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181 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
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