We use Markov chain Monte Carlo methods to augment, via a novel multimove sampling scheme, a vector autoregressive (VAR) system with a latent business-cycle index that is negative during recessions and positive during expansions. We then sample counterfactual values of the macroeconomic variables in the case where the latent business-cycle index is held constant. These counterfactual values represent posterior beliefs about how the economy would have evolved absent business-cycle fluctuations. One advantage is that a VAR framework provides model-consistent counterfactual values in the same way that VARs provide model-consistent forecasts, so data series are not filtered in isolation from each other. We apply these methods to estimate the business-cycle components of industrial production, consumer price inflation, the federal funds rate, and the spread between long-term and short-term interest rates. These decompositions provide an explicitly counterfactual approach to isolating the effects of the business cycle and to deriving empirical business-cycle facts.

The article compares the social efficiency of monetary targeting and inflation targeting when central banks may have private information on shocks to money demand and the transparency solution is not feasible because of verifiability problems. Under inflation targeting and monetary targeting, central banks may have an incentive to signal their private information in order to influence the public's expectations about future inflation. We show that inflation targeting is superior to monetary targeting, as it makes it easier for central banks to commit to low inflation. Moreover, central banks that are weak on inflation prefer inflation targeting to monetary targeting.

This research develops a theory about the role of within-country income inequality in the emergence of overtaking in economic performance among countries. The theory captures two opposing effects of inequality on factor accumulation and suggests that the qualitative change in their combined effect is a prime cause of overtaking. Because of the initial dominance of the positive effect of inequality, a less egalitarian economy follows a higher growth path in the short run, with a lower growth path in the long run. It also is shown that divergence or convergence may arise instead of overtaking, depending on the initial levels of development and inequality.

This paper uses recent advances in financial econometrics to test the Friedman hypothesis that money supply volatility Granger-causes velocity. Comparisons are made among simple-sum and Divisia velocity series at the M1 and M2 levels of monetary aggregation, using quarterly data from 1959:1 to 2004:3. The conclusion is that the Friedman hypothesis cannot be rejected if money supply volatility is modeled explicitly, using models that capture important volatility effects that previous work has ignored.

S. James Press's many contributions to statistical research, lecturing, mentoring students, the statistics profession, etc., are summarized. Then some new developments in Bayesian analysis are described and remarks on the future of Bayesian analysis are presented.

This study constructs a dynamic model of the coexistence of public and private schools to study the impact of voucher programs when there are nonlinear peer group effects. The government provides public schools as well as tuition vouchers for households attending private schools. School quality depends on expenditure per student and peer quality within the school. When peer quality is nonlinear, more agents will choose public schools if peer quality is more substitutable, whereas more agents will attend private schools if peer quality is more complementary. We find that vouchers will typically create a “cream skimming” effect and the impact of voucher programs on economic performance is sensitive to the way in which peer interactions affect school quality.