Externalities, 113-114, 118, 121, 136, 142 aggregate demand, 261, 279 crowding, 474 pecuniary, 5 In, 114n thick-market, 284, 474

Fair wage-effort hypothesis, 442, 488-489 Federal funds rate, 396-398, 417 Federal Reserve, 233-235, 395, 396-398,

417-418 Finance:

debt vs. equity, 387

internal vs. external, 381-383 Financial markets, 309, 328-332

and asymmetric information, 369-380

perfect, 378, 461 Financial systems, 379-380 Financial-market imperfections, 284-285, 287-288, 377-380, 382-383

Implications of, 377-380

model of, 370-377

sources of, 369-370 Finite-horizon models (see Diamond model) Firms:

and long-term relationships with

workers, 461 high-dividend vs. low-dividend, 382-383 monitoring abilities of, 450, 452 price-setting, 278-279, 444, 449 and user cost of capital, 346-347

First Welfare theorem, 50-51

Fiscal problems, 428

Fiscal reform, 428

Fischer model, 256-257, 262-265, 276-277

assumptions of, 262

equilibrium in, 264

implications of, 264-265

solution of, 262-264 Fisher effect, 394, 434 Fisher identity, 392

Flow approach (see Search and matching

models) Fluctuations:

and calibration, 181-182

and competitive models, 181

and consumption, 309

costs of, 413-416

and efficiency wages, 444, 449-450

and equilibria, 300

and exogenous disturbances, 81

facts about, 146-150

and financial system, 378-379

before the Great Depression, 149

and imperfect competition, 261

and intertemporal elasticity of

substitution, 172 and Keynesian models, 151-152, 205,

. and labor input, 182

and monetary shocks, 232-236 new Keynesian view of, 285 and nominal adjustment, 261 and nominal shocks, 300 as optimal responses to shocks, 161 and output components, 148 persistence of, 163, 175-180 randomness of, 146-148 and real-business-cycle models, 163, 302

and real non-Walrasian theories, 302

and real shocks, 300

seasonal, 147n

sources of, 179-180, 205

theories of, 150-152

and Walrasian models, 150-151

and welfare, 261

(See also specific fluctuations, e.g.. Employment movements; Output movements)

Game theory, 297-299 General (Keynes), 215-216, 301

Golden-rule capital stock: definition of, 18 Diamond model, 82 and government financing, 87-88 modified, 53

in Ramsey-Cass-Koopmans model, 47-48, 50, 52-53

in Solow model, 18 Goods market, 217, 221-222 Government:

budget constraint of, 64-65 Government debt, 65-67, 84, 87-88 Government purchases:

and aggregate demand, 203-205

and aggregate supply, 205

assumptions about, in models, 59

and capital stock, 86

and consumption, 166-167

in Diamond model, 85-87

and distortionary taxation, 185

financing of, 64-66, 87-88

and imperfect capital mobiUty, 214

and labor supply, 166

permanent changes in, 60, 86

persistence of movements in, 174

in Ramsey-Cass-Koopmans model, 59-64

and real-business-cycle model, 153-154,

164, 172-174 and real interest rates, 61-64, 86 shocks to, 151, 164, 166-167, 172-174 temporary changes in, 60-64, 66, 86 and wars, 61-64 Great Depression, 149, 182-183, 335, 378 Grossman-Helpman model, 96-97, 114

Growth (economic)-and consumption, 309 and inflation, 432 and investment, 309 long-run: endogenous, 100, 110, 117 and ftnanaal system, 379-380 and increasing returns, 136 and knowledge, 101-102 and population growth, 100 and savmg rate, 117, 121 and technological progress, 100 short-run, sources of, 26-27 worldwide, 100

and knowledge accumulation, 121 {See also Diamond model; Ramsey-Cass-Koopmans model; Research and development [R&D]; Solow model) Growth accountmg, 8n, 26-27, 36-37, 121 Growth effect, 16

Growth, ever-increasing, 101, 108-109, 136

Habit formation, 333n Half-life, 22n Hamiltonian:

current-value, 352, 385-386

present-value, 352n Harris-Todaro model, 491 Harrod-Domar model, 35 Hazard rate, 451 *

Heterogeneity, modeling of, 473 Hodrick-Prescott ftlter, 180n Home production, 186n Households:

budget constramt of, 41-45, 59-60, 65-66

consumption behavior of, 40, 322-323 and government ftnancmg, 66-68 and government purchases, 61 m Ramsey-Cass-Koopmans model, 39, 43-45

in real-business cycle model, 154-158 fixed number of, vs. continual entry of

new, 38, 72 inftnitely-lived, 38, 118 and hquidity constraints, 323 and uncertainty, 156-158 variafton m mcome of, 315 Housing, 148, 384-385, 430 Human capital {see Capital, human) Hyperinflation, 388-389, 394, 424-428, 431

Hysteresis, 469-473

Imperfect competition (see Competition,

imperfect) Impliat differennation, 20n Inada conditions, 9-10, 13-14, 81, 129 Incentive contracts (for monetary policy),

