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182 Pnce adjustment and coordmation failures, 297 destabilizing, 239240 frequency of, 294 incentives for, 278284, 286287, 444, 449 and menu costs, 280281 microeconomic evidence on, 293294 Ss, 273274, 277 and supply shocks, 291293 synchronized, 304 time dependent vs state dependent, 257, 273, 275276 (See also Nominal adjustment) Price level and aggregate demand shocks, 269 and labor market, 215216 and money supply, 391 and output, 272 (See also Inflation) Pnce rigidity, 214222 Price setters, 217 and aggregate demand, 269 and neutrality of money, 276 and output, 261262, 265 Prices and aggregate demand shocks, 249 flexible, 257, 264 and marginal cost, 219, 221 nominal and output, 204205, 220. 242 vs real, 242 predetermined\s fixed, 257, 265266 Production function 7 constant elasncity of substmition, 34 intensive form, 810 (See also CobbDouglas producnon function) Productivity slowdown, 5, 27, 89 Profit function, insensitivity of, 283285 Property rights, 112, 116, 122 Pumshment equilibria, 404n, 436 q (value of capital), 354 margmal vs average, 354 q theory model of investment, 345, 348 353, 425n assumpuons of, 349 equilibrium m, 357358 firms behavior m, 350353 implications of, 358364 phase diagram m, 356358 vs RamseyCassKoopmans model, 356 saddle path m, 357358 transversahty condition m, 351, 353 R&D effect, 114 RamseyCassKoopmans model assumptions of, 3940 balanced growth path in, 5253 and capital taxauon, 8990 vs Diamond model, 38, 72 discrete time variation of, 152 and disturbances, 151 dynamics of economy m, 4650, 5557 and employment movements, 151 and fluctuations, 151 government purchases m, 5964, 90, 151 vs q theory model of investment, 356 quantitative implications of, 5559 and savmg, 53 social planners problem m, 5152, 384385 vs Solow model, 5253 utihty function m, 39 as Walrasian basehne model, 151 welfare m, 81 Ramsey model (see RamseyCassKoopmans model) Random walk hypothesis, 317320, 323 failure ol, 341 Rational expectations, 210212, 247, 256, 263 398 435 Rationing, 217, 238 Reaction function, 295 Real busmess cycle model assumptions of, 151154, 158159, 189 balanced growth path m, 165166, 192 calibrating, 180 182 consumption m, 167168 depreciation m, 163164 and employment movements, 184185 equilibnum m, 159 extensions and variations of, 183186 general case of, 164168 and government purchases, 164, 166167 without government, 180182 household behavior m, 154158 imphcations of, 164, 168174 indivisible labor version of, 184185 mtertemporal hrst order condition m, 157, 160, 167168 intratemporal hrst order condition m, 158, 160161, 165167 vs Keynesian models, 152, 189190, 196197, 205 labor supply m, 161 and monetary shocks, 187188 with multiple sectors, 186 saving rate m, 160 objections to, 186189 simplifications m, 188 solution methods for, 158161, 164168 and sources of shocks, 300301 special case of, 158164 and technology shocks, 186187 Real rigidity (see Rigidity, real) Real wages (see Wages, real)
Recessions, 146147, 149150 Reduced form, 235n Regime changes, 435 Relative cost shoclcs, 291293 Rentseeking, 115 Research and development (R&D), 96 externalities from, 114 and growth rate of knowledge, 102 knowledge created by, 1 13 and longrun growth, 100, 108 private incentives for, 113115 (See also Knowledge accumulation; Technological progress) Return, rate of: and crosscountry income differences, 24, 135136 and dynamic efflciency, 84 uncertainty about, 156158 Returns to scale, 284 to capital, 136 .  constant, 810, 88 to capital, 117, 144145 diminishing, 140 to entrepreneurs activities, 115 increasing, 97, 117n, 136137, 145 and crosscountry income differences, 136137 external vs. internal, 136 and worldwide economic growth, 136 to knowledge, 104 in knowledge production, 9798 to produced factors, 104, 106 Ricardian equivalence, 66, 200 and consumption, 67 and intergenerational links, 6869 and liquidity constraints, 6970 and nonlumpsum taxes, 70 and ruleofthumb consumption behavior, 71 and turnover in population, 6768 usefulness of, 7172 Rigidity: microeconomic vs. macroeconomic, 256, 270, 276 real, 270 and equilibria, 299300 and monetary shocks, 265 and multiple equilibria, 297 and price adjustment, 281284 and profit function, 283 sources of, 284285, 297 real vs. nominal, 265 Risk aversion, 332, 335 Rival, 111 Romers (P.) models, 9697, 110, 114, 117n, 118n, 136 Ruleofthumb consumption behavior, 71, Rules (see Monetary policy, and rules) Saddle path, 5051, 5557 St. Louis equation, 232235 Sample selection, 2930 Samuelson overlappinggenerations model, 9294 Saving: and consumption, 311312 crosscountry differences in, 338 in Diamond model, 81 effects of welfare payments on, 340341 endogenous, 118121 and income, 311 and interest rate, 325328 in RamseyCassKoopmans model, 53 and uncertainty, 335 Saving, precautionary (see Precautionary saving) Saving rate: and consumption in Solow model, 1619 and crosscountry income differences, 3132 as endogenous, 6, 38, 52, 138 as exogenous, 6, 38 increase in, 1516 and investment rates, 3132, 142 and loantovalue ratio, 338339 and longrun growth, 104, 108 and physical capital, 126127 and realbusinesscycle model, 159160 and Solow model, 1518, 2021 and technology shocks, 170171 and welfare, 6 Scientific research, 113 Search and matching models, 441. 473481, 492493 Sectorspecific shocks, 186 Seignorage, 389, 420428, 433, 438 Selffulfilling prophecies, 81, 296 ShapiroStiglitz model: assumptions of, 451452 and efficiency, 459460 equilibrium in. 457 examples of. 457458 • extensions of. 460461 and fluctuations. 459 implications of, 458460 noshirking condition (NSC) in, 454456 turnover in, 458 Shoeleather costs, 429 Signal extraction, 247248 Signaltonoise ratio. 248n Sluggish nominal adjustment (see Nominal adjustment) Social security. 92 Solow model: assumptions of. 712 balanced growth path in, 1415, 5253 and consumption, 1619
and crobbcountry mcome differences, b, 33, 135136 m discrete time, 9192 dynamics of economy in, 1214 factor payments m, 35 long run growth , 15 mam conclusion of, 6, 23 microeconomic foundations for, 92 natural resources m, 3536 production function in, 710 quantitative implications of, 1823 vs RamseyCassKoopmans model, 52 and saving rate, 6, 1518, 31, 5255 simplifications m, 11 Solow residual, 26, 181183, 187 Ss pricing, 273274 Stabilization pohcy (see Monetary policy) Staggered price adjustment models (see CaplmSpulber model, Fischer model, Taylor model) Staggered wage adjustment models, 256, 262n Standard Industrial Classification (SIC), 484 Standards of living, 5, 121122, 312 (See also Income differences, crosscountry ) Stock market, 331332 Subgame perfection, 402 Substihition effect, 75, 155, 159, 325327 Sunspots, 81, 296 Supply (see Aggregate supplv) Supply shocks, 226227, 291293, 416 Talented individuals, 115116 Tanzi (OhveraTanzi) effect, 423n Target band, 210 Taste shocks, 192 Taxes vs bonds, 6466 and capital, 347 and capital accumulation, 87 corporate income, 384 distorhonary, and realbusmess cycle model, 185 and dynamic inconsistency, 402 effect of, on economy and mvestment, 347, 362364 (See also Inv estment tax credit) m q theory model of investment, 362 temporary changes m, 251 (See aho Non lump sum taxes) Taylor model, 256257, 265273, 276277 assumphons of, 265266 vs CaplmSpulber model, 275276 equilibrium in, 268269 vs Fischer model, 257 implications of, 269270 and inflation inertia, 272273 limitations of, 272 and real rigidity, 283 solution of, 272 usmg lag operators, 270272 using method of undetermined coefficients, 266269 Taylorseries approximations, 23n Technological piogiess capital augmenting, 7n, lOn embodied, 36, 186n endogenous, 110 Harrodneutral, 7 Hicks neutral, 7n, lOn labor augmenting, 7, lOn and learning bydomg, 116 and population size, 123 production function for, 9697 as a worldwide phenomenon, 125 (Sec also Research and development [R&D]) Technologv and cross country mcome differences, 122 and fluctuations, 175 gTov\th of, \s level of, 175 in real busmess cycle model, 153154 Technology shocks, 151, 161, 167, 169172, 182183, 186187 Term premium, 396, 398, 435436 Term structure, expectations theory of, 395398 Term structure of interest rates (see Interest rates, term structure of) Thickmarket effects, 474 Timeaveraging problem, 341 Time dependence, 451 Timetobuild, 186n Tobins q, 353354 Transitional dynamics, 120 Transversahty condition, 351, 353 and firms optimal pohcy, 357 Twodigit industries, 484 Twostage least squares, 235n Undershooting, 212 Undetermined coefficients, method of, 165, 266269 Unemployment and aggregate demand, 220 and contracting, 468 469 and efficiency wages, 444449 fricnonal, 480 and hysteresis, 473 and inflation, 229 and insider outsider distinction, 468469 natural rate nf, , 418419, 439, 469 and nominal adjustment, 220
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