Knowledge accmnulation: allocation of resources to, 117-118 and capita] accumulation, 116-117 determinants of. 111 d>Tiamics of, 98-99 and growth, 95, 102 in isolated regions, 125-126 models of, 110, 118-126 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

Kydland-Prescott model, 399-402

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, 285-287

and nominal adjustment, 215-216

non-Walrasian features of, 439-440

and real wages, 220, 222, 446

turnover in, 480

and imemployment, 445-446

Walrasian, 439-441

(See also Contracting models; Efficiency

wages; Insider-outsider 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 interest-rate movements, 156, 170 intertemporal substitution in, 154-156,

161, 187, 191, 217n in real-business-cycle model, 154-156,

and wage variations, 155-156 Labor-force attachment, 473 Lag operators, 162n, 176n, 266, 270-273 Law of iterated projections, 263 Layoffs, vs. work-sharing, 460 Learning-by-doing, 116-121, 141, 180 Level effect, 16

Life-cycle/permanent income hypothesis: alternatives to, 332-341

assumptions of, 310

and consumption movements. 319

and equity premium. 332

implications of, 311

and Keynesian consumption function,

313-316 and Uquidity constraints, 336 and random-walk hypothesis,

317-320 and tax cuts, 332 Linear growth models, 104, 116-121,

Liquidity constraints, 323

and aggregate growth, 339n

and aggregate saving. 338-339

and con-sumption, 336-338

cross-country differences in, 338

and debt. 340

endogenous, 69-70

and non-lump-sum taxes, 70

and precautionary saving, 337

and Ricardian equivalence, 69-70

and saving, 336-338 Liquidity effect, 394-395 Liquidity trap, 237 LM curve, 199-200 Loan-to-value ratio, 338 Long-run aggregate supply (LRAS) curve, 227

Lucas asset-pricing model, 343 Lucas critique, 196-197, 251-252 Lucas imperfect-information model, 276-277

assumptions of, 246-248

and availability of information, 288-289

and case of perfect information, 243-246

central idea of, 242-243

equilibrium in, 248-250

and fluctuations. 255

implications of, 249-256

and intertemporal substitution, 288-289

labor market in, 258n

vs. new Keynesian view, 291

objections to, 255

price index in, 244-245

producer behavior in, 246-248 Lucas supply curve, 248, 251, 399 Lucas-Phelps model (see Lucas imperfect-information model)

Marginal cost, 284-285 Marginal revenue, 284-285 Market betas, 330n Market size. 115n

Markets (see speclhc markets, e.g., (Soods

market; Labor market) Markup. 219, 221-222, 259, 262n, 284-285 Matching function, 474 Measurement error, 30

Menu costs, 277-278, 283-284, 293, 301

effects of, 278-283, 285-287 Method of undetermined coefficients, 165,

266-269 Mihtary spending, 63-64 Models.

purpose of, 3-4, 11-12 Modigliam-MiUer theorem, 387 Monetary policy.

and aggregate relahonships, 251

and commitment, 400, 403

contractionary, and long-term nominal interest rates, 398

and delegation, 407-409, 437

determinants of, 233

discretionary, 399, 401-402

effects of, 389

errors m, 418-419

expansionary, 401 and employment, 225-226

and federal funds rate, 396-398

and finance, 383

inflationary bias in, 389

low-mflation, 399

and Lucas imperfect-information model,

252-253 observed, 252-253 and output stabilization, 412-416 and permanent drop m mflation, 394 and real \ ariables, 241-242 and reputation, 407, 436-437 and rules, 264-265, 403, 418-419 shifts m, motivations for, 234-235 and stabilization, 264-265 and term structure of mterst rates,

396-398 and uncertainty, 438 and tmemployment, 413 m United States, 234-235, 395, 417-420 and welfare, 413-416 (See also Policymakers) Monetary shocks, and demand, 247 and fluctuations, 187-188 and natural experiments, 235 observed vs. unobserved, 249, 252-253,

264-265, 303 and output, 255, 274-275 real effects of, 236, 241 and relative prices, 235-236 Money.

high-powered, 199, 289n, 421, 429 neutrality of, 245-246, 261 m overlapping-generations model, 93

Money demand, 199, 233-234, 238,

391, 422-424 Money growth.

