in, 82, 83 correlation matrix of errors to exchange- ®scal expansion in, 170±73, 210±11 rate equations, 116±29 ®xed investment in, 89, 90 Council of Economic Advisers, 281, 282, ®xed vs. ¯exible exchange rates in, 285, 288 229±34, 244, 254 Cowles Commission, 22 import demand in, 91±94, 105 CPI (consumer price index), 62 inventory investment in, 92 credibility, systematic policies and, 283±84 investment demand in, 103 credit controls, U.S., 111 monetary expansion in, 142±45, 207±9 Crocket, Andrew, 293 money demand in, 93±95, 105 ªcrowding-inº effect, 25, 270 in multicountry model, 67, 69, 75±83, crowding-out, 210, 275±77 85±90, 92±97, 101±5, 110, 111, currency: 116±30, 142±45, 170±73, 207±11 appreciation of, 207, 210, 211, 213, 214, nondurables consumption in, 86, 87 216, 272, 273 permanent income and consumption in, depreciation, see depreciation 103 exchange rates of, see exchange rates, policy coordination and, 248±49 exchange-rate policy services consumption in, 86, 87, 88 import and export prices and, 79±82, shocks and, 110, 111, 115±30 91 capital markets, capital: international monetary reform and, 6 demand for, 8 see also speci®c currencies international, 224±25 in Italy, 84±85 Dagli, C. Ates, 18, 75n, 312 in multicountry model, 67, 68, 70, 89 data series, used to estimate multicountry Carlozzi, Nicholas, 31, 222n model, 295±310 central banks, 7, 8, 78, 134, 211, 212, 225 Davidon, W. C., 63 of Germany (Bundesbank), 134, 232 Davidon-Fletcher-Powell technique, 44 IMF, 6, 288 de®cits: of Japan, 8, 134, 211, 225, 226, 232±33, budget, see budget de®cit 235, 286 trade, 208, 210, 214, 269, 272, 275 oil-price shocks and, 285, 286, 288 demand: policy coordination and, 244, 247±50 aggregate, see aggregate demand policy rules and, 5, 244, 247±51 consumption, 70, 85±88, 102, 106, 107, of United States, see Federal Reserve 222 System export, 70, 91±93, 104, 270 Cholesky decomposition algorithm, 133 ®scal expansion and, 168, 172, 176, 180, Chow, Gregory C., 31 184, 188, 192, 204 closed economy, two-country model and, import, 70, 91±94, 105, 134, 270 24±25 investment, 70, 88±91, 103, 222, 273 Cockerline, Jon, 98 labor-market, 40, 42 computer programs, 311±12 monetary expansion and, 140, 144, 148, con®dence shocks, 281 152, 156, 160, 164, 200, 206, 207, constant-growth rate rule, 280 208, 212, 213 consumer price index (CPI), 62 money, see money demand consumption: wages and, 75 aggregate, 86, 88 depreciation: budget de®cit and, 270, 272 exchange rates and, 137, 206, 208, 213, durables, see durables consumption 224 ®xed vs. ¯exible exchange rates and, 229 exports and, 208, 209±10, 213 Friedman-type equation for, 20 imports and, 82, 208, 210±11 impact of a change in permanent income in¯ation and, 78±79, 134, 213 on, 103 interest rate and, 70, 207 in multicountry model, 67, 68, 70, 85±88, price level and, 79, 82, 275 100±103, 108±11, 131, 206, 210 Depression, Great, 106 nondurables, 70, 86, 87, 131, 206 Desert Storm, 286 Sargan's test of overidentifying design of policy rules, 31, 53±59, 107, 113, restrictions for, 100 115, 221±57, 281±82 services, 70, 86, 88, 131 conclusions about, 251±56 shocks to, 108±11, 131 coordination in, 221, 244±50 consumption demand, 70, 85±88, 106, 107, discretion in, 5, 30, 223, 281, 292 222 domestic monetary policy and, 6±7, 221, semi-elasticities of, 102 247 Index 321 exchange rates and, 6, 221±49, 251, 252, full, 74, 259, 264 254±55 in single-country model, 32, 33, 38±39, international monetary system and, 6, 42 221±44 see also unemployment; wages questions about, 6±7 ªentitlementº spending, 289 rational expectations and, 222, 260 Epple, Dennis, 31 steady-state covariance matrix of the European Monetary