This paper investigates how volatile the general price level can be in an equilibrium where all uncertainty is extrinsic. The government operates a lump-sum redistribution policy using fiat money. An approach to modeling asset market segmentation is introduced in which this tax policy determines how volatile the price level can be, which in turn determines the volatility of consumption. The paper characterizes (i) the set of general price levels consistent with the existence of competitive equilibrium and (ii) the resulting set of equilibrium allocations. The results demonstrate how redistribution policies that are fixed in nominal terms can have a destabilizing effect on an economy, and show how to evaluate the amount of volatility that a particular policy may induce.

The government-led transition from barter to fiat money and its possible failure are analyzed in the Kiyotaki-Wright model when prices are determined endogenously by the strategic bargaining process. The transition is shown to be more inflationary as the government becomes less patient and less credible. The possibility of breakdown in fiat money due to uncertainty in the size of government and its patience implies longer transition path and higher expected inflation. An application to the transition from local currencies to currency integration shows that local governments are tempted to issue more currency to extract seigniorage from foreign as well as home agents. As long as the degree of economic integration is sufficiently large, an increasing frequency of trading opportunities implies lower price levels and higher welfare relative to the local currency regime. It is when the two countries are fully integrated that the world economy with the unified currency achieves the highest welfare.

We develop a test of the null hypothesis that an observed time series is a realization of a strictly stationary random process. Our test is based on the result that the kth value of the discrete Fourier transform of a sample frame has a zero mean under the null hypothesis. The test that we develop will have considerable power against an important form of nonstationarity hitherto not considered in the mainstream econometric time-series literature, that is, where the mean of a time series is periodic with random variation in its periodic structure. The size and power properties of the test are investigated and its applicability to real-world problems is demonstrated by application to three economic data sets.

We develop a theory of financial development based on the costs associated with the provision of external finance. These costs arise through informational asymmetries between borrowers and lenders that are costly to resolve. When borrowing is limited, producers with access to financial intermediary loans obtain higher returns to investment than other producers. This creates incentives for others to undertake the technology adoption necessary to access investment loans. Over time, as increasing numbers of producers gain access to external finance, borrowers' net worth rises relative to debt. This reduces the costs of financial intermediation and raises the overall return on investment. The theory is consistent with recent evidence that financial development reduces the costs associated with the provision of external finance and increases the rate of economic growth. Furthermore, the theory predicts that financial development will raise the return on loans and reduce the spread between borrowing and lending rates.

Paul A. Volcker has spent most of his life in public service, at the Treasury under President Kennedy (1962–1965) and then as Undersecretary for Monetary Affairs under President Nixon (1969–1974), as President of the Federal Reserve Bank of New York (1975–1979), and finally as Chairman of the Board of Governors of the Federal Reserve System under both President Carter and President Reagan (1979–1987). Born in 1927, his world view was formed by childhood experience of the Great Depression and World War II, times of great national trial that led ultimately to recommitment and reconstruction. He went into public service in order to be a part of the rebuilding effort, but it was his fate instead to be involved mainly in managing pressures that would ultimately lead to the breakdown of the Bretton Woods system internationally and the Glass–Steagall banking system domestically. Consequently, there is some sadness today when he looks back on his career, but there is also a sense of accomplishment. In spite of everything, there was no depression and there was no world war. The possibility and hope for progress in years to come remains alive.

The interview took place in Volcker's office at Rockefeller Center in New York City. His fourth-floor windows look out over the sunken plaza to the gold-leafed statue of Prometheus stealing fire from the gods, and then on farther to the elegant GE building, which is familiar to anyone who has visited New York. Over the front entrance it is just possible to see the inscription adapted from Isaiah 33:6, “Wisdom and Knowledge shall be the stability of thy times.” It strikes me as an appropriate inscription for the building, reminding one that this most beautiful complex was built in the years of the Great Depression. Today, with the forthcoming interview in mind, it reminds me also of the stakes involved in the conduct of monetary policy.