Stock–flow job matching implies that there are two types of job seekers—those on the short side of their occupations who can easily find work, and those on the long side who expect extended unemployment spells. Using matching data and information on completed and uncompleted unemployment spells for England and Wales, this paper uses the stock–flow matching hypothesis to identify the fraction (incidence) of laid off workers who find themselves on the long side of the market and, conditional on being on the long side, their expected unemployment duration. The average incidence is around one-half and increases significantly in recessions. The expected duration is also strongly countercyclical—peaking at 15 months in the 1990–1992 recession and falling to a more modest 9 months by January 1999. Cross-section estimates also identify a North–South divide and a large city effect—the unemployed in large cities and in the North experience longer spells.

This paper examines the choice between government expenditure on public goods and transfer payments, in the form of a pension, in an overlapping-generations model. Government expenditure is tax-financed on a pay-as-you-go basis. A utilitarian judge chooses expenditures to maximize a social welfare function. The nonlinear solution is found to involve the ratio of a welfare-weighted average income, which depends on the inequality aversion of the judge, to arithmetic mean income. An approximation for this ratio is found that produces explicit solutions for the optimal composition. The result is used to obtain an indication of “implicit” inequality aversion for a range of countries.

We pursue a semiparametric approach to examining core implications of the Fisher hypothesis, namely cointegration linking nominal interest rates and inflation, and homogeneity of the potential equilibrium relation. The sample is an unbalanced panel and comprises monthly time series from more than 100 economies. The time period of at most 45 years is subdivided into three regimes according to dominating monetary policies. To exploit the cross-sectional dimension for inference on parameter homogeneity, we apply mean group estimation of functional coefficients that allow the conditioning of key model parameters on economic states. The evidence in favor of cointegration is weakened over states of negative real interest rates that are likely to coincide with scenarios of high inflation. The ex post real interest rate is mostly diagnosed as unstable. The Fisher hypothesis is particularly confirmed for states characterized by large positive interest rate adjustments during the inflation-targeting regime.

This paper analyzes the effect of the sectoral composition of government spending on the stability properties of a two-sector economy with a progressive tax structure. The results suggest that indeterminacy is more likely to occur if the fraction of government spending on consumption goods increases. This study also finds that, under progressive taxation, a sufficiently high public-consumption share is needed to generate indeterminacy. It is shown that, with the benchmark parameterization, a higher fraction of government spending on consumption goods needs to be implemented with a more progressive tax scheme to stabilize the economy. Moreover, it is emphasized that belief-driven economic fluctuations may indeed be a feature of the U.S. economy.

The period of low interest rates since the global financial crisis provides a unique opportunity to examine monetary policy reaction functions near the zero lower bound (ZLB). Using smooth transition regressions for the Euro area and a panel of industrialized countries we show that central banks anticipate the ZLB by less aggressive policies in its vicinity while we do not find a significant difference between both regimes for the US.

We investigate the economic importance of modeling nonlinearities in the dynamics of exogenous processes on the implied moments of endogenous variables in the context of the consumption-based asset pricing model. For this purpose, we model the endowment process alternatively as a linear autoregression and as a nonlinear threshold autoregression. The asset pricing model with nonlinear endowment is solved using quadrature techniques. A comparison of the moments of the model-implied rates of return in the two cases suggests that the economic impact of modeling nonlinearities is small.

We analyze the implications of openness and growth for determinacy and learnability of rational expectations equilibria in a two-country New Keynesian model with alternative monetary policy rules. Under the contemporaneous data rule, the conditions for determinacy and learnability become more stringent as a result of openness but less stringent as a result of growth, so that growth weakens the effect of openness. Under the expectations-based rule, the conditions for determinacy and learnability also become more stringent as a result of openness, whereas as a result of trend growth the conditions for determinacy also become more stringent (thus reinforcing the effect of openness) but those for learnability become less stringent (thus weakening the effect of openness). As in related studies, the elasticity of intertemporal substitution is key to our result, but within a framework that is consistent with long-run labor supply and balanced growth facts.

We examine optimal policy in an open-economy model with uncertainty and learning, where monetary policy actions affect the economy through the real exchange rate channel. Our results show that the degree of caution or activism in optimal policy depends on whether central banks are in coordinated or uncoordinated equilibrium. If central banks coordinate their policy actions then activism is optimal. In contrast, if there is no coordination, caution prevails. In the latter case caution is optimal because it helps central banks to avoid exposing themselves to manipulative actions by other central banks.

