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181 Knowledge accmnulation: allocation of resources to, 117118 and capita] accumulation, 116117 determinants of. 111 d>Tiamics of, 9899 and growth, 95, 102 in isolated regions, 125126 models of, 110, 118126 rate of, 116 as a side effect of production, 116n and talented individuals, 115 (See also Research and development [R&DD Kondratiev cycles, 147 Kuznets cycles, 147 KydlandPrescott model, 399402 Labor: cost of. 285, 481, 483 and human capital, 134 (See also Effectiveness of labor) Labor contracts (see Contracts) Labor demand, effective, 218 Labor hoarding, 186n Labor market: cyclical behavior of, 439, 478 and employment movements, 450 frictionless, 473 and goods market, 218 « imperfections in, 285287 and nominal adjustment, 215216 nonWalrasian features of, 439440 and real wages, 220, 222, 446 turnover in, 480 and imemployment, 445446 Walrasian, 439441 (See also Contracting models; Efficiency wages; Insideroutsider models; Search and matching models) Labor supply: and capita] stock, 171 and consumption, 158 elasticity of, 439, 465, 468 and employment movements, 255 and fluctuations, 439 and interestrate movements, 156, 170 intertemporal substitution in, 154156, 161, 187, 191, 217n in realbusinesscycle model, 154156, and wage variations, 155156 Laborforce attachment, 473 Lag operators, 162n, 176n, 266, 270273 Law of iterated projections, 263 Layoffs, vs. worksharing, 460 Learningbydoing, 116121, 141, 180 Level effect, 16 Lifecycle/permanent income hypothesis: alternatives to, 332341 assumptions of, 310 and consumption movements. 319 and equity premium. 332 implications of, 311 and Keynesian consumption function, 313316 and Uquidity constraints, 336 and randomwalk hypothesis, 317320 and tax cuts, 332 Linear growth models, 104, 116121, Liquidity constraints, 323 and aggregate growth, 339n and aggregate saving. 338339 and consumption, 336338 crosscountry differences in, 338 and debt. 340 endogenous, 6970 and nonlumpsum taxes, 70 and precautionary saving, 337 and Ricardian equivalence, 6970 and saving, 336338 Liquidity effect, 394395 Liquidity trap, 237 LM curve, 199200 Loantovalue ratio, 338 Longrun aggregate supply (LRAS) curve, 227 Lucas assetpricing model, 343 Lucas critique, 196197, 251252 Lucas imperfectinformation model, 276277 assumptions of, 246248 and availability of information, 288289 and case of perfect information, 243246 central idea of, 242243 equilibrium in, 248250 and fluctuations. 255 implications of, 249256 and intertemporal substitution, 288289 labor market in, 258n vs. new Keynesian view, 291 objections to, 255 price index in, 244245 producer behavior in, 246248 Lucas supply curve, 248, 251, 399 LucasPhelps model (see Lucas imperfectinformation model) Marginal cost, 284285 Marginal revenue, 284285 Market betas, 330n Market size. 115n Markets (see speclhc markets, e.g., (Soods market; Labor market) Markup. 219, 221222, 259, 262n, 284285 Matching function, 474 Measurement error, 30
Menu costs, 277278, 283284, 293, 301 effects of, 278283, 285287 Method of undetermined coefficients, 165, 266269 Mihtary spending, 6364 Models. purpose of, 34, 1112 ModigliamMiUer theorem, 387 Monetary policy. and aggregate relahonships, 251 and commitment, 400, 403 contractionary, and longterm nominal interest rates, 398 and delegation, 407409, 437 determinants of, 233 discretionary, 399, 401402 effects of, 389 errors m, 418419 expansionary, 401 and employment, 225226 and federal funds rate, 396398 and finance, 383 inflationary bias in, 389 lowmflation, 399 and Lucas imperfectinformation model, 252253 observed, 252253 and output stabilization, 412416 and permanent drop m mflation, 394 and real \ ariables, 241242 and reputation, 407, 436437 and rules, 264265, 403, 418419 shifts m, motivations for, 234235 and stabilization, 264265 and term structure of mterst rates, 396398 and uncertainty, 438 and tmemployment, 413 m United States, 234235, 395, 417420 and welfare, 413416 (See also Policymakers) Monetary shocks, and demand, 247 and fluctuations, 187188 and natural experiments, 235 observed vs. unobserved, 249, 252253, 264265, 303 and output, 255, 274275 real effects of, 236, 241 and relative prices, 235236 Money. highpowered, 199, 289n, 421, 429 neutrality of, 245246, 261 m overlappinggenerations model, 93 Money demand, 199, 233234, 238, 391, 422424 Money growth. causes of, 389, 398 and fiscal reform, 428 and