causes of, 389, 398

and fiscal reform, 428

and hyperinflation, 428

and mflation, 389-392, 433-434

and mterest rates, 391-394

and nominal interest rate, 393-394

and output, 273

and output inflation tradeoff, 398-399

and real money balances, 393-394, 427, 433-434

and seignorage, 423 Money stock, 209

and mflation, 427

as intermediate target, 417-418, 437-438

and output, 233

real vs nominal, 394 Money-output regressions, 232-235 Monte Carlo experiment, 177, 194 Moral hazard, 287, 376 Mulnple equilibna, 79-80, 294-297, 299, 307

Multiplier, 202, 237, 300 Multiplier-accelerator, 237 Mundell effect, 237 Mundell-Fleming model, 207-210, 212

Natural experiments, 235 Natural resources, 8, 35-36 Natural-rate 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, 287-288

and hnancial markets, 287

and fluctuations, 151-152

and goods market, 217-220

implications of, for output, 242

and Keynesian models, 241

and labor market, 215-216, 439-440

and markup, 222

microeconomic foundations of, 241-242, 256, 277

and policy, 241-242

and real-busmess-cycle models, 188

and real wage, 222

and unemployment, 220, 222

and Walrasian models, 152

(See also Price adjustment) Non-lump-sum taxes, 70 Non-Walrasian theories, 439

reaL 152, 299-300 Nonexpected utilitv, 333n NonrivaL 111, 122

Objectives (policymaking), 417-418 Observational equivalence, 303

Okuns law, 150

Open market operations, 235-236 Option value to waiting, 368 Option-pricing theory, 368 Output

and aggregate demand, 264-265, 269

components of, and fluctuations, 148

equilibrium vs optimal, 260-261 full employment (see Output, natural rate of)

and government purchases, 59

and inflation, 250-251

under imperfect competmon, 261

and internal finance, 377

long run behavior of, 179

and monetary shocks, 274-275

natural rate of, 227, 230

and population growth, 32-33

potential (see Output, natural rate of)

and price-setters, 261-262

and saving, 32-33

and savmg rate, 20-21

trend-stationary vs nonstationary,

176-179 Output movements asymmetries m, 148-149 and government purchases shock, 174 durmg the Great Depression, 182-183 vs employment movements, 150 and investment, 359-361, 377 m Keynesian models, 175, 179-180 and labor input, 183 and monetary movements, 234 and money stock, 233 and output growth, 175-176 and Pareto efficiency, 161 permanent, \ s temporary, 360-361 persistence of, 175-80, 255n and q theory model of mvestment,

359-361

m real-busmess cycle models, 175, 179

and wages, 459

white noise, 255n Output per worker

and capital, 23-25, 32, 52

and effectiveness of labor, 25

and saving rate, 24n

and technological progress, 15 Output taxation, 185 Output-inflation tradeoff, 222-225, 229, 420

and average inflation, 290-291

and inflation mertia, 272-273

and Lucas imperfect information model,

251, 253-254, 290-291 and monetary policy, 389

and money growth, 398-399 and natural rate hypothesis, 225-227 and new Keynesian models, 290 291 and policy, 251

and variability of aggregate demand,

253-254 Outsiders, 465-468 Overidentifying restrictions, 322n Overlapping generations model, 72,

92-94

(See also Diamond model) Oxershooting of exchange rate, 210-212, 238 m search and matching models, 474

Panel Study of Income Dynamics (PSID), 322

Pareto efficiency, 50-51, 82

(See also Dynamic efficiency. Dynamic inefficiency) Patents, 112, 114 Patent races, 115n Pecuniary externalities, 51n, 114n Phase diagram, 14, 47-48 Phillips curve, 225

expectations augmented, 227-232

failure of, 226

and Lucas supply curve, 248, 251

and relative cost shocks, 292-293

m United States, 226-227, 229 Physical capital (see Capital) Pigou effect. 237 Poisson processes, 451 Pohcy (see Monetary pohcy) Policymakers

choices of, and infianon. 400-402 v

and commitment, 400

and discretion, 401-403

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, 137-140

and growth rate of knowledge, 103 and level of population. 124-125 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, 333-337, 340-341

Prescott model, 159, 180-182, 190