In their landmark paper, Bray and Savin note that the constant-parameters model used by their agents to form expectations is misspecified and that, using standard econometric techniques, agents may be able to determine the time-varying nature of the model's parameters. Here, we consider the same type of model as employed by Bray and Savin except that our agents form expectations using a perceived model with parameters that vary with time. We assume agents use the Kalman filter to form estimates of these time-varying parameters. We find that, under certain restrictions on the structure of the stochastic process and on the value of the stability parameter, the model will converge to its rational expectations equilibrium. Further, the restrictions on the stability parameter required for convergence are identical to those found by Bray and Savin.

We study the sustainability of long-run growth in a two-sector economy where a renewable natural resource is exploited under private property rights. We obtain short- and long-run growth trajectories in closed form, examine transitional dynamics, and characterize convergence properties. We find conditions for sustainable long-run growth, which depend on the harvesting rate, and show that the speed of convergence decreases during transition. We identify a stronger version of Hartwick's rule and analyze parameter dependences for endogenous variables. Economic growth relies less on abundance or scarcity of natural resources than on the way they are managed.

Hirofumi Uzawa is one of the giants of modern economic theory. Hiro is probably best known to the readers of Macroeconomic Dynamics (MD) for his seminal articles on two-sector economic growth. The two-sector technology is more general than the one-sector technology: it allows a production possibility frontier that is strictly concave to the origin as opposed to being necessarily flat. This generality allows richer and more complex dynamics. This makes it especially useful for the analysis of economic fluctuations. The two-sector model is perfect for dynamic international trade.

Hiro is also well known to macroeconomists for his seminal contribution to endogenous growth. In his article in the 1965 IER, productivity permanently increases as the result of permanent accumulation of human capital. Uzawa was thus a first mover in the new growth theory. The symbol H (for Human Capital, or for Hiro?) is today everywhere in models of economic dynamics.

On his own and through his many students and mentees, Hiro has been the major inspiration for the modern theory of optimal economic growth. He taught a generation of pure and applied economists how to apply Pontryagin's maximum principle in economic dynamics. It seems that Uzawa introduced—or at least pushed the use of—phase diagrams in economic dynamics. Where would we be without this essential tool?

Most readers of MD are likely to think first of Uzawa's contributions to macro, but Hiro is equally well known for his superb works on mathematical economics, general equilibrium, and demand theory. Hiro's mathematics is elegant and often very deep. Like the quality mathematician that he is, he does not apply technique for technique's sake.

Hiro has made fundamental contributions to nonlinear programming. For the convex (but not necessarily smooth) case, he employed Slater's condition to obtain Kuhn–Tucker multipliers that satisfy the saddlepoint property necessary for an optimum. For the smooth (but not necessarily convex) case, Arrow, Hurwicz, and Uzawa introduced the current version of the constraint qualification, which ensures that optimality implies the existence of Kuhn–Tucker multipliers satisfying the saddlepoint property.

Hiro's paper “Walras's Existence Theorem and Brouwer's Fixed Point Theorem” in the Economic Studies Quarterly (1962) is a hidden gem on general equilibrium. This paper can be seen as foreshadowing Sonnenschein's result on excess demand functions. Hiro clarified old, important questions about recovering preference maps from demand functions. Hiro was probably the first to convincingly show—in the context of tatonnement adjustment—the important distinction between local stability and global stability in economic dynamics.

We have given here only a glimpse into the very large body of beautiful, influential Uzawa papers. Hiro's splendid bibliography is given at the end of the interview. Some of the work that Hiro has pursued energetically has yet to be widely recognized. One thinks, for example, of the Penrose Effect, Hiro's modeling of the organizational costs incurred in adding capital or making other changes in the way a firm does business.

Hiro has had many successful students and mentees. Your MD interviewers are lucky to have been among those whom Hiro has influenced profoundly. A very incomplete list of the others would also include Dave Cass, Steve Goldman, Harl Ryder, Hajime Oniki, Bob Lucas, George Akerlof, Joe Stiglitz, Miguel Sidrauski, Morris Teubal, Assaf Razin, Guillermo Calvo, Bill Ethier, and Lenny Mirman.