hyperinflation, 428 and mflation, 389392, 433434 and mterest rates, 391394 and nominal interest rate, 393394 and output, 273 and output inflation tradeoff, 398399 and real money balances, 393394, 427, 433434 and seignorage, 423 Money stock, 209 and mflation, 427 as intermediate target, 417418, 437438 and output, 233 real vs nominal, 394 Moneyoutput regressions, 232235 Monte Carlo experiment, 177, 194 Moral hazard, 287, 376 Mulnple equilibna, 7980, 294297, 299, 307 Multiplier, 202, 237, 300 Multiplieraccelerator, 237 Mundell effect, 237 MundellFleming model, 207210, 212 Natural experiments, 235 Natural resources, 8, 3536 Naturalrate hypothesis, 225 Natural rate of unemployment (see Unemployment, natural rate of) New growth theor> (see Capital, human; loiowledge accumulation; Research and development [R&D]) New Keynesian theories, 277 Nominal adjustment. and aggregate demand, 215 and debt contracts, 287288 and hnancial markets, 287 and fluctuations, 151152 and goods market, 217220 implications of, for output, 242 and Keynesian models, 241 and labor market, 215216, 439440 and markup, 222 microeconomic foundations of, 241242, 256, 277 and policy, 241242 and realbusmesscycle models, 188 and real wage, 222 and unemployment, 220, 222 and Walrasian models, 152 (See also Price adjustment) Nonlumpsum taxes, 70 NonWalrasian theories, 439 reaL 152, 299300 Nonexpected utilitv, 333n NonrivaL 111, 122 Objectives (policymaking), 417418 Observational equivalence, 303
Okuns law, 150 Open market operations, 235236 Option value to waiting, 368 Optionpricing theory, 368 Output and aggregate demand, 264265, 269 components of, and fluctuations, 148 equilibrium vs optimal, 260261 full employment (see Output, natural rate of) and government purchases, 59 and inflation, 250251 under imperfect competmon, 261 and internal finance, 377 long run behavior of, 179 and monetary shocks, 274275 natural rate of, 227, 230 and population growth, 3233 potential (see Output, natural rate of) and pricesetters, 261262 and saving, 3233 and savmg rate, 2021 trendstationary vs nonstationary, 176179 Output movements asymmetries m, 148149 and government purchases shock, 174 durmg the Great Depression, 182183 vs employment movements, 150 and investment, 359361, 377 m Keynesian models, 175, 179180 and labor input, 183 and monetary movements, 234 and money stock, 233 and output growth, 175176 and Pareto efficiency, 161 permanent, \ s temporary, 360361 persistence of, 17580, 255n and q theory model of mvestment, 359361 m realbusmess cycle models, 175, 179 and wages, 459 white noise, 255n Output per worker and capital, 2325, 32, 52 and effectiveness of labor, 25 and saving rate, 24n and technological progress, 15 Output taxation, 185 Outputinflation tradeoff, 222225, 229, 420 and average inflation, 290291 and inflation mertia, 272273 and Lucas imperfect information model, 251, 253254, 290291 and monetary policy, 389 and money growth, 398399 and natural rate hypothesis, 225227 and new Keynesian models, 290 291 and policy, 251 and variability of aggregate demand, 253254 Outsiders, 465468 Overidentifying restrictions, 322n Overlapping generations model, 72, 9294 (See also Diamond model) Oxershooting of exchange rate, 210212, 238 m search and matching models, 474 Panel Study of Income Dynamics (PSID), 322 Pareto efficiency, 5051, 82 (See also Dynamic efficiency. Dynamic inefficiency) Patents, 112, 114 Patent races, 115n Pecuniary externalities, 51n, 114n Phase diagram, 14, 4748 Phillips curve, 225 expectations augmented, 227232 failure of, 226 and Lucas supply curve, 248, 251 and relative cost shocks, 292293 m United States, 226227, 229 Physical capital (see Capital) Pigou effect. 237 Poisson processes, 451 Pohcy (see Monetary pohcy) Policymakers choices of, and infianon. 400402 v and commitment, 400 and discretion, 401403 and imperfect information, 416 and political pressures, 419 reputation of, 404 uncertainty about, 407 and unemployment, 413, 419 and well are, 419 Policymaking (see Monetary policy) Political business cycles, 419n Population growth and cross country mcome differences, 137140 and growth rate of knowledge, 103 and level of population. 124125 and long run growth. 108 rate of. and growth rate of output per worker, too and technological progress. 123 Population, turnover m, 72 Precautionary saving, 91, 333337, 340341 Prescott model, 159, 180182, 190
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