New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒09‒11
24 papers chosen by



  1. Payroll Taxes, Social Insurance and Business Cycles By Burda, Michael C.; Weder, Mark
  2. Banking globalization and international business cycles By Kozo Ueda
  3. Optimal policy and consumption smoothing effects in the time-to-build AK model By M. BAMBI; G. FABBRI; F. GOZZI
  4. Endogenous Time Preference in Monetary Growth Model By Been-Lon Chen; Yu-Shan Hsu; Chia-Hui Lu
  5. Monetary Policy in an Uncertain World: Probability Models and the Design of Robust Monetary Rules By Paul Levine
  6. A Floating versus Managed Exchange Rate Regime in a DSGE Model of India By Nicoletta Batini; Vasco Gabriel; Paul Levine; Joseph Pearlman
  7. Assessing the Parfit's Repugnant Conclusion within a canonical endogenous growth set-up By Raouf BOUCEKKINE; Giorgio FABBRI
  8. A Dynamic Politico-Economic Model of Intergenerational Contracts By Lancia, Francesco; Russo, Alessia
  9. The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours By Luca Sala; Ulf Soderstrom; Antonella Trigari
  10. Short-term forecasting GDP with a DSGE model augmented by monthly indicators By Marianna Červená; Martin Schneider
  11. Using estimated models to assess nominal and real rigidities in the United Kingdom By Gunes Kamber; Stephen Millard
  12. Retirement and Social Security: A Political Economy Perspective By Ryo Arawatari; Tetsuo Ono
  13. Commuting, Wages and Bargaining Power By Rupert, Peter; Stancanelli, Elena G F; Wasmer, Etienne
  14. Geographic Macro and Regional Model for EU Policy Impact Analysis of Intangible Assets and Growth By Attila Varga; Péter Járosi; Tamás Sebestyén
  15. A theory of the non-neutrality of money with banking frictions and bank recapitalization By Zeng, Zhixiong
  16. Fixed-term and permanent employment contracts: theory and evidence By Shutao Cao; Enchuan Shao; Pedro Silos
  17. The Consumption Terms of Trade and Commodity Prices By Martin Berka; Mario J. Crucini
  18. A Note on Balanced Growth with a less than Unitary Elasticity of Substitution By Miguel A. Leon-Ledesma; Mathan Satchi
  19. Household Choices and Child Development By Del Boca, Daniela; Flinn, Christopher; Wiswall, Matthew
  20. Global Banking and International Business Cycles By Robert Kollmann; Zeno Enders; Gernot J. Müller
  21. Válaszút elõtt a makroökonómia? By Tamás Mellár
  22. Microfoundations: a decisive dividing line between Keynesian and new classical macroeconomics? By Michel DE VROEY
  23. Lucas on the Lucasian transformation of macroeconomics: an assessment By Michel DE VROEY
  24. Lucas on the relationship between theory and ideology By Michel DE VROEY

  1. By: Burda, Michael C. (Humboldt University, Berlin); Weder, Mark (University of Adelaide)
    Abstract: Payroll taxes represent a major distortionary influence of governments on labor markets. This paper examines the role of payroll taxation and the social safety net for cyclical fluctuations in a nonmonetary economy with labor market frictions and unemployment insurance, when the latter is only imperfectly related to search effort. A balanced social insurance budget renders gross wages more rigid over the cycle and, as a result, strengthens the model's endogenous propagation mechanism. For conventional calibrations, the model generates a negatively sloped Beveridge curve as well as substantial volatility and persistence of vacancies and unemployment.
    Keywords: business cycles, labor markets, payroll taxes, unemployment, consumption-tightness puzzle
    JEL: E24 J64 E32
    Date: 2010–08
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp5150&r=dge
  2. By: Kozo Ueda
    Abstract: This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking crossborder borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country affect the other, yielding business-cycle synchronization on both the real and financial sides. It also suggests that the FIs' globalization, net worth shock, and credit constraints are key to understanding the recent financial crisis.
