The Equity Premium and the Concentration of Aggregate Shocks

This paper examines an economy in which aggregate shocks are not dispersed equally throughout the population. Instead, while these shocks affect all individuals ex ante, they are concentrated among a few ex post.The equity premium in general depends on the concentration of these aggregate shocks; it follows that one cannot estimate the degree of risk aversion from aggregate data alone. These findings suggest that the empirical usefulness of aggregation theorems for capital asset pricing models is limited.

The Macroeconomist as Scientist and Engineer

This essay offers a brief history of macroeconomics, together with an evaluation of what has been learned over the past several decades. It is based on the premise that the field has evolved through the efforts of two types of macroeconomist—those who understand the field as a type of engineering and those who would like it to be more of a science. While the early macroeconomists were engineers trying to solve practical problems, macroeconomists have more recently focused on developing analytic tools and establishing theoretical principles. These tools and principles, however, have been slow to find their way into applications. As the field of macroeconomics has evolved, one recurrent theme is the interaction—sometimes productive and sometimes not— between the scientists and the engineers.

A Letter to Ben Bernanke

This paper discusses five questions the incoming chairman of the Federal Reserve must ponder as he assumes his new post. How important are monetary rules? Should the Fed adopt inflation targeting? Should he be free with his opinions? Should he be a high-profile public figure? Is it more important to be good or lucky?

Imperfect Competition and the Keynesian Cross

This paper presents a simple general equilibrium model in which the only non-Walrasian feature is imperfect competition in the goods market. The model is shown to exhibit various Keynesian characteristics. In particular, as competition in the goods market becomes less perfect, the fiscal policy multipliers approach the values implied by the textbook Keynesian cross.

Consumer Durables and the Real Interest Rate

One important channel through which real interest rates affect aggregate demand is consumer expenditure on durable goods. This paper examines empirically the link between interest rates and consumer durables. Solving for the decision rule relating income and interest rates to consumer demand is an intractable task. This paper avoids this problem by examining the first-order conditions necessary for maximization by the representative consumer. Structural parameters of there presentative utility function are thus recovered. The estimated model suggests that expenditure on consumer durables is far more sensitive to changes in the interest rate than is expenditure on nondurables and services.

The Macroeconomist as Scientist and Engineer

This essay offers a brief history of macroeconomics, together with an evaluation of what has been learned over the past several decades. It is based on the premise that the field has evolved through the efforts of two types of macroeconomist%u2014 those who understand the field as a type of engineering and those who would like it to be more of a science. While the early macroeconomists were engineers trying to solve practical problems, macroeconomists have more recently focused on developing analytic tools and establishing theoretical principles. These tools and principles, however, have been slow to find their way into applications. As the field of macroeconomics has evolved, one recurrent theme is the interaction%u2014sometimes productive and sometimes not%u2014 between the scientists and the engineers.

Commentary : separating the business cycle from other economic fluctuations

Greenspan, Alan ; Monetary policy ; Business cycles

Government Purchases and Real Interest Rates

This paper examines the dynamic impact of government purchases in a simple general equilibrium model with both durable and non-durable consumer goods as well as productive capital. The model generates perhaps surprising results. In particular, increases in government purchases are shown to cause reductions in real interest rates. The model thus provides a possible explanation for the observed behavior of real interest rates around wars.

Questions about fiscal policy: Implications from the financial crisis of 2008-2009

This article is a modified version of remarks given at the Federal Reserve Bank of Philadelphia’s policy forum “Policy Lessons from the Economic and Financial Crisis,” December 4, 2009. The presentation was made during a panel discussion that also included James Bullard and John Taylor.Financial crises ; Fiscal policy