Hiro is widely recognized and even revered in Japan. He was elected to the very selective Japan Academy in 1989 at a remarkably young age. He was named “A Person of Cultural Merit” in 1983 and elected to the Order of Culture in 1997. Hiro has received significant international recognition. He was President of the Econometric Society. He is a Fellow of the Econometric Society, Member of the American Academy of Arts and Sciences, Foreign Honorary Member of the American Economic Association, and Foreign Associate of the U.S. National Academy of Sciences.

This interview took place nearly 10 years ago. We apologize to the readers and to Professor Uzawa for the delay in getting the transcript to the editor. The interview was held at the Research Center on Global Warming of the Development Bank of Japan, at which Hiro plays an important role. Four of us—Uzawa, the two interviewers, and Yumiko Baba, who was then a post-doc in economics at the University of Tokyo, there to operate the tape recorder—were collected at the Meiji Gakuin University in central Tokyo and whisked away in a large black automobile to Hiro's home court at the Bank. Hiro is an imposing figure: tall and erect with a very long, pointed white beard. His eyes are very active. He strokes his beard in a soothing manner. It is not difficult to be in awe of him. The interview took an even more formal tack because there were two in the room with the nickname “Hiro.” It was hence efficient to use last names at times.

The interviewers had agreed to try to steer Uzawa toward a discussion of his well-known basic technical contributions and away from his less well-known and more political contributions. In the end, we failed to steer Hiro onto any course other than his own. This is mostly as it should be. In this interview, you will hear about some of the technical contributions for which Hiro is widely known. You will also hear about what motivated him to enter economics, his strong social concerns and strong political views, the turbulence of the war years and the postwar years, and his recent work and interests. A few of the paragraphs at the end of the interview were added to bring the record up to date. What comes through is a picture of Hirofumi Uzawa, a truly distinguished scholar and a person dedicated to human betterment.

Hiro talked in his usual warm, friendly voice. He peppered the interview with his strong opinions about other major economists, often with lively anecdotes. Of course, Hiro's opinions are his own, not those of the interviewers or the editors. We hope that the readers will get as much out of this conversation with Hiro as we did.

During the typical recovery from U.S. postwar period economic downturns, employment recovers to its prerecession level within months of the output trough. However, during the past two recoveries, employment has taken up to three years to achieve its prerecession benchmark. We propose a formal empirical model of business cycles with recovery periods to demonstrate that the past two recoveries have been statistically different from previous experiences. We find that this difference can be attributed to a shift in the speed of transition between business cycle regimes. Moreover, we find this shift results from both durable and nondurable manufacturing sectors losing their cyclical characteristics. We argue that this finding of acyclicality in post-1980 manufacturing sectors is consistent with previous hypotheses (e.g., improved inventory management) regarding the reduction in macroeconomic volatility over the same period. These results suggest a link between the two phenomena, which have heretofore been studied separately.

The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan, King, and Wolman [Review of Economic Studies 10 (4), 825–860] uses a richer model but still finds deflation optimal. In an otherwise standard New Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.

The next international version of the System of National Accounts will recommend that R&D (Research and Development) expenditures be capitalized instead of being immediately expensed as in the present System of National Accounts 1993. An R&D project creates a new technology, which in principle does not depreciate like a reproducible asset. A new technology is, however, subject to obsolescence, which acts in a manner that is somewhat similar to depreciation. The paper looks at the net benefits of an R&D project in the context of a very simple intertemporal general equilibrium model and suggests that R&D expenditures be amortized using the matching principle that has been developed in the accounting literature to match the fixed costs of a project to a stream of future benefits. Of particular interest is the evaluation of the net benefits of a publicly funded project where the results are made freely available to the public.

The behavior of postwar real U.S. GNP, the inputs to an aggregate production function, and several formulations of the associated Solow residuals for the presence of nonlinearities in their generating mechanisms are examined. Three different statistical tests for nonlinearity are implemented: the McLeod-Li test, the BDS test, and the Hinich bicovariance test. We find substantial evidence for nonlinearity in the generating mechanism of real GNP growth but no evidence for nonlinearity in the Solow residuals. We further find that the generating mechanism of the labor input series is nonlinear, whereas that of the capital services input appears to be linear. We therefore conclude that the observed nonlinearity in real output arises from nonlinearities in the labor markets, not from nonlinearities in the technical shocks driving the system. Finally, we investigate the source of the nonlinearities in the labor markets by examining simulated data from a model of the Dutch economy with asymmetric adjustment costs.