    Keywords: Globalization ; Global financial crisis ; Business cycles ; Financial markets
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:fip:feddgw:58&r=dge
  3. By: M. BAMBI (Department of Economics and Related Studies, University of York); G. FABBRI (Universita di Napoli Parthenope and School of Mathematics and Statistics, UNSW, Sydney); F. GOZZI (Dipartimento di Scienze Economiche ed Aziendali, Università LUISS - Guido Carli Roma, and Centro De Giorgi, Scuola Normale Superiore, Pisa, Italy)
    Abstract: In this paper the dynamic programming approach is exploited in order to identify the closed loop policy function, and the consumption smoothing mechanism in an endogenous growth model with time to build, linear technology and irreversibility constraint in investment. Moreover the link among the time to build parameter, the real interest rate, and the magnitude of the smoothing effect is deeply investigated and compared with what happens in a vintage capital model characterized by the same technology and utility function. Finally we have analyzed the effect of time to build on the speed of convergence of the main aggregate variables.
    Keywords: Time-to-build, AK model, Dynamic programming, optimal
    JEL: E22 E32 O40
    Date: 2010–08–29
    URL: http://d.repec.org/n?u=RePEc:ctl:louvir:2010029&r=dge
  4. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Yu-Shan Hsu (Department of Economics, National Chung Cheng University); Chia-Hui Lu (Department of Economics, National Taipei University)
    Abstract: We study the otherwise standard growth model with money except endogenous time preferences determined by resources pent on imagining future pleasures along the line of Becker and Mulligan (1997). Money plays a role in transactions via the cash-in-advance constraint.The resulting steady-state condition can be simplified to the standard textbook diagram in terms of two loci. We analyze the relationship between monetary growth and capital accumulation. If spending on imagining future pleasures is not constrained by cash, the existing relationship no longer holds. The optimum quantity of money is studied.
    Keywords: endogenous time preferences, growth, money
    JEL: E22 E31
    Date: 2010–09
    URL: http://d.repec.org/n?u=RePEc:sin:wpaper:10-a005&r=dge
  5. By: Paul Levine (National Institute of Public Finance and Policy)
    Abstract: The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies. This papers describes this transformation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. In particular by treating DSGE models estimated by Bayesian-Maximum-Likelihood methods I argue that they can be considered as probability models in the sense described by Sims (2007) and be used for risk-assessment and policy design. This is true for any one model, but with a range of models on oer it is possible also to design interest rate rules that are simple and robust across the rival models and across the distribution of parameter estimates for each of these rivals as in Levine et al. (2008). After making models better in a number of important dimensions, a possible road ahead is to consider rival models as being distinguished by the model of expectations. This would avoid becoming `a prisoner of a single system' at least with respect to expectations formation where, as I argue, there is relatively less consensus on the appropriate modelling strategy.
    Keywords: structured uncertainty, DSGE models, robustness, Bayesian estimation, interest-rate rules
    JEL: E52 E37 E58
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:eab:macroe:2224&r=dge
  6. By: Nicoletta Batini; Vasco Gabriel; Paul Levine; Joseph Pearlman (National Institute of Public Finance and Policy)
    Abstract: We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic inflation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely.
    Keywords: DSGE model, Indian economy, monetary interest rate rules, floating versus managed exchange rate, financial frictions
    JEL: E52 E37 E58
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:eab:macroe:2222&r=dge
  7. By: Raouf BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), CORE and University of Glasgow, Scotland); Giorgio FABBRI (Dipartimento di Studi Economici S. Vinci, Universita di Napoli Parthenope)
    Abstract: Parfit's Repugnant Conclusion stipulates that under total utilitarianism, it might be optimal to choose increasing population size while consumption per capita goes to zero. We evaluate this claim within a canonical AK model with endogenous fertility and a reduced form relationship between demographic growth and economic growth. While in the traditional linear dilution model, the Parfit Repugnant Conclusion can never occur for realistic values of intertemporal substitution, we show that it occurs when population growth is linked to economic growth via an inverted U-shaped relationship. Finally, we find moving from the Benthamite to the Millian social welfare function may not only cause optimal population size to go up and consumption to go down, it may also favor the realization of the Repugnant Conclusion.
