Pnce adjustment and coordmation failures, 297 destabilizing, 239-240 frequency of, 294

incentives for, 278-284, 286-287, 444, 449

and menu costs, 280-281 microeconomic evidence on, 293-294 Ss, 273-274, 277 and supply shocks, 291-293 synchronized, 304

time dependent vs state dependent, 257, 273, 275-276

(See also Nominal adjustment) Price level

and aggregate demand shocks, 269

and labor market, 215-216

and money supply, 391

and output, 272

(See also Inflation) Pnce rigidity, 214-222 Price setters, 217

and aggregate demand, 269

and neutrality of money, 276

and output, 261-262, 265 Prices

and aggregate demand shocks, 249

flexible, 257, 264

and marginal cost, 219, 221

nominal and output, 204-205, 220. 242 vs real, 242

predetermined\s fixed, 257, 265-266 Production function 7

constant elasncity of substmition, 34

intensive form, 8-10

(See also Cobb-Douglas producnon function) Productivity slowdown, 5, 27, 89 Profit function, insensitivity of, 283-285 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, 357-358

firms behavior m, 350-353

implications of, 358-364

phase diagram m, 356-358

vs Ramsey-Cass-Koopmans model, 356

saddle path m, 357-358

transversahty condition m, 351, 353

R&D effect, 114

Ramsey-Cass-Koopmans model assumptions of, 39-40 balanced growth path in, 52-53

and capital taxauon, 89-90

vs Diamond model, 38, 72

discrete time variation of, 152

and disturbances, 151

dynamics of economy m, 46-50, 55-57

and employment movements, 151

and fluctuations, 151

government purchases m, 59-64, 90, 151

vs q theory model of investment, 356

quantitative implications of, 55-59

and savmg, 53

social planners problem m, 51-52, 384-385

vs Solow model, 52-53

utihty function m, 39

as Walrasian basehne model, 151

welfare m, 81 Ramsey model (see Ramsey-Cass-Koopmans model) Random walk hypothesis, 317-320, 323

failure ol, 341 Rational expectations, 210-212, 247, 256,

263 398 435 Rationing, 217, 238 Reaction function, 295 Real busmess cycle model

assumptions of, 151-154, 158-159, 189

balanced growth path m, 165-166, 192

calibrating, 180 182

consumption m, 167-168

depreciation m, 163-164

and employment movements, 184-185

equilibnum m, 159

extensions and variations of, 183-186

general case of, 164-168

and government purchases, 164,

166-167 without government, 180-182 household behavior m, 154-158 imphcations of, 164, 168-174 indivisible labor version of, 184-185 mtertemporal hrst order condition m,

157, 160, 167-168 intratemporal hrst order condition m,

158, 160-161, 165-167

vs Keynesian models, 152, 189-190, 196-197, 205

labor supply m, 161

and monetary shocks, 187-188

with multiple sectors, 186

saving rate m, 160

objections to, 186-189

simplifications m, 188

solution methods for, 158-161, 164-168

and sources of shocks, 300-301

special case of, 158-164

and technology shocks, 186-187 Real rigidity (see Rigidity, real) Real wages (see Wages, real)

Recessions, 146-147, 149-150 Reduced form, 235n Regime changes, 435 Relative cost shoclcs, 291-293 Rent-seeking, 115

Research and development (R&D), 96 externalities from, 114 and growth rate of knowledge, 102 knowledge created by, 1 13 and long-run growth, 100, 108 private incentives for, 113-115 (See also Knowledge accumulation; Technological progress) Return, rate of: and cross-country income differences,

24, 135-136 and dynamic efflciency, 84 uncertainty about, 156-158

Returns to scale, 284 to capital, 136 . -

constant, 8-10, 88

to capital, 117, 144-145 diminishing, 140 to entrepreneurs activities, 115 increasing, 97, 117n, 136-137, 145 and cross-country income differences,

136-137 external vs. internal, 136 and worldwide economic growth, 136 to knowledge, 104 in knowledge production, 97-98 to produced factors, 104, 106 Ricardian equivalence, 66, 200 and consumption, 67 and intergenerational links, 68-69 and liquidity constraints, 69-70 and non-lump-sum taxes, 70 and rule-of-thumb consumption

behavior, 71 and turnover in population, 67-68 usefulness of, 71-72 Rigidity:

microeconomic vs. macroeconomic, 256,

270, 276 real, 270 and equilibria, 299-300 and monetary shocks, 265 and multiple equilibria, 297 and price adjustment, 281-284 and profit function, 283 sources of, 284-285, 297 real vs. nominal, 265 Risk aversion, 332, 335 Rival, 111

Romers (P.) models, 96-97, 110, 114,

117n, 118n, 136 Rule-of-thumb consumption behavior, 71,

Rules (see Monetary policy, and rules)