We study optimal monetary stabilization policy in a DSGE model with microfounded money demand. A search externality creates “congestion,” which causes aggregate output to be inefficient. Because of the informational frictions that give rise to money, households are unable to insure themselves perfectly against aggregate shocks. This gives rise to a welfare-improving role for monetary policy that works by adjusting the nominal interest rate in response to these shocks. Optimal policy is determined by choosing a set of state-contingent nominal interest rates to maximize the expected lifetime utility of the agents subject to the constraints of being an equilibrium.

We generalize existing fair wage models to allow effort to vary over the business cycle. When effort is variable, wage fluctuations are partially compensated for by endogenous effort fluctuations, so that the sensitivity of marginal cost to output and employment variations is decreased. This new mechanism decreases the need for sluggishness to explain the observed high inflation persistence.

We study the relationships between various concepts of financial development and balanced economic growth. A model of endogenous growth that incorporates roles for both financial efficiency and access to financial services permits a better understanding of the relationship between the size of the financial sector (value added) and growth. Higher financial value added results from some, but not all, kinds of finance-driven growth. If greater access rather than greater efficiency generates higher growth, then value added and growth can be positively correlated. We present some preliminary empirical results that support the importance of access alongside efficiency in explaining cross-country variations in growth.

This paper analyzes policies by means of which a whole society in an initial state of illiteracy and low productivity can raise itself into a condition of continuous growth. Using an overlapping generations model in which human capital is formed through child rearing and formal education, we show that an escape from a poverty trap, in which children work full time and no human capital accumulation takes place, is possible through compulsory education or programs of taxes and transfers. If school attendance is unenforceable, temporary inequality is unavoidable if the society is to escape in finite time, but long-run inequalities are avoidable provided sufficiently heavy, but temporary, taxes can be imposed on the better off. Programs that aim simply at high attendance rates in the present can be strongly nonoptimal.

We test the expectations theory of the term structure of U.S. interest rates in nonlinear systems. These models allow the response of the change in short rates to past values of the spread to depend upon the level of the spread. The nonlinear system is tested against a linear system, and the results of testing the expectations theory in both models are contrasted. We find that the results of tests of the implications of the expectations theory depend on the size and sign of the spread. The long maturity spread predicts future changes of the short rate only when it is high.

We consider a linear growth model with idiosyncratic productivity shocks in which producers cannot commit to repay their loans. Borrowing constraints are determined endogenously by the borrowers' incentives to repay, assuming that defaulters lose a share of output and are excluded from future trade in the credit market. We characterize necessary and sufficient conditions for the enforceability of a first-best equilibrium growth path. Weak property rights, impatient producers, and small productivity differentials can make the efficient growth path nonenforceable and lead to an inefficient equilibrium with binding borrowing constraints. For some economies, multiple balanced growth paths coexist.

This paper studies the growth and welfare effects of macroprudential regulation in an overlapping generations model of endogenous growth with banking and agency costs. Indivisible investment projects combine with informational imperfections to create a double moral hazard problem à la Holmström–Tirole and a role for bank monitoring. When the optimal monitoring intensity is endogenously determined, an increase in the required reserve ratio (motivated by systemic risk considerations) has conflicting effects on investment and growth. On one hand, requiring banks to put away a fraction of the deposits that they receive reduces the supply of loanable funds. On the other, a higher required ratio raises incentives to save and mitigates banks' incentives to monitor, thereby lowering monitoring costs and freeing up resources to increase lending. In addition, it may mitigate the systemic risk externality associated with excessive leverage. This trade-off can be internalized by choosing the required reserve ratio that maximizes growth and welfare. However, the risk of disintermediation means that in practice financial supervision may also need to be strengthened, and the perimeter of regulation broadened, if the optimal ratio is relatively high.