    Keywords: Parfit's Repugnant Conclusion, AK models, endogenous fertility, intertemporal altruism
    JEL: O41 I20 J10
    Date: 2010–07–13
    URL: http://d.repec.org/n?u=RePEc:ctl:louvir:2010025&r=dge
  8. By: Lancia, Francesco; Russo, Alessia
    Abstract: This paper investigates the conditions for the emergence of implicit intergenerational contracts without assuming reputation mechanisms, commitment technology and altruism. We present a tractable dynamic politico-economic model in OLG environment where politicians play Markovian strategies in a probabilistic voting environment, setting multidimensional political agenda. Both backward and forward intergenerational transfers, respectively in the form of pension benefits and higher education investments, are simultaneously considered in an endogenous human capital setting with labor income taxation. On the one hand, social security sustains investment in public education; on the other hand investment in education creates a dynamic linkage across periods through both human and physical capital driving the economy toward different Welfare State Regimes. Embedding a repeated-voting setup of electoral competition, we find that in a dynamic efficient economy both forward and backward intergenerational transfers simultaneously arise. The equilibrium allocation is education efficient, but, due to political overrepresentation of elderly agents, the electoral competition process induces overtaxation compared with a Benevolent Government solution with balanced welfare weights.
    Keywords: aging; Benevolent Government allocation; intergenerational redistribution; Markovian equilibria; repeated voting.
    JEL: E62 D71 H11 C61
    Date: 2010–07–26
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:24795&r=dge
  9. By: Luca Sala; Ulf Soderstrom; Antonella Trigari
    Abstract: We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic inefficiency in recent U.S. data: the output gap - the gap between the actual and effcient levels of output - and the labor wedge|the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i ) The output gap and the labor wedge are closely related, suggesting that most inefficiencies in output are due to the inecient allocation of labor. (ii ) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii ) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the eciency of business cycle fluctations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:igi:igierp:365&r=dge
  10. By: Marianna Červená; Martin Schneider
    Abstract: DSGE models are useful tools for evaluating the impact of policy changes but their use for (short-term) forecasting is still at an infant stage. Besides theory based restrictions, the timeliness of data is an important issue. Since DSGE models are based on quarterly data, they are vulnerable to a publication lag of quarterly national accounts. In this paper we propose a framework for a short-term forecasting of GDP based on a medium-scale DSGE model for a small open economy within a currency area that utilizes the timely information available in monthly conjunctural indicators. To this end we adopt a methodology proposed by Giannone, Monti and Reichlin (2009). Using Austrian data we find that the forecasting performance of the DSGE model can be improved considerably by conjunctural indicators while still maintaining the story-telling capability of the model. JEL classification:
    Keywords: DSGE models, nowcasting, short-term forecasting, monthly indicators
    Date: 2010–08–25
    URL: http://d.repec.org/n?u=RePEc:onb:oenbwp:163&r=dge
  11. By: Gunes Kamber; Stephen Millard (Reserve Bank of New Zealand)
    Abstract: This paper aims to contribute to our understanding of inflation dynamics in the United Kingdom by estimating two dynamic stochastic general equilibrium models and assessing the role of nominal and real rigidities within them. We first obtain an empirical representation of the monetary transmission mechanism in the United Kingdom and then estimate the models by minimising the difference between this representation and its model equivalents.We find that both models can explain the data reasonably well without relying on undue amounts of price and wage stickiness.
