William A. Brock has taught in the Departments of Economics at the University of Rochester, Cornell University, and the University of Chicago, before moving to the University of Wisconsin, Madison, where he is now Vilas Research Professor of Economics. He has also been an External Professor at the Santa Fe Institute since 1989. His many awards include election as a Fellow of the Econometric Society in 1974, a Fellow of the American Academy of Arts and Sciences in 1992, and as a Member of the National Academy of Sciences in 1998. His over 100 invited lectures include presentations in Poland, Belgium, France, Mexico, Canada, Japan, Australia, England, Sweden, Norway, and Australia.

Brock has been a leading contributor to the development of methods of intertemporal equilibrium analysis in the areas of growth theory, monetary theory, and finance. More recently, he has played a crucial role in the development of new methods for the analysis of nonlinear dynamics in macroeconomics and finance, and models of expectations that relax the assumption of rational expectations.

I interviewed Buz in the faculty cafeteria near the Social Science Research Institute building, on the Madison campus of the University of Wisconsin, on October 22, 1998. Our interview was interrupted when he had to go to teach, and then was finished by phone on December 11, 1998. The transcript that follows does little justice to the liveliness of Buz's conversation, mainly because of my inability to transcribe the animated facial expressions and hand gestures that made the mathematical references more concrete. I have added several footnotes to the transcript, identifying some of the published sources that were mentioned during our conversation.

We analyze job switching and wage growth of young workers, separately considering the jobs experienced by workers before and after college completion. These two groups of jobs consist of very different occupational compositions. Workers with many jobs before college completion (JBCC) and with little or no job experiences before college completion have similar subsequent wage paths. These facts can be interpreted that JBCC contribute less to career building compared to the ones after college completion. If we disregard all JBCC, the number of jobs that are experienced by workers before age 35 are about three jobs fewer than the total number of jobs.

Short-selling constraints are common in financial markets, while physical assets such as housing often lack markets for short-selling altogether. As a result, investment decisions are often restricted by such constraints. This paper studies asset prices in behavioral heterogeneous-belief models with short-selling constraints and arbitrarily many belief types. We provide conditions on beliefs such that short-selling constraints bind for different types, along with analytic expressions for price and demands that allow us to construct fast solution algorithms relevant for a wide range of models. An application studies how an alternative uptick rule, as in the United States, affects price dynamics and wealth distribution in a market with many belief types in evolutionary competition. In a numerical example, we highlight a scenario in which a modified version of the alternative uptick rule, triggered by smaller percentage falls in price, reduces both asset mispricing and wealth inequality relative to the current regulation. As extensions, we show how our method applies to multiple asset markets with short-selling constraints, additional heterogeneities, and price setting by a market maker.

I develop and study a factor-augmented quasi-vector autoregressive (FAQVAR) model for economic policy analysis in tumultuous times. An observation-driven framework that exploits the information from the score of the model allows a maximum likelihood estimation. This multivariate FAQVAR model, which assumes a Student t error distribution, is robust to atypical observations such as the global financial crisis and the recent pandemic. The model outperforms the FAVAR moving average model because of the assumed heavy tails that capture the COVID-19 atypical data and other turbulent episodes. An empirical application to the U.S. economy assessing its monetary policy reveals that estimates and impulse responses are stable when considering the sample before and during COVID-19.

Using monthly headline inflation data covering 184 countries for the period between January 1971 and December 2020, this paper investigates the role of standard gravity variables on inflation convergence across country pairs. The convergence analysis by unit root tests is based on ten-year rolling windows to control for potential structural changes over time, whereas the corresponding results are connected to the standard gravity variables in the preceding year to investigate the drivers of inflation convergence and its speed. Regarding the existence of inflation convergence, empirical results show that having a common currency, a free trade agreement, proximity, a common border, or a colonial relationship between countries increases the probability of inflation convergence. Regarding the speed of inflation convergence, the very same gravity variables are shown to reduce the half-life of convergence. In both cases, the effects of having a common currency are shown to dominate those of other gravity variables.