This paper embeds time-varying volatility into a dynamic equilibrium model of returns and trading. The model allows us to ask how time-varying volatility might affect the relation among return autocorrelation, volatility, and trading volume, as opposed to the pairwise relations that have been studied previously. It is shown analytically that, with time-varying volatility, the relationship between volume and stock return autocorrelation is ambiguous even if agents have symmetric information, which may explain the contradictory findings in the empirical literature. In the numerical exercise, the model is simulated in a way that mimics the persistent volatility of high-frequency stock data documented in numerous empirical studies. Specially, the time-varying volatility of stock returns is approximated with a highly persistent chaotic tent map, which is known to have the same autocorrelation coefficients as an AR(1) process. The simulated data can approximate GARCH-type behavior very well. Whereas in the simulated data, no significant relation between volume and return autocorrelation can be found, there is a significantly positive relation between volume and one-step-ahead stock return volatility. The ambiguous volume–persistence and positive volume–volatility relations are confirmed empirically by using four heavily traded individual stocks. Therefore, the data simulated from the highly stylized asset pricing model with deterministic time-varying volatility can mimic well the volume–return dynamics revealed in the observed data in these two respects.

We quantify the importance of idiosyncratic health risk in a calibrated general equilibrium model of Social Security. We construct an overlapping generations model with rational-expectations households, idiosyncratic labor income and health risk, profit-maximizing firms, incomplete insurance markets, and a government that provides pensions and health insurance. We calibrate this model to the US economy and perform two computational experiments: $\left (i\right)$ cutting Social Security’s payroll tax, and $\left (ii\right)$ modifying Social Security’s benefit-earnings rule. Our findings suggest that health risk amplifies the welfare implications of both experiments: downsizing Social Security always leads to higher overall welfare, but the welfare gain is larger when we account for health risk, and increasing the progressivity of Social Security’s benefit-earnings rule has a larger positive effect on welfare in the presence of health risk. We also find that allowing households additional tools to self-insure against health risk weakens the precautionary motive, so our experiments have similar welfare implications both with and without health risk.

I study the bias of actuarially fair measures commonly used to evaluate the impact of a social security system on the well-being of individuals. I investigate how the magnitude of this bias is affected by different features of a pay-as-you-go social security system. Social security affects an individual's welfare in ways other than through its direct effect on her lifetime income. It influences labor and savings decisions and hence factor prices, affecting labor income and the return to savings. Although social security can provide insurance against risk, it can also push borrowing-constrained individuals further away from their optimal consumption paths. I show that, by ignoring these features, actuarially fair measures can grossly misevaluate the impact of social security on the well-being of an individual.

This paper examines the stability of sunspot equilibria in one-sector RBC models under infinite horizon learning. We present general conditions under which the reduced-form model can possess E-stable sunspot equilibria and apply these conditions to three prominent one-sector RBC models. We find that the rational expectations sunspot equilibria are generally unstable under learning.

This paper analyzes the process of decision-making on consumption in a two-period consumption setting, assuming the return on savings is uncertain in the sense of Knight [Risk, Uncertainty, and Profit. Boston: Houghton Mifflin (1921)]. The results imply that a naïve strategy to save zero is optimal for a continuum of income values. Under the Permanent Income Hypothesis, consumption equals current income only when current income is equal to permanent income. Indeed Campbell and Mankiw [in Olivier Blanchard and Stanley Fischer (eds.), NBER Macroeconomics Annual, pp. 185–214. Cambridge, MA: MIT Press (1989)] assumed that consumers who spend their total income are only following a simple rule of thumb. However, the naïve strategy obtained casts doubt on their interpretation.

The Encyclopedia Americana, 2002 edition, concludes its entry on Milton Friedman as follows: “His major work, A Monetary History of the United States, 1867–1960, was published in 1963.” That might be seen as an indirect compliment to Anna J. Schwartz, who coauthored the Monetary History with Friedman but is not mentioned in the encyclopedia entry. Similarly, the Nobel Committee neglected to mention Schwartz when, in awarding Friedman his Prize in 1976, it described A Monetary History as “[h]is major work [and] … one of Friedman's most profound and also most distinguished achievements.” Fortunately, the economics profession as a whole has not been so negligent, and the phrase “Friedman and Schwartz” has become second nature to economists when discussing the importance of monetary policy.