    JEL: E31 F52
    Date: 2010–08
    URL: http://d.repec.org/n?u=RePEc:nzb:nzbdps:2010/05&r=dge
  12. By: Ryo Arawatari (Faculty of Economics, Shinshu University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: Countries with higher implicit taxes on continued work are associated with lower labor force participation rates of the elderly. This paper constructs a politicoeconomic model that accounts for this feature based on multiple, self-fulfilling expectations of agents. In this model, agents are identical at birth and can become skilled (or remain unskilled) through educational investment. When agents hold expectations of larger social security benefits, it provides a disincentive to engage in educational investment, thereby resulting in an unskilled majority. In turn, this unskilled majority supports larger social security benefits, which induces the retirement of the elderly and thus results in a lower labor force participation rate. The opposite applies when agents have expectations of smaller social security benefits in their old age.
    Keywords: Political equilibrium; Retirement; Self-fulfilling expectations; Social security
    JEL: H55 D72 J26
    Date: 2010–02
    URL: http://d.repec.org/n?u=RePEc:osk:wpaper:1004r&r=dge
  13. By: Rupert, Peter; Stancanelli, Elena G F; Wasmer, Etienne
    Abstract: A search model of the labor market is augmented to include commuting time to work. The theory posits that wages are positively related to commute distance, by a factor itself depending negatively on the bargaining power of workers. Since not all combinations of distance and wages are accepted, there is non-random selection of accepted job offers. We build on these ingredients to explore in the data the relationship between wages and commute time. We find that neglecting to account for this selection will bias downward the wage impact of commuting, and marginally affect the coefficients on education, age and gender. The correlation between the residuals of the selectivity equation and the distance equation is -0.70, showing the large impact of commute time on job acceptance decisions. We also use the theory to calculate the bargaining power of workers which largely varies depending on demographic groups: it appears to be much larger for men than that for women and that the bargaining power of women with young children is essentially zero.
    Keywords: commuting, search model, simultaneous equations
    Date: 2009–10–01
    URL: http://d.repec.org/n?u=RePEc:cdl:ucsbec:1080855&r=dge
  14. By: Attila Varga (Department of Economics and Regional Studies, University of Pécs); Péter Járosi (Department of Economics and Regional Studies, University of Pécs); Tamás Sebestyén (Department of Economics and Regional Studies, University of Pécs)
    Abstract: This paper introduces the geographic macro and regional model for NUTS-2 regions of the Euro zone. This model consists of three blocks: the TFP, the SCGE and the MACRO blocks. The model is built for impact analysis of policies targeting intangible assets in the forms of R&D, human capital and social capital. The analysis can be done both at the regional and the EU macroeconomic levels. Policy simulations illustrate the capabilities of the complex model system.
    Keywords: TFP, SCGE models, DSGE models, impact analysis, R&D, human capital, social capital
    JEL: O31 H41 O40
    Date: 2010–06
    URL: http://d.repec.org/n?u=RePEc:pec:wpaper:2010/4&r=dge
  15. By: Zeng, Zhixiong
    Abstract: Policy actions by the Federal Reserve during the recent financial crisis often involve recapitalization of banks. This paper offers a theory of the non-neutrality of money for policy actions taking the form of injecting capital into banks via nominal transfers, in an environment where banking frictions are present in the sense that there exists an agency cost problem between banks and their private-sector creditors. The analysis is conducted within a general equilibrium setting with two-sided financial contracting. We first show that even with perfect nominal flexibility, the recapitalization policy can have real effects on the economy. We then study the design of the optimal long-run recapitalization policy as well as the optimal short-run policy responses to banking riskiness shocks.
    Keywords: Banking frictions; two-sided debt contract; money neutrality; unconventional monetary policy; reaction function.
    JEL: E52 E44 D82
    Date: 2010–08–25
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:24752&r=dge
  16. By: Shutao Cao; Enchuan Shao; Pedro Silos
    Abstract: This paper constructs a theory of the coexistence of fixed-term and permanent employment contracts in an environment with ex ante identical workers and employers. Workers under fixed-term contracts can be dismissed at no cost while permanent employees enjoy labor protection. In a labor market characterized by search and matching frictions, firms find it optimal to discriminate by offering some workers a fixed-term contract while offering other workers a permanent contract. Match-specific quality between a worker and a firm determines the type of contract offered. We analytically characterize the firms' hiring and firing rules. Using matched employer-employee data from Canada, we estimate the wage equations from the model. The effects of firing costs on wage inequality vary dramatically depending on whether search externalities are taken into account.