This study develops a new dynamic general equilibrium model to explore the role of people’s love of novelty as a cultural preference in innovation and innovation-based growth. The model considers (a) an infinitely lived representative consumer who has standard love-of-variety preferences for differentiated products and additional love-of-novelty preferences for new products and (b) technological progress driven by two costly and time-consuming innovation activities, new product development and existing product development. We demonstrate that consumers’ love of novelty is a source of innovation-based growth, wherein economies with a moderate love of novelty can achieve innovation and long-run growth through endogenous cycles between periods in which new product development is active and those in which existing product development is active. However, if love of novelty preference is too weak or too strong, the economy is caught in an underdevelopment trap with less innovation and no long-run growth. We also provide some suggestive empirical evidence that supports our theoretical predictions.

This paper develops a multivariate filter based on an unobserved component model to estimate the financial cycle. Our model features: (1) a dynamic relationship between the financial cycle and key variables; (2) time-varying shock volatility for trend and cycle components. We demonstrate that our approach not only exhibits superior early warning properties for banking crises but also outperforms commonly used indicators in terms of data fit for decomposition exercises, as evidenced by the higher marginal likelihood. We document three important properties of the financial cycle. First, the sensitivity of the financial cycle to changes in real estate valuations increased during the post-90s period. Second, the sensitivity of the cycle to changes in financial conditions displays volatility and country specificities. Finally, our reduced form estimates suggest that the banking crisis of 1988 was preceded by positive contributions from the risk appetite shock, while the primary source of vulnerabilities emanated from the housing market in the run-up to the Global Financial Crisis.

In this paper, we study the relationship between changes in the world interest rate and within-country inequality during the 1985–2005 period in which the world interest rate sharply declined. In line with the predictions of the seminal model of Galor and Zeira [Income distribution and macroeconomics. Review of Economic Studies 60, 35–52], the analysis suggests that the decrease in the world interest rate is associated with a decrease in inequality in poor countries and an increase in inequality in rich ones.

A monetary cash-in-advance model is known to be prone to real indeterminacy if the intertemporal elasticity of substitution in consumption is sufficiently low. Moreover, if the model features habit formation in consumption, the scope of indeterminacy increases substantially. This paper shows that many of the nominal frictions and real rigidities commonly used in the New Keynesian paradigm act to decrease the scope of this indeterminacy. These frictions include stickiness in prices and wages, adjustment costs in investment, and variable capacity utilization. When they are all used together in the model, the problem of indeterminacy nearly vanishes, even when habit formation in consumption is allowed.

One of the most prominent and consistent findings of the recent empirical literature on fiscal policy is that investment expenditure is crowded out by public spending in the short run. In this contribution, we address this empirical fact using a dynamic general equilibrium model and show that the introduction of habit-forming behavior plays a major role in accommodating the observed negative relationship between investment and government expenditure. Our numerical experiments point out the role of consumption inertia in determining the reactions of the open economy: as habit persistence gets stronger, fiscal expansion crowds out real consumption by a smaller amount and investment by a larger one, while the current account enters into a greater deficit.

In this paper, we examine the influence of monetary policy on the speed of convergence in a standard monetary growth model à la Sidrauski allowing for differences in the elasticity of substitution between factors of production. The respective changes in the rate of convergence and its sensitivities to the central model parameters are derived both analytically and numerically. By normalizing the constant elasticity of substitution (CES) production functions both outside the steady state and within the steady state, it is possible to distinguish between an efficiency and a distribution effect of a change in the elasticity of substitution. We show that monetary policy is the more effective, the lower is the elasticity of substitution, and that the impact of monetary policy on the speed of convergence is mainly channeled via the efficiency effect.

Recent empirical research has documented the clustered volatility and fat tails of return distribution in stock markets, yet returns are uncorrelated over time. Certain agent-based theoretical models attempt to explain the empirical features in terms of investors' order-splitting or dynamic switching strategies, both of which are frequently used by actual stock investors. However, little theoretical research has discriminated among the behavioral assumptions within a model and compared the impacts of the assumptions on the empirical features. Nor has the research simultaneously replicated the return features and empirical features on market microstructure, such as patterns of order choice. This study constructs an artificial limit order market in which investors split orders into small pieces or use fundamental and trend-following predictors interchangeably over time. We demonstrate that, on one hand, the market that features strategies with order splitting and dynamic predictor selection can independently replicate clustered volatility and fat tails with near-zero return autocorrelations. However, we also show that patterns of order choice do not match those found in certain previous empirical studies in both types of economies. Thus, we conclude that, in reality, the two strategies can work to generate the empirical return features but that investors may also use other strategies in actual stock markets. We also demonstrate that the impact of both strategies on the volatility persistence tends to be greater as the number of traders increases in the market; this finding implies that the order-splitting strategy and dynamic predictor selection are more crucial for the empirical phenomena pertaining to larger capital stocks.