Saddle path, 50-51, 55-57

St. Louis equation, 232-235

Sample selection, 29-30

Samuelson overlapping-generations model,

92-94 Saving:

and consumption, 311-312

cross-country differences in, 338

in Diamond model, 81

effects of welfare payments on, 340-341

endogenous, 118-121

and income, 311

and interest rate, 325-328

in Ramsey-Cass-Koopmans model, 53

and uncertainty, 335 Saving, precautionary (see Precautionary

saving) Saving rate:

and consumption in Solow model, 16-19

and cross-country income differences, 31-32

as endogenous, 6, 38, 52, 138

as exogenous, 6, 38

increase in, 15-16

and investment rates, 31-32, 142

and loan-to-value ratio, 338-339

and long-run growth, 104, 108

and physical capital, 126-127

and real-business-cycle model, 159-160

and Solow model, 15-18, 20-21

and technology shocks, 170-171

and welfare, 6 Scientific research, 113 Search and matching models, 441.

473-481, 492-493 Sector-specific shocks, 186 Seignorage, 389, 420-428, 433, 438 Self-fulfilling prophecies, 81, 296 Shapiro-Stiglitz model:

assumptions of, 451-452

and efficiency, 459-460

equilibrium in. 457

examples of. 457-458 •

extensions of. 460-461

and fluctuations. 459

implications of, 458-460

no-shirking condition (NSC) in, 454-456

turnover in, 458 Shoe-leather costs, 429 Signal extraction, 247-248 Signal-to-noise ratio. 248n Sluggish nominal adjustment (see Nominal

adjustment) Social security. 92 Solow model:

assumptions of. 7-12

balanced growth path in, 14-15, 52-53

and consumption, 16-19

and crobb-country mcome differences, b,

33, 135-136 m discrete time, 91-92 dynamics of economy in, 12-14 factor payments m, 35 long run growth , 15 mam conclusion of, 6, 23 microeconomic foundations for, 92 natural resources m, 35-36 production function in, 7-10 quantitative implications of, 18-23 vs Ramsey-Cass-Koopmans model, 52-

and saving rate, 6, 15-18, 31, 52-55

simplifications m, 11 Solow residual, 26, 181-183, 187 Ss pricing, 273-274

Stabilization pohcy (see Monetary policy) Staggered price adjustment models (see

Caplm-Spulber model, Fischer

model, Taylor model) Staggered wage adjustment models, 256,

262n

Standard Industrial Classification (SIC), 484 Standards of living, 5, 121-122, 312 (See also Income differences, crosscountry ) Stock market, 331-332 Subgame perfection, 402 Substihition effect, 75, 155, 159, 325-327 Sunspots, 81, 296 Supply (see Aggregate supplv) Supply shocks, 226-227, 291-293, 416

Talented individuals, 115-116 Tanzi (Ohvera-Tanzi) effect, 423n Target band, 210 Taste shocks, 192 Taxes

vs bonds, 64-66

and capital, 347

and capital accumulation, 87

corporate income, 384

distorhonary, and real-busmess cycle model, 185

and dynamic inconsistency, 402

effect of, on economy and mvestment, 347, 362-364 (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, 256-257, 265-273, 276-277 assumphons of, 265-266 vs Caplm-Spulber model, 275-276 equilibrium in, 268-269 vs Fischer model, 257 implications of, 269-270

and inflation inertia, 272-273 limitations of, 272 and real rigidity, 283 solution of, 272 usmg lag operators, 270-272 using method of undetermined coefficients, 266-269 Taylor-series approximations, 23n Technological piogiess capital augmenting, 7n, lOn embodied, 36, 186n endogenous, 110 Harrod-neutral, 7 Hicks neutral, 7n, lOn labor augmenting, 7, lOn and learning by-domg, 116 and population size, 123 production function for, 96-97 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, 153-154

Technology shocks, 151, 161, 167, 169-172, 182-183, 186-187 Term premium, 396, 398, 435-436 Term structure, expectations theory of, 395-398

Term structure of interest rates (see

Interest rates, term structure of) Thick-market effects, 474 Time-averaging problem, 341 Time dependence, 451 Time-to-build, 186n Tobins q, 353-354 Transitional dynamics, 120 Transversahty condition, 351, 353

and firms optimal pohcy, 357 Two-digit industries, 484 Two-stage least squares, 235n

Undershooting, 212

Undetermined coefficients, method of, 165,

266-269 Unemployment

and aggregate demand, 220

and contracting, 468 469

and efficiency wages, 444-449

fricnonal, 480

and hysteresis, 473

and inflation, 229

and insider outsider distinction, 468-469 natural rate nf, , 418-419, 439, 469 and nominal adjustment, 220