System, 223, 259 endogenous variables and, 53±55 exchange rates, exchange-rate policy, 3, 6, wage shocks and, 57±59 67, 70, 134 Deutsche mark, 115 budget de®cits and, 216 discretionary policy rules, 5, 30, 223, 281, expected value of, 83 292 ®scal expansion and, 166, 170, 174, 178, ªdiscretionaryº spending, 289 182, 186, 190, 202, 209, 211 disin¯ation, 7, 59±62, 259, 261±69, 278 ®xed, see ®xed exchange rates current and deferred wage changes ¯exible, see ¯exible exchange rates during, 264, 267 import prices and, 81 disposable income, 223 interest rates and, 82±84, 225±27, 230, disturbances, see shocks and disturbances 232, 234±35 Dobson, Wendy, 293 monetary expansion and, 138, 142, 146, dollar, Canadian, 115, 130 150, 154, 158, 162, 194±98, 206±7, dollar, U.S.: 208, 211±12 appreciation of, 207, 210, 213, 214, 216, policy design and, 6, 221±44, 251, 252 272, 273 policy transition and, 270, 271, 274, 275, depreciation of, 134, 207, 208, 213, 275 276 exchange rates and, 6, 83, 115, 130, shocks to, 106, 108, 115, 130, 222, 206±7, 208, 211 228±29, 235±44 international monetary reform and, 6 target zones and, 223 as standard, 137, 259 see also appreciation; depreciation domestic monetary policy: expectations, rational, see rational coordination in, 247 expectations design of, 6±7, 221, 247 expected in¯ation, see in¯ation, expected Dornbusch, Rudiger, 31 expected sales, see sales, expected Dornbusch model, 206 export demand, 70, 91±93, 104 durables consumption, 70, 86, 87, 213, 273 elasticities of, 104, 270 shocks and, 107±11, 131, 206, 210 export prices, 68, 79±80, 82, 83, 91±93 shocks to, 132 Eastern Europe, 6, 8, 259 exports, 67, 70 Econometrica,5,63 depreciation and, 208, 209±10, 213 econometric models: ®scal expansion and, 167, 168, 171, 172, policy analysis in validation of, 61±62 175, 176, 179, 180, 183, 184, 187, see also multicountry model; rational 188, 191, 192, 203, 204, 210, 211, expectations; single-country model 214, 215±16 econometric policy evaluation, 32±63, ®xed vs. ¯exible exchange rates and, 229, 219±93 230, 231 design of policy rules and, 53±59, 221±57 monetary expansion and, 139, 140, 143, model validation with policy analysis and, 144, 147, 148, 151, 152, 155, 156, 61±62 159, 160, 163, 164, 199, 200, 207, summary, retrospect, and prospect for, 208 62±63 policy design and, 229, 230, 231, 253 transition to policy rules and, 59±61, shocks to, 108, 131, 132 258±78 variance of, 229±32 see also single-country model see also net exports Economic Report of the President (1990), extended path method, 19±20, 109, 135 281±86 Economic Summit of G-7 countries, 244, factorization method, 18, 31, 44, 312 247 Faddeeva, V. N., 133 elasticities: Fair, Ray C., 19, 63, 71n, 133 export-demand, 104, 270 federal funds rate, 225, 226, 280±81, 285 import-demand, 105, 270 Federal Reserve System (the Fed), 7, 8, interest rate, 115, 206, 270, 272 134, 225, 226, 235, 281, 291 of money demand, 94, 105, 206, 208 systematic policy and, 285 employment, 134 transition to ®scal policy and, 273 aggregate demand and, 38±39 feedback rules, 4, 5, 39 322 Index FIML (full-information maximum- policy design and, 221±46, 254±55 likelihood) methods, 109 response coef®cient changes and, 244, ®nancial-market shocks, 115, 130±31 246 de®ned, 108 shocks and, 222, 228±29, 235±44 ®scal expansion: in simulation results, 212 anticipated, 202±5, 213±14 in simulation with actual residuals, 235, in Canada, 170±73, 210±11 244 demand and, 168, 172, 176, 180, 184, two-country model with, 27±29 188, 192, 204 world price index weight and, 244, 245 exchange rates and, 166, 170, 174, 178, ®xed investment, 88±91, 206, 210 182, 186, 190, 202, 209, 211 Fleming, J.