This paper combines horizontal and vertical innovations to generate an endogenous growth model allowing for structural change as an endogenous phenomenon. Older technologies are continuously replaced by newer ones due to creative destruction, and new technologies appear as a result of horizontal innovations and due to the consumers' preference for variety. We assume fixed operational costs for the manufacturing sector and an endogenously defined patent price for every new technology. Every industry is profitable only for a limited period of time, making the effective time of existence of the technology endogenous and finite. We find that in such an economy endogenous structural change is the source of ongoing economic growth. Furthermore, the range of existing sectors as well as growth rates stays constant as long as the technologies are symmetric.

This paper aims at investigating the interplay between inequality, innovation dynamics, and investment behaviors in shaping the long-run patterns of growth of a closed economy. By extending the analysis proposed in Caiani et al. [(2018) Journal of Evolutionary Economics], we explore the effects of alternative wage regimes under different investment and technological change scenarios. Experimental results seem to de-emphasize the role of technological progress as a possible source of greater inequality. Overall, simulation results are consistent with the predominance of a wage-led growth regime in most of the scenarios analyzed: A faster growth of low- and middle-level workers’ wages, relative to managers’, generally exert beneficial effects on the economy and allows to counteract the labor-saving effects of technological progress. Furthermore, a distribution more favorable to workers does not compromise firms’ profitability, but rather strengthen it by creating a more favorable macroeconomic environment, which encourages further innovations, stimulates investment, and sustains economic growth.

We investigate the quantitative behavior of business-cycle models in which the intermediation process acts either as a source of fluctuations or as a propagator of real shocks. In neither case do we find convincing evidence that the intermediation process is an important element of aggregate fluctuations. For an economy driven by intermediation shocks, consumption is not smoother than output, investment is negatively correlated with output, variations in the capital stock are quite large, and interest rates are procyclical. The model economy thus fails to match unconditional moments for the U.S. economy. We also structurally estimate parameters of a model economy in which intermediation and productivity shocks are present, allowing for the intermediation process to propagate the real shock. The unconditional correlations are closer to those observed only when the intermediation shock is relatively unimportant.

This paper examines the relationship between environmental policy and growth when green preferences are endogenously determined by education and pollution. We consider an environmental policy in which the government implements a tax on pollution and recycles the revenue to fund pollution abatement activities and/or an education subsidy (influencing green behaviors). When the sensitivity of agents' environmental preferences to pollution and human capital is high, the economy can converge to a balanced growth path equilibrium with damped oscillations. We show that this environmental policy can both remove the oscillations, associated with intergenerational inequalities, and enhance the long-term growth rate. However, this solution requires that the revenue from the tax rate must be allocated to education and direct environmental protection simultaneously. We demonstrate that this type of mixed-instrument environment policy is an effective way to address environmental and economic issues in both the short and the long run.

In this paper, we analyze the effects of demographic change on a pay-as-you-go (PAYG) pension system, financed with a defined contribution scheme. In particular, we examine the relationship between retirement, fertility, and pensions in a three-period overlapping generations model. We focus on both the case of mandatory retirement and the case where the retirement age is freely chosen. In the case of mandatory retirement, increasing longevity has an unambiguously negative impact on fertility and pension payouts and a positive effect on the level of physical capital in the steady state. On the other hand, when agents choose the time of retirement, an increase in life expectancy positively affects physical capital only when the tax rate is sufficiently low and can have a positive impact on pension benefits, because agents may find it optimal to retire later and to decrease fertility less. Finally, the effects of the social security tax on capital per worker are negative with mandatory retirement; however, they could be positive in the optimal retirement case.

Within the seminal asset-pricing model by Brock and Hommes (Journal of Economic Dynamics Control 22, 1235–1274, 1998), heterogeneous boundedly rational agents choose between a fixed number of expectation rules to forecast asset prices. However, agents’ heterogeneity is limited in the sense that they typically switch between a representative technical and a representative fundamental expectation rule. Here, we generalize their framework by considering that all agents follow their own time-varying technical and fundamental expectation rules. Estimating our model using the method of simulated moments reveals that it is able to explain the statistical properties of the daily and monthly behavior of the S&P500 quite well. Moreover, our analysis reveals that heterogeneity is not only a realistic model property but clearly helps to explain the intricate dynamics of financial markets.