Beside her collaborations with Friedman, Anna Schwartz is perhaps best known for her longevity, which is on an epoch-shattering scale. Her career as an economic researcher began a quarter-century before the publication of A Monetary History, and has continued in the 40 years since. Schwartz's first journal article was published in May 1940, the month Winston Churchill became Prime Minister of the United Kingdom and over 18 months before the United States entered World War II. She has worked at the National Bureau of Economic Research in New York City continuously since 1941. Monetary economics has been a constant interest for her, and she is the only person to have had items published in the inaugural issues of both the Journal of Money, Credit, and Banking (February 1969) and the Journal of Monetary Economics (January 1975).The JME piece was a book review, and so does not appear in the bibliography below. Schwartz's numerous book reviews make rewarding reading and include a prediction in Kyklos in 1968 of an era when economists would use Internet connections to download macroeconomic databases. The JME moved into its fiftieth volume in 2003, and Schwartz became one of only two authors (the other being Thomas Sargent) to have published in both volumes 1 and 50 of the journal. With the NBER branching out in the 1970's into a national network of researchers, Schwartz has been for a quarter century an unmistakable fixture at the NBER monetary economics program's regular meetings at Cambridge, Massachusetts. At the time of the interview, her contributions to the NBER's various working paper series spanned from NBER Technical Paper No. 4, 1947, to NBER Working Paper No. 9321, November 2002. The latter paper covered the issue of equity price behavior, the same subject of her 1940 publication, implying that Schwartz had entered a remarkable seventh decade of research in that area. Much of Schwartz's early research was on UK economic growth and fluctuations in the nineteenth century, and was reflected in a two-volume study essentially completed in the early 1940's but not published until 1953 [Gayer et al. (1953)]. Robert Lucas, who read the volume as a graduate student in history, describes it as “an amazingly ambitious and exciting mix of history and theory.”

Schwartz's collaboration with Milton Friedman on the relationship between the quantity of money and other variables began in 1948. Their early findings on the importance of money were reported by Friedman in a 1952 American Economic Review paper, but, by and large, he had problems promoting their work in the 1950's. Friedman's solo work in the fifties on flexible exchange rates, the consumption function, and the limits of stabilization policy would cement his reputation and be cited in his eventual Nobel award, but the monetary policy studies initially made a much more limited impact. All of Friedman's remaining 1950's writings on money were in “in-house” University of Chicago publications or in congressional testimony.A short excerpt from a Journal of Political Economy paper by Friedman on money did appear in the 1959 proceedings issue of the American Economic Review. Two books by Friedman in the early 1960's previewed some findings from the monetary history project with Schwartz. The first of these, A Program for Monetary Stability, is now recognized as a classic, but its muted reception is evidenced by the fact that economists have never been able to agree on which year it was published. The second book, Capitalism and Freedom (1962), was intended for a wide audience, but was virtually driven underground when all major U.S. newspapers declined to review it. In 1969, a Federal Reserve Bank of New York official, Richard Davis, gave this perspective on reactions to early monetarist work of the 1950's and early 1960's: “[E]conomists regarded this group—when they regarded it at all—as a mildly amusing, not quite respectable collection of eccentrics…. The fact is that the view held by Friedman and others on the predominant importance of money was just not given serious attention by most economists.”

The turning point was in 1963, when Friedman and Schwartz's 15 years of research finally saw print in their Monetary History and the article “Money and Business Cycles.” The Monetary History is justly celebrated, and has remained in print for 40 years.Furthermore, of the 93 books listed by Princeton University Press in its Economics and Finance Catalogue 2003, the Monetary History is the only pre-1994 publication included. The “Cycles” paper, as Davis acknowledged, provided “[b]y far the largest mass of evidence” on the cyclical relation between money and output. In addition, the paper's “tentative sketch” of the monetary transmission mechanism became a cornerstone of the monetarist literature, and an inspiration to many monetary economists, including the late Rudiger Dornbusch, as they endeavored to escape the “single interest rate channel” view of the transmission mechanism.

Schwartz began the 1970's with another collaboration with Friedman, Monetary Statistics, and went on in 1973 to join a number of economists, including fellow monetarists Karl Brunner and Allan Meltzer, in forming the Shadow Open Market Committee (SOMC). The SOMC commented regularly on U.S. economic policy and, in particular, offered monetary policy recommendations to address the severe inflation problem of the 1970's. Schwartz remains on the SOMC 30 years later, the only founding member to serve since the SOMC's inception.