I examine how money and trend inflation shaped US macroeconomic dynamics during the Great Inflation. I develop a business cycle model with positive trend inflation where money is allowed (but not required) to play a role in determining the equilibrium values of inflation and output through non-separable utility, adjustment costs for holding real balances, and the monetary policy reaction function. The Taylor principle changes in this environment. Targeting money guarantees price determinacy even with trend inflation, but these results are sensitive to the inclusion of non-separability and portfolio adjustment costs. The framework is combined with Greenbook data that detect the role of money in the policy reaction function. The response to money was likely not sufficiently strong to complement the reaction to inflation and counteract the high trend inflation observed during the pre-Volcker period, which most likely led to price indeterminacy.

This paper quantitatively examines the macroeconomic and welfare effects of macroprudential policies in open economies. We develop a small open economy dynamic stochastic general equilibrium (DSGE) model, where banks choose their funding sources (domestic vs. foreign deposits) and are subject to financial constraints. Our model predicts that banks reduce leverage in response to a macroprudential policy tightening, but increasingly rely on foreign funding. This endogenous shifts of funding composition significantly undermine the stabilizing effect and welfare gains of macroprudential policies. Our results also suggest macroprudential policies are less effective in financially more open economies, and optimal policy should take capital flows into consideration. Finally, we find empirical support for the model predictions in a group of developing and emerging economies.

Since the company declared bankruptcy in June 2009, shares of General Motors stock (now known as Motors Liquidation Company) have continued to trade at a high volume while maintaining a market capitalization near $300 million through most of 2010. Anecdotal evidence strongly suggests that both rational speculators and uninformed investors (often mistaking Motors Liquidation for the new, reorganized GM) have purchased the stock. We develop a theoretical asset-pricing model that includes both types of agents. We present two major results. First, the most frequent state is one where a small fraction of rational agents ensure that the share price behaves as if all agents are rational. A second state exists where all rational agents exit and the share price is inflated. Second, fitting the model to Motors Liquidation, we find evidence of irrational asset pricing for this firm. We find little evidence of similar behavior in the share prices of the thirty stocks that compose the Dow Jones Industrial Average.

The effects of inflation are studied for a small open economy with a cash-in-advance constraint on consumption in which the representative agent has preferences with habit persistence. An increase in the inflation rate requires a fall in the steady state living standards. On impact, to maintain living standards, the representative agent reduces his savings and labor supply. Investment falls and the current account turns into a deficit. In support of this model, we provide evidence from eight high-inflation countries suggesting that after an increase in the inflation rate, output and investment fall, and the net foreign asset position deteriorates over time.

Historically, industrialization has been associated with falling relative returns to skills. This fact is at odds with most unified theories of industrialization, which tend to imply rising skill premia as natural concomitants of economic growth. This paper develops a very simple model of historical growth to help solve this puzzle. Assuming that human capital is both a consumption good and an investment good, the model demonstrates how gradually rising investments in human capital, nonmonotonic fertility rates, and falling skill premia can all be explained within one theory.

We study the influence of wage differential on the emergence of endogenous fluctuations. In this way, we introduce a dual labor market, based on the Shapiro–Stiglitz efficiency wage theory in an overlapping generations model. We show that wage inequality is a source of endogenous fluctuations. Indeed, a sufficiently strong wage differential leads to the occurrence of cycles of period 2 and local indeterminacy. Moreover, in contrast to several existing contributions, these results depend neither on increasing returns to scale nor on the degree of capital–labor substitution.

In dynamic general equilibrium models, private output is increased by government spending for goods and services, but decreased by government spending for employment. This paper presents the first evidence for the latter effect by studying the pre-WWII British wartime economy. Britain participated in numerous wars, increasing military employment greatly. British tax-smoothing policy and rare wartime governmental interventions reduce the difficulty of studying the effects of wartime government spending. This paper finds wartime decreases in industrial production, which can be explained by wartime government spending for military employment.

This paper shows that the ability of the credible wage bargaining model to match the observed unemployment volatility hinges on an unrealistic assumption about disagreement payoffs to the firm. Relaxing this assumption can lead to the substantial wage flexibility. As a consequence, the model is unable to capture the observed unemployment volatility.