On the record: putting people into economic policy: a conversation with Finn Kydland

Finn Kydland, a Dallas Fed consultant since 1994, shared the 2004 Nobel Prize in economics with Edward C. Prescott for their groundbreaking work incorporating decisionmaking by individuals, households and firms into economic models.Economic policy ; Business cycles - Econometric models ; Macroeconomics - Econometric models

On the econometrics of world business cycles

A description of the method used in dynamic general equilibrium business-cycle research as applied in some recent work on open economies.Business cycles

Quantitative Aggregate Theory

Nobel Prize Lecture, December 8, 2004Business Cycles; Time Consistency

The role of money in a business cycle model

Two mechanisms are considered through which money can play a role in a real business cycle model. One is in the form of aggregate price surprises when there is heterogeneity across individuals or groups of individuals (“islands”). These shocks affect the accuracy of information about real compensation that can be extracted from observed wage rates. Another, perhaps complementary, mechanism is that the amount of desired liquidity services varies over the cycle due to a trade-off between real money and leisure. This mechanism leads to price fluctuations even when the nominal money stock does not fluctuate. As is the case for the U.S. economy over the postwar period, the price level is then countercyclical. A key finding is that with neither mechanism do nominal shocks account for more than a small amount of variability in real output and in hours worked. Indeed, output variability may very well be lower the larger the variance of price surprises is.Business cycles ; Money

Monetary aggregates and output

This paper offers a general equilibrium model that explains how the observed correlations of money and output fluctuations may come about through endogenously determined fluctuations in the money multiplier. The model is calibrated to meet long-run (including monetary) features of the U.S. economy; it is then subjected to shocks to the Solow residual following a random process similar to that observed in U.S. data.Money supply

Monetary aggregates and output

This paper offers a general equilibrium model that explains how the observed correlations of money and output fluctuations may come about through endogenously determined fluctuations in the money multiplier. The model is calibrated to meet long run features of the U.S. economy (including monetary features) and then subjected to shocks to the Solow residual following a random process like that observed in U.S. data. The model's predicted business-cycle frequency correlations, of both real and nominal variables, share the following features with U.S. data: i) M1 is positively correlated with real output; ii) the money multiplier and deposit-to-currency ratio are positively correlated with real output; iii) the price level is negatively correlated with output [in spite of (i) and (ii)]; iv) the correlation of M1 with contemporaneous prices is substantially weaker than the correlation of M1 with real output; v) correlations among real variables are essentially unchanged under different monetary policy regimes; and vi) real money balances are smoother than money demand equations would predict. Although features (i) and (iv) may have been considered support for a causal influence of money on output, the paper demonstrates that they are consistent with an economy in which money has no such causal influence.Money supply

Does being different matter?

Changes in the demographic structure of the U.S. population will affect many aspects of the US economy as we move into the next century. Concerns about the impact of an aging population on savings and interest rates, the financing of government spending programs for the elderly, and the possibility of higher taxes for future generations to pay for them have become hot topics, both in the press and among economists. Another concern is whether rising immigration will place an even greater burden on the government. In this article, Finn Kydland and D'Ann Petersen present a framework economists can use to shed ight quantitatively on such issues where individual differences matter. They also discuss why, for a certain class of questions, being different does not matter. In the final section, the authors present findings from current research that deals with the issues mentioned above.Emigration and immigration ; Social security ; Saving and investment

The gold standard as a rule

In this paper, we show that the monetary rule followed by a number of key countries before 1914 represented a commitment technology preventing the monetary authorities from changing planned future policy. The experiences of these major countries suggest that the gold standard was intended as a contingent rule. By that, we mean that the authorities could temporarily abandon the fixed price of gold during a wartime emergency on the understanding that convertibility at the original price of gold would be restored when the emergency passed.Gold standard ; Economic history ; Monetary policy