CONTENTS

Acknowledgments xix

Introduction 1

Chapter! THE SOLOW GROWTH MODEL 5

1.1 Theories of Economic Growth 5

1.2 Assumptions 7

1.3 The Dynamics of the Model 12

1.4 The Impact of a Change in the Saving Rate 15

1.5 Quantitative Implications 18

1.6 The Solow Model and the Central Questions of Growth

Theory 23

1.7 Empirical Applications 26 Problems 34

Chapter 2 BEHIND THE SOLOW MODEL: INFINITE-HORIZON AND OVERLAPPINC-CENERATIONS

MODELS 38

Part A THE RAMSEY-CASS-KOOPMANS MODEL 39

2.1 Assumptions 39

2.2 The Behavior of Households and Firms 40

2.3 The Dynamics of the Economy 46

2.4 Welfare 50

2.5 The Balanced Growth Path 52

2.6 The Effects of a Fall in the Discount Rate 53

2.7 The Effects of Government Purchases 59

2.8 Bond and Tax Finance 64

2.9 The Ricardian Equivalence Debate 66

Part THE DIAMOND MODEL 72

2.10 Assumptions 72

2.11 Household Behavior 73

2.12 The Dynamics of the Economy 75

2.13 The Possibility of Dynamic Inefficiency 81

2.14 Government in the Diamond Model 85 Problems 88

Chapter 3 BEYOND THE SOLOW MODEL: NEW

GROWTH THEORY 95

Part A RESEARCH AND DEVELOPMENT MODELS 96

3.1 Framework and Assumptions 96

3.2 The Model without Capital 98

3.3 The General Case 104

3.4 The Nature of Knowledge and the Determinants of

the Allocation of Resources to R&D 111

3.5 Endogenous Saving in Models of Knowledge

Accumulation: An Example 118

3.6 Models of Knowledge Accumulation and the Central

Questions of Growth Theory 121

3.7 Empirical Application: Population Growth and

Technological Change since I Million . . 122

Part HUMAN CAPITAL 126

3.8 Introduction 126

3.9 A Model of Human Capital and Growth 128

3.10 Implications 132

3.11 Empirical Application: Physical and Human Capital

Accumulation and Cross-Country Differences in

Incomes 137

Problems 140

Chapter 4 REAL-BUSINESS-CYCLE THEORY 146

4.1 Introduction: Some Facts about Economic Fluctuations 146

4.2 Theories of Fluctuations 150

4.3 A Baseline Real-Business-Cycle Model 152

4.4 Household Behavior 154

4.5 A Special Case of the Model 158

4.6 Solving the Model in the General Case 164

Chapter 5 TRADITIONAL KEYNESIAN THEORIES

OF FLUCTUATIONS 195

5.1 Introduction 195

5.2 Review of the Textbook Keynesian Model of Aggregate

Demand 197

5.3 The Open Economy 205

5.4 Alternative Assumptions about Wage and Price Rigidity 214

5.5 Output-Inflation Tradeoffs 222

5.6 Empirical Application: Money and Output 232 Problems 236

Chapter 6 MICROECONOMIC FOUNDATIONS OF INCOMPLETE NOMINAL ADJUSTMENT 241

4.7 Implications 168

4.8 Empirical Application: The Persistence of Output

Fluctuations 175

4.9 Additional Empirical Applications 180

4.10 Extensions and Limitations 183 Problems 190