404

Income: blacks, vs. whites, 315-316 and consumption, 311-312, 319, 335-336

current vs. permanent, 251-252 permanent, 311, 315 and saving, 312 time pattern of, 311-312 transitory, 311, 315 Income differences, cross-country: and capital accumulation, 23-25, 137-140

and convergence, 27-31, 138-140

and effectiveness of labor, 23, 25

and human capital, 126, 128

and increasing returns, 136-137

and knowledge accumulanon, 121-122

and population growth, 32-33

and saving, 32-33

and Solow model, 6, 23-25, 33, 135-136

and welfare, 5 Income effect, 75, 155, 159, 325-327 Indexanon, 277, 288, 303-304, 430 Indicators (pohcyTnakmg), 417-418 Infmite-honzon models (see Ramsey-Cass-Koopmans model) Inflation-actual vs. expected, 400-401, 409

benefits of, 432-433

causes of, 389-390, 419-420

and central-bank independence, 410-411

core vs. expected, 248

costs of, 429, 433

expected, 63, 200, 231, 424

explosive, 425-428

and growth, I37n, 432

and investmenl, 432

menu costs of, 430

and money growth, 389-392

optimal rate of. 389, 429-430. 433

and output, 231, 250-251

and owner-occupied housing, 384

and policymakers reputations, 407

popular view of, 430-431. 433

and price adjustment, 289-291

and real money balances, 424-427

and relative prices, 429-431

and seignorage. 420-428, 438

steady, 430-431

and tax system, 430

and uncertainty, 431-432

underlymg (see Core inflation)

and imemployment, 229

variable, 431-432

variation in, 388, 411-412

(See also Core inflation; Dynamic inconsistency; Hyperinflation; Output-inflation tradeoff) Inflation merua, 272-273

Inflation-tax Laffer curve, 422-423 Inflation-tax revenues, 421 Inflationary bias, 389, 419 Innovators, 114-115 Insider-outsider models:

assumptions ot, 466

and hysteresis, 469-473

impUcations of, 467

and unemployment, 468-469 Insiders, 465, 467-473 Instrumental variables, 235n, 320-321 Instruments, 321

Instruments (policymaking), 417-418 Interest rates: and consumption movements, 324-325 and discount rate, 324-325 and exchange-rate movements, 211-212 expected, 362, 396 government vs. household, 69 and government-purchases shock, 174 as intermediate target, 437-438 long-term vs. short-term, 395 and money growth, 391-394 nominal, 62-63 and change in money growth,

393-394 and Federal-funds-rate target,

397-398 and price flexibility, 394-395 reaL 392

and golden-rule level of capital stock, 84

and government purchases, 61-64, 86 and saving, 325-328, 336 short-term vs. long-term, 62-63, 362 and technology shocks, 170 term structure of, 395, 435 uncertainty about, 365 and user cost of capital, 346-347 Interest-rate movements, and q theory

model of investment, 361-362 Interest-rate parity, 211 Intergenerational links, 66-68 Interindustry wage differences {see Wages,

interindustry differences in) Intermediate targets (policymaking), 417-418

Intertemporal substitution (.see Labor

supply, mtertemporal substitution in)

Inventories, 148, 200, 237, 255n Investment:

actual vs. break-even, 13-14

and asy-mmetric information, 370

baseline model of, 345-348, 366

and capital income, 84-85

and cash flow, 381-384

and cost of capital, 345-348

in equipment, 137n

and hnancial system, 378

and hnancial-market imperfections,

381-384 and fixed costs, 368 and fluctuations, 309, 345 and government purchases, 59 and growth, 309 and inflation, 431-432 irreversible, 366-368 in Ramsey-Cass-Koopmans model,

46-47 and risk, 378

and StabiUzation policy, 416 and taxes, 347, 378

(See also q theory model of investment)

Investment tax credit, 347 and capital-goods prices, 380-381 permanent vs. temporary, 362-364

IS curve, 200-202

IS-LM modeL 199-200, 205-214

IS-LM-AS model, 205

Job selling, 460-461 Juglar cycles, 147

Keynesian cross, 201 Keynesian models:

and aggregate supply, 232

aggregate variables in, 196-197

and calibration, 205

and consumption, 196, 312-316

and core inflation, 231

disadvantages of, 196-197, 300-302

flexibility of, 301-302

and fluctuations, 312-313

modeling strategy of, 196-197, 231-232

and monetary shocks, 232-236

and nominal adjustment, 302

vs. real-business-cycle models, 151-152, 189-190, 196-197, 205, 232

and specific episodes, 301

simplicity of, 196

traditional, 197-205

and types of shocks, 205 Keynesian StabiUzation policy, 252 Keynesian view of fluctuations, 205 Kitchin cycles, 147 Knowledge:

and capitaL 104-110

and competitive market forces, 112

and effectiveness of labor, 25

excludabiUty of, 112

growth rate of, 99-110

and population growth, 100

production function for, 97-98, 110

in Solow modeL H types of. Ill worldwide, 100

(See also Effectiveness of labor)