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2010-13&r=dge
  17. By: Martin Berka; Mario J. Crucini
    Abstract: Movements in a nation's terms of trade are widely viewed as important for the understanding the sources of business cycle °uctuations, the dynamics of the trade balance and economic welfare. Backus, Kehoe and Kydland (1994) emphasize the role of productivity movements in a two-country, two-good setting. In their model an increase in domestic productivity expands out- put at home relative to output abroad and the terms of trade deteriorates. Put di®erently: a large country expanding the supply of the traded good it produces must (in equilibrium) drive down the relative price of its prod- ucts on world markets. The importing country's terms of trade improves, a positive spillover. Backus and Crucini (2000) add a third region to this model; a region that specializes in oil production. When the oil region cuts back production, the relative price of oil rises, a terms of trade improvement for oil producers. Output falls in the oil importing regions because oil is an intermediate input into production of the two manufactured goods produced in those regions. The business cycle implications of this model are consis- tent with empirical work by Hamilton (1983) showing oil price increases in advance of U.S. recessions. Mendoza (1995) studies the terms of trade and business cycles in an extensive cross-country panel using a partial equilibrium business cycle model where terms of trade movements are exogenous. In his theoretical setting, terms of trade shocks are analogous to lotteries with the sign and magnitude of the payout dependent upon a country's pattern of specialization across an array of internationally traded goods.
    Date: 2010–09
    URL: http://d.repec.org/n?u=RePEc:acb:camaaa:2010-27&r=dge
  18. By: Miguel A. Leon-Ledesma; Mathan Satchi
    Abstract: We present a simple production technology in which the choice of production technique results in a balanced growth path even in the presence of capital-augmenting technical progress. Given a particular choice of technique, the production function is CES with a less than unitary elasticity of factor substitution. The form of this production technology is also invariant to the choice of units, allowing us to abstract from the normalization considerations that often accompany the use of CES. The approach yields a balanced growth path but short-run time-varying factor shares without requiring an explicit model of the R&D sector.
    Keywords: Balanced growth; capital-augmenting technical progress, measurement units, elasticity of substitution
    JEL: E25 O33 O40
    Date: 2010–08
    URL: http://d.repec.org/n?u=RePEc:ukc:ukcedp:1007&r=dge
  19. By: Del Boca, Daniela (University of Turin); Flinn, Christopher (New York University); Wiswall, Matthew (New York University)
    Abstract: The growth in labor market participation among women with young children has raised concerns about the potential negative impact of the mother's absence from home on child outcomes. Recent data show that mother's time spent with children has declined in the last decade, while the indicators of children's cognitive and noncognitive outcomes have worsened. The objective of our research is to estimate a model of the cognitive development process of children nested within an otherwise standard model of household life cycle behavior. The model generates endogenous dynamic interrelationships between the child quality and employment processes in the household, which are found to be consistent with patterns observed in the data. The estimated model is used to explore the effects of schooling subsidies and employment restrictions on household welfare and child development.
    Keywords: time allocation, child development, household labor supply
    JEL: J13 D1
    Date: 2010–08
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp5155&r=dge
  20. By: Robert Kollmann; Zeno Enders; Gernot J. Müller
    Abstract: This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007-09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the US and the Euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.