Friedman and Schwartz's final major collaboration, Monetary Trends in the United States and the United Kingdom, was published in 1982. Among monetary economists, the response to Monetary Trends was mild compared to the reception for the Monetary History. Work by Friedman and Schwartz and other monetarists had already changed macroeconomic thinking substantially, and most academic work was now concerned with rigorous modeling of short-run dynamics, rather than the empirical evidence on long-run relations that concerned Friedman and Schwartz in their Trends study.

Schwartz's own work over the past 20 years has been prolific, and has often been in collaboration with Michael Bordo, with whom she has written some 25 articles. While her areas of research have included banking regulation and the role of international financial institutions, Bordo's and her mutual interest in monetary economics and economic history has repeatedly been evident in their work. Among the issues that their studies, sometimes with further collaborators, have addressed are the role of monetary targets in Canada and the United Kingdom in the face of money demand instability, whether monetary policy rules could have avoided the Great Contraction, the historical record of alternative monetary policy regimes, and the history of economic thought, including the development of monetarism.

This paper provides evidence that domestic opportunities to share risk have contributed to slower growth. We first provide a simple model economy that demonstrates how a country's ability to diversify risk is linked to its growth rate. In the context of the model economy, we then investigate empirically whether there is any systematic relationship between domestic opportunities to diversify risk and growth. We employ two econometric procedures: (1) traditional instrumental variables estimation and (2) dynamic panel methods. Interpreted in the context of the model economy, the empirical analysis reveals a robust negative relationship between domestic opportunities to diversify risk and both capital stock and output growth.

A higher labor tax rate increases the equilibrium real interest rate and reduces the equilibrium wage in a heterogeneous-agent model with endogenous savings and indivisible labor supply decisions. I show that these general equilibrium (GE) adjustments, in particular of the real interest rate, reinforce the negative employment impact of higher labor taxes. However, the representative-agent version of the model, which generates similar aggregate employment responses to labor tax changes, implies that GE feedback is neutral. The cross-country panel data reveal that the negative association between labor tax rates and the extensive margin labor supply is significantly and robustly weaker in small open economies where the interest rate is less tightly linked to domestic circumstances. This empirical evidence supports the transmission mechanism of labor tax changes for employment in the heterogeneous-agent model.

Elhanan Helpman is on a quest for knowledge. He is a researcher in transition, constantly redefining his fields of interest by altering the questions asked and the techniques used. Like many of the great economists, Elhanan has worked in many areas: open economy macro, trade under uncertainty, the new international economics, growth theory, and political economy, to list the most famous. However, this interview is not intended as a review of his contributions. Rather, it is about what drives Elhanan's creative process: his wide-ranging reading, his characteristic stubbornness in tackling problems, the conceptualization of his larger research agenda, and his recollections of how he initiated transitions between fields. It is a very personal interview for those in search of creative inspiration.

We estimate a smooth-transition vector autoregression model (ST-VAR) using panel data from 14 OECD countries to study the cross-country spillover effects of economic policy uncertainty (EPU) shocks. An unexpected elevation of EPU originating abroad has an overall contractionary real effect, and the spillover effects depend on the state of the business cycle of the recipient country. EPU spillover shocks during recessions have stronger but less persistent effects on a number of economic indicators. We also find that the interconnectedness of EPU, financial markets, and business confidence are important channels for the EPU shocks to propagate across countries, while the trade channel has limited effects, especially during expansions.

This paper identifies several ways in which “measurement matters” in detecting quantity-theoretic linkages between money growth and inflation in recent data from the Euro Area, United Kingdom, and USA. Elaborating on the “Barnett critique,” it uses Divisia aggregates in place of their simple-sum counterparts to gauge the effects that monetary expansion or contraction is having on inflationary pressures. It also uses one-sided time series filtering techniques to track, in real time, slowly shifting trends in velocity and real economic growth that would otherwise weaken the statistical money growth-inflation relationship. Finally, it documents how measures of inflation based on GDP were distorted severely, especially in the EA and UK, during the 2020 economic closures. Using measures based on consumption instead, estimates from the P-star model confirm that changes in money growth have strong predictive power for subsequent movements in inflation.

A recent theoretical literature highlights the role of endogenous firm entry as an internal amplification mechanism of business cycle fluctuations. The amplification mechanism works through the competition effect (CE) and the variety effect (VE). This paper tests the significance of this amplification mechanism, quantifies its importance, and disentangles the CE and VE. To this end, we estimate a medium-scale real business cycle model with firm entry for the U.S. economy. The CE and VE are estimated to be statistically significant. Together, they amplify the volatility of output by 8.5% relative to a model in which both effects are switched off. The CE accounts for most amplification, whereas the VE only plays a minor role.