    Date: 2010–08
    URL: http://d.repec.org/n?u=RePEc:eca:wpaper:2013/60880&r=dge
  21. By: Tamás Mellár (Department of Economics and Regional Studies, University of Pécs)
    Abstract: A 2008-ban kitört pénzügyi válság ráirányította a figyelmet a mainstream makroökonómiára, amely a válság elõrejelzésében és magyarázatában rossz teljesítményt nyújtott. Az újklasszikus és az újkeynesi iskola közötti konszenzus eredményeként létrejött DSGE-modellek számos probléma miatt nem alkalmasak elõrejelzésekre és gazdaságpolitikai elemzésekre. Ezért a makroökonómia válaszút elé került: vagy folytatja a dinamikus sztochasztikus egyensúlyi modellépítést, vagy pedig új modelleket és ezzel utakat keres.
    Keywords: mainstream macroeconomics, neoclassical and new classical synthesis, DSGE models
    JEL: E20 E32 E44 E52 E60
    Date: 2010–05
    URL: http://d.repec.org/n?u=RePEc:pec:wpaper:2010/2&r=dge
  22. By: Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: It is often argued that what marks the difference between Keynesian macroeconomics and new classical macroeconomics (the first installment of dynamic stochastic general equilibrium models) is the presence of microfoundations. These are deemed to be absent in the Keynesian approach, but central to the new classical one. The aim of my paper is to critically discuss this view. Lucas and Sargent defined the microfoundations requirement as consisting of two elements, optimizing behavior and market clearing. I claim that an alternative, weaker, definition is conceivable, which can be traced back to Hayek and Patinkin. According to them, the microfoundations requirement consists of a single criterion, optimizing planning. This definition, I claim, is better than the new classical one. Next, I examine whether Keynesian macroeconomics, which admittedly does not abide by the Lucas-Sargent definition, does accord with the Hayek-Patinkin approach. My conclusion is that Keynes’s General Theory is indeed microfounded in this sense, although no single conclusion can be drawn for Keynesian models in general.
    Keywords: microfoundations, Keynes, new classical macroeconomics
    JEL: B E E
    Date: 2010–05–31
    URL: http://d.repec.org/n?u=RePEc:ctl:louvir:2010030&r=dge
  23. By: Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Robert Lucas is rightfully credited with having changed the course of macroeconomic theory. The aim of this paper is to document his transformation from a potential contributor to Keynesian macroeconomics to the master builder of an alternative paradigm, equilibrium macroeconomics. I reconstruct Lucas’s theoretical journey as involving seven steps: (1) his pre-macroeconomic years, (2) his early work as a macroeconomist, jointly with Rapping, (3) the ‘Expectations and the Neutrality of Money’ 1972 article, (4) his inaugural equilibrium model of the business cycle, (5) his all-out attack on Keynesian macroeconomics, (6) the passing of the baton to Kydland and Prescott, and (7) his standpoint after the victory of the approach he so much contributed to launch
    Keywords: Lucas, new classical macroeconomics
    JEL: B B E30
    Date: 2010–07–31
    URL: http://d.repec.org/n?u=RePEc:ctl:louvir:2010032&r=dge
  24. By: Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper concerns a neglected aspect of Lucas’s work: his methodological writings, published and unpublished. Particular attention is paid to his views on the relationship between theory and ideology. I start by setting out Lucas’s non-standard conception of theory: to him, a theory and a model are the same thing. I also explore the different facets and implications of this conception. In the next two sections, I debate whether Lucas adheres to two methodological principles that I dub the ‘non-interference’ precept (the proposition that ideological viewpoints should not influence theory), and the ‘non-exploitation’ precept (that the models’ conclusions should not be transposed into policy recommendations, in so far as these conclusions are built into the models’ premises). The last part of the paper contains my assessment of Lucas’s ideas. First, I bring out the extent to which Lucas departs from the view held by most specialized methodologists. Second, I wonder whether the new classical revolution resulted from a political agenda. Third and finally, I claim that the tensions characterizing Lucas’s conception of theory follow from his having one foot in the neo- Walrasian and the other in the Marshallian-Friedmanian universe.
    Keywords: Lucas, new classical macroeconomics, methodology
    JEL: B B B E
    Date: 2010–06–30
    URL: http://d.repec.org/n?u=RePEc:ctl:louvir:2010